Kroger shifting gears by implementing micro-fulfillment to improve delivery times
Kroger Co. has shifted gears for its plans to develop new distribution centers aimed at boosting digital sales by getting products to customers more quickly and efficiently.
Rodney McMullen, CEO of downtown Cincinnati-based Kroger said the company will develop micro-fulfillment centers in addition to the highly touted huge, automated warehouse/distribution centers it’s developing with British digital grocery delivery company Ocado.
We've partnered with @OcadoGroup to support our growing #ecommerce business. We just announced a new Customer Fulfillment Center, measuring 135,000 sq. ft, in Metro #Detroit. Read more: https://t.co/BDSoaC8n87 pic.twitter.com/9oiLFjjaUX
— Kroger News (@KrogerNews) September 28, 2020
Some analysts have launched criticism in recent months of Kroger’s distribution plans that seemed focused solely on the huge Ocado facilities, which Kroger refers to as sheds. They argue small fulfillment centers allow supermarkets to get closer to the customer and provide digitally ordered products more quickly than larger fulfillment centers that are more spaced out. Kroger said in 2018 it plans to build 20 Ocado fulfillment centers around the country in the next three years.
Kroger, the nation’s largest operator of traditional supermarkets, plans to open its first Ocado center this spring in Monroe. The $55 million, 335,000-square-foot facility will create more than 400 jobs. It’s expected to serve Ohio, Kentucky and Indiana.
Kroger hadn’t publicly discussed any other options until its executives talked at the company’s Oct. 27 investor presentation about adding flexibility to its fulfillment plans.
“Micro-fulfillment will be a combination of automation and non-automation,” McMullen said during the presentation. “We would expect Ocado to be an important partner in that. And obviously one of the keys is getting the economics to work.”
“Kroger plans to build out a flexible network of fulfillment centers including our innovative partnership with Ocado.”
CFO Gary Millerchip said Kroger plans to “build out a flexible network of fulfillment centers including our innovative partnership with Ocado.”
Many micro-fulfillment centers are expensive and don’t offer enough different products, McMullen said.
“We’re all learning together,” he said. “Obviously, a big Ocado shed is what's got the most experience in the marketplace in how it performs.”
That’s because Ocado has used these big facilities in Europe and Canada for years and has found the automation and its expertise have enabled it to provide a broad variety of products quickly to customers and stores.
We’re excited to expand our partnership with @clustertruck, a #Midwest technology start-up that operates delivery-only restaurants, with the launch of two on-premise ghost kitchens in Ohio and Indiana.
— Kroger News (@KrogerNews) October 8, 2020
Read more in today’s announcement: https://t.co/dzDdr5sBlI pic.twitter.com/ytqf6RHHxc
Yael Cosset, Kroger’s chief information officer who leads its technology and digital strategy, made that point when Kroger broke ground on the Ocado facility in Monroe in June 2019.
“Ocado brings automation and reliability to pickup and delivery that is unprecedented,” Cosset told me then. “Ocado is a very fast innovator compared to other technology companies, so we’ll benefit from not only what they’ve built already but what we’re intending to build together.”
Analysts see several advantages to using micro-fulfillment centers.
Micro-fulfillment centers solve three key problems, Paul Weitzel, a vice president in the analytics solutions unit of Winston-Salem, N.C.-based data and technology services company Inmar, which works in the food retail and consumer packaged goods industries, told me:
With dedicated inventory (vs. shopping from shelf), it helps to reduce out-of-stocks on the fastest-moving stock-keeping units
It reduces picking/shopping labor, one of Kroger's largest expenses
It reduces last-mile costs vs. a single centralized warehouse.
Jim Hertel, senior vice president of analytics at Inmar, said Kroger might be likely to use the smaller facilities in conjunction with the larger Ocado facilities.
“I wouldn't be surprised if the product moves from Ocado to micro-centers and then to home, at least in densely populated areas with a high concentration of deliveries,” he said.
Micro-centers help companies build their so-called omnichannel strategy of selling in stores as well as online for pickup or delivery, James Lewis, equity research analyst at downtown-based Bartlett Wealth Management.
“Delivery is an expensive undertaking as the last mile has proven to be challenging and costly,” he said. “Delivering food has to be timely. Using micro-centers will ease overall stress on the infrastructure, be more cost-effective as transportation costs are lowered and improve delivery times.”
Micro-fulfillment centers could be an efficient way for Kroger to get products closer to its customers, Joe Edelstein, research analyst at Cincinnati-based Johnson Investment Counsel, told me.
“With as many customers that have moved to order pick-up and delivery as a result of the pandemic, it does not surprise me that the company continues to search for additional ways to not only make the entire process more convenient for customers, but also more profitable for the company in the long-run since some of these customers may not go back to the old ways of shopping in store as often,” Edelstein said.
Kroger CEO: COVID-19 pandemic has changed how we shop for food https://t.co/9onmtAEDCK by @BrianSozzi pic.twitter.com/TXgxGUuS0Q
— Yahoo Finance (@YahooFinance) September 14, 2020
McMullen said during the presentation that Kroger’s fulfillment strategy from Ocado and micro-fulfillment centers will play a key role in increasing its profitability from products ordered online.
“We can clearly see a path to improved incremental profitability from digital. And over time, we aspire and would expect to where we’re indifferent between that customer shopping in-store or online.”
