Walmart vs Kroger: A strategy battle for online grocery
Automation is playing an increasingly important role in online grocery fulfillment. Automated warehouses are not new to retail supply chains, but online demand for groceries in the U.S. never warranted them. Prior to the pandemic, roughly 4% of American grocery spending was done online, compared with upward of 15% in the U.K. and South Korea. But the pandemic changed everything for grocers. Online grocery spending has nearly tripled since March and has maintained its peak lockdown penetration level since, unlike every other retail category.
There’s little doubt that online grocery demand is here to stay. The question is how grocers will drive efficiency and profitability while also meeting ever-changing and ever-more-demanding consumer expectations.
There are two primary strategies to automating online grocery fulfillment: local/micro-fulfillment centers and larger robotically enabled warehouses.
Walmart announced via a blog post Wednesday it plans to scale its local fulfillment center (LFC) model to “dozens of locations, with many more to come.” The company began piloting the LFC model in Salem, New Hampshire, in late 2019 with an impressive robotics system called Alphabot.
Walmart is collaborating with a startup, Alert Innovation, to introduce automated technology to Online Grocery Pickup at the supercenter in Salem, New Hampshire.
The system operates within a 20,000-square-foot facility that Walmart built onto the back of its store. Automated systems like Alphabot can pick and pack orders as much as 10 times faster than humans can, but not without human interaction. Not only do humans act as the final accuracy approval, but Walmart employees also select all fresh produce, meat and seafood from the store floor.
The system does not fully eliminate the need for human hands and decisions, but streamlines the picking and packing process for standardized items like frozen foods, dry and canned goods and household essentials. That’s a significant contrast with the new Kroger warehouses being constructed in a partnership with Ocado, which has made a name for itself in the U.K. with fully automated e-commerce grocery warehouses.
Kroger has committed to building 20 automated warehouses facilities, with its first already operational in Monroe, Ohio, a suburb near the company’s headquarters. A stark difference between Kroger and Walmart’s facilities is size — Walmart is planning the next few Alphabot implementations to be even smaller than the 8,000 square-foot Salem operation, while the newest Kroger/Ocado facility in Wisconsin will be 350,000 square feet.
Opponents of LFCs say that the need for manual processes is a flaw in the system. They believe the increase in BOPIS and rapid delivery has resulted in more crowded stores with “pickers” getting in the way of the most profitable customers: in-store shoppers.
“A store is made for shopping, not fulfillment. Store fulfillment is a Rube Goldberg machine,” said Gene Destroyer, a professor of finance and economics at Guizhou University. While this may be true and store fulfillment could be an overly complicated method of fulfillment, its costs pale in comparison to the estimated $55 million each Ocado warehouse is costing Kroger to build.
Unfortunately, Walmart did not give any cost estimates for its Alphabot-enabled LFC builds, but it did note it took roughly two years to build the first facility. The company expects the implementation speed to rapidly accelerate with each new location. Additionally, Walmart believes each location will be slightly different and that some will not require the building of additional square footage but be built within existing store space.
While we don’t have hard numbers on the LFC buildout, we can safely assume building <20,000 square feet onto a standing structure is far less capital-intensive than building a fully automated industrial warehouse from scratch.
They’re a marvel of modern math and technology, but they’re hella expensive. With LFCs, Walmart takes on a much lower cost, it can utilize existing infrastructure, its real estate usage improves, its worker productivity increases and it pleases Wall Street with higher same-store sales.
Opponents of LFCs assert that with proper automation systems, larger warehouses are more efficient than LFCs.
“There is little doubt the Kroger/Ocado approach with centralized warehousing will be more efficient than Walmart’s mini-warehouses. The interesting question is whether they will be sufficiently effective and flexible to meet consumer expectations at the final point of delivery,” wrote Ben Ball, senior vice president of management consulting firm Derchert-Hampe.
One of the biggest challenges of automated warehousing is flexibility. While they can be scoped for optimum performance, they are often difficult to scale up or down as demand varies. It’s also costly and difficult to change the shelved goods, but they do have the advantage of being able to work round the clock if necessary.
Not many retailers have the scale of Walmart, so the potentially wider geographic coverage area of LFCs isn’t attainable for most retailers. But for Walmart and its 5,000+ stores, it can cover a much larger geographical area with LFCs than it could with larger automated facilities. That being said, it has no plans to build LFCs in every store. The company has been able to fulfill many stores’ orders with its Salem LFC and believes it will only need one mini-warehouse in the area of multiple Walmart locations.
So what’s the better solution?
The U.S. e-commerce market is really a set of markets that are highly diverse in terms of population density and traffic flows, with widely varied consumer profiles in each. Thus there is not a one-size-fits-all grocery automation solution in the U.S.
In densely populated urban areas with high order volume, the Ocado model will be the right fit. But for midsize cities, like say Chattanooga, Tennessee, where the population is fairly dispersed, LFCs will offer a better return on invested capital. Other areas, like my hometown of Fairview, Tennessee, will be able to get away with old-fashioned (circa 2019) employee picking.
Walmart’s micro-fulfillment centers will complement traditional in-store fulfillment services and further optimize its omnichannel offering. With Ocado, Kroger is attempting to substitute in-store fulfillment and rid stores of the burden of fulfillment.
However, both methods serve the same purpose: to create cost savings and economies of scale and to reduce store traffic created by pickers. While Walmart still has employees picking and packing fresh produce, it has plans to test automated picking for perishable goods as well. So it may not be long before Walmart blends the two strategies into smaller, fully automated LFCs either housed within existing infrastructure or added to existing stores.
No matter the method, grocers must keep innovating to grab market share. Online grocery penetration has accelerated greatly over the past year but still remains well below most other product categories. Each 1% shift to e-commerce from in-store grocery spend is ~$9 billion in sales up for grabs.
