Kroger 'open' to test micro-fulfillment; believes Ocado will enhance in-store experience

'Macrofullment' click-and-collect could make sense, CFO says

The Kroger Co. intends to test use of its newly built Ocado e-commerce facilities to deliver to stores as well as homes, with the idea that clearing aisles of e-commerce pickers for click-and-collect orders may also improve sales at the store.

Speaking at BMO Capital’s Farm to Market conference this week, Gary Millerchip, chief financial officer of the Cincinnati-based retailer, said shipped-in orders for pickup, rather than the same items selected from stores, could “create capacity” for the store by providing a better in-store shopping experience. A similar idea is at work among Kroger’s rivals utilizing “microfulfillment” facilities located in or adjacent to stores that are seen as something of alternative to the fewer, larger and more far-flung regional picking centers that Ocado and Kroger are building together.

Such a test—which Millerchip said would be done “only where it makes sense”—is not necessarily underway, but rather contemplated as part of its evolution. Kroger’s first Ocado center, located in Monroeville, Ohio, only began shipping to customers last week, Millerchip revealed during the May 19 BMO event—a virtual question-and-answer session with analyst Kelly Bania.

“One of the things that’s happened during COVID is, you’ve got a lot of people moving around the stores that aren’t shopping as a customer: They’re shopping as a picker,” Millerchip said, according to a Sentieo transcript. “And there’s some data in other markets that suggest that when you relieve that capacity from the store, you actually see an improvement in the store sales too. So that’s one of the things that we’re interested to test is as you help the capacity in the store, can you not only make the process more efficient, but could you also drive higher sales across the store and the digital experience, combined?”

Ocado is the U.K.-based grocery e-tailer that is licensing its software and robotic technologies in an exclusive U.S. partnership with Kroger. The first of at least 11 facilities, which officials say will bring superior efficiency, freshness and accuracy to e-commerce for Kroger, are ramping up in Monroeville and in Groveland, Fla.

Millerchip described a developing long-term play at work in both spots. The company, for example, is still considering ideas like paid memberships for customers, in the context of an overall omnichannel strategy—or what the company refers to as “seamless”—to drive greater value and loyalty over the long term. For now, the facilities are building momentum behind a new superior experience for next-day delivery.

“At the moment, if you looked at what we're doing in Monroe, in supporting Cincinnati, it’s really integrated into the customer value proposition,” he said. “So think of Ocado more as what we believe will be for customers that are looking for great on-time delivery, great in-stock performance, a great door-to-door delivery that feels like my local delivery person who I get to know is kind of consistently and routinely around the neighborhood. That’s kind of embedding that experience in for that Cincinnati customer.”

Millerchip said the company was “constantly” testing various membership schemes but noted customers still like the price of its current loyalty program, which happens to be free to them—and valuable to Kroger—as is.

“One of the challenges for us is that we’re very good at what we do around personalizing,” Millerchip said. “And so most of our customers tell us I get the benefits of membership without paying a fee today because I get fuel discounts, I get free pickup, I can use your Scan, Bag, Pay and Go where it's available if I’m a loyalty card member.”

“And so for us, [the question is] identifying, is there a loyalty program where it’s a membership strategy that would truly drive greater value and long-term loyalty for the customer and also makes sense economically? We are continuing to test different solutions there.”

Pricing and Promotions

Millerchip also addressed pricing and promotional strategies as investors turn attention to forecasted food inflation and concern that conventional supermarkets such as Kroger may lack the ability to pass along higher costs to shoppers given pricing gaps with leaders like Walmart.

Millerchip said Kroger “essentially maintained” price gaps with Walmart last year, when including rewards, personalization and what its shopper data tells the company that customers value.

“When we look at the overall equation, when we look at our position vs. EDLP, we felt like in 2020, all of our data shows that we essentially maintained our position there. And then when we look at the rest of the market, we felt like we created separation from the traditional retailers because we did continue investing [in prices and promotions] in 2020.”

As officials have previously described, Kroger shifted its promotions last year when availability issues made certain “stock up” deals difficult to honor, but it continued finding ways to demonstrate value to shoppers. Millerchip this week said that was important so that its customers wouldn’t view the company as exploiting the COVID crisis and would win loyalty over the longer term.

“When you see situations where it appears that retailers are maybe taking advantage of the situation because supply is short, because you can, and the margins can be higher, it doesn't impact at the time because there's only certain places you can get the products you're looking for,” Millerchip said. “But it does impact, over the longer term, the perception of the brand and long-term loyalty.

“And so while we have to maybe pivot some of our promotions to different categories because certain products weren't available, and we didn’t want to be forcing out-of-stock positions or offering promotions where the product wouldn't be there, we did deliberately figure out how to continue to invest to really stand by our brand promise of value for the customer.”