Ocado deal could help Kroger 'leapfrog' Walmart and Amazon in grocery ecommerce, says analyst

By Elaine Watson contact

- Last updated on GMT

Ocado deal could help Kroger 'leapfrog' Walmart and Amazon in grocery ecommerce, says analyst
Teaming up with Ocado – a British firm using automated distribution centers to fulfil online grocery orders – could allow Kroger to “potentially leapfrog both Walmart and Amazon in this space,” argues one retail commentator.

While most US grocers have deployed a range of approaches to ecommerce - from a click and collect model whereby shoppers order online and collect their own groceries, to partnerships with third parties such as Instacart where personal shoppers pick and deliver orders to customers’ homes – Ocado’s Smart Platform allows grocers to fulfil orders from vast warehouses utilizing hundreds of robots.

Ocado – which has its own branded online grocery business in the UK – has partnered with other retailers in the UK (Waitrose and Morrisons), France (Casino) Sweden (ICA) and Canada (Sobeys). However, the deal with Kroger is exclusive, said the firm, which says it will “discontinue discussions with other US-based retailers.”

Under the deal​, Ocado and Kroger [which currently partners with Instacart and offers click and collect from store services for online shoppers] will identify the three initial sites for automated ‘dark’ warehouse facilities in the US as part of a plan to build up to 20 sites over three years.

In the longer term, Kroger will retain exclusivity in the US conditional upon its meeting market share targets or ordering an agreed number of fulfilment centers per year.

Ocado has illustrated the ability to operate profitably in the ecommerce space

In a note commenting on the deal, under which Kroger will buy a 5% stake in Ocado for £183m, Kantar Consulting VP of retail and shopper insights Diana Sheehan said: “Ocado’s current logistics and technical expertise in supporting online grocery fulfillment in Europe allows Kroger to potentially leapfrog both Walmart and Amazon in this space.”

While some commentators have queried whether a model that works in densely populated European markets can deliver the same efficiencies in the US, where the economics of the last mile may be quite different, partnering with a firm with proven capabilities in this space is a bold move for Kroger (which notched up sales of $122bn in 2017), said Sheehan.

This model - a pure-play retailer using its platform as service support - was very successful for Amazon a decade ago, and could potentially be a similar game-changer for Kroger​. The exclusivity of Kroger’s offer​ is unique because it keeps that technology out of competitors’ hands trying to get up to speed in the online grocery landscape in the US​.

“Not only does the knowledge make Kroger better positioned to succeed in ecommerce, but Ocado has also illustrated the ability to operate profitably in the ecommerce space, something yet to be realized in the US across any major grocery retailer."

Dr James Richardson: 'Kroger is late to home delivery, but not too late'

James Richardson, PhD, founder of consultancy Premium Growth Solutions,​ told FoodNavigator-USA that "Kroger is late to home delivery, but not too late."

He added "In key urban markets and select zip codes, Amazon will soon be a major threat to  Kroger trips as Prime Now rolls out this year to many Whole Foods locations and also subsumes Amazon Fresh. Kroger has to defend itself. Whether it can do so profitably is unclear. This move may actually accelerate adoption of home delivery in key markets, if their Kroger branded service is good. 

"If Kroger can manage to integrate local and early stage brands well, they could obtain further advantage over Amazon which appears to be de-emphasizing both in its home delivery offerings. It could also open up a better online channel for startup food/beverage brands. The latter have a very hard time getting on Amazon’s Fresh/Prime Now platform."

Globally, while the online channel only accounts for a small percentage of grocery sales, this market is growing fast, said Kantar Worldpanel in its November 2017 report, The Future of Ecommerce in FMCG (fast moving consumer goods).

"Online grocery penetration has increased rapidly in the US, reaching 30% of the total population. By 2021, Americans will be spending $59bn a year on food and alcohol through online channels, which will hold 5.4% of the total market. E-commerce in the USA will grow to 8% share by 2025 representing a $90bn US dollar business. This can be attributed to the promising rollout of click-and-collect, delivery and subscription models."

According to Kantar Worldpanel data for the 52 weeks to March 2017, online sales accounted for 7.5% of the market for fast moving consumer goods in the UK and 1.5% of the market in the US.

Kantar_Worldpanel-report-November-2017

ocado van

Established in the UK 16 years ago and listed on the London Stock Exchange in July 2010, Ocado claims to be the world’s largest dedicated online grocery retailer. 

Its Ocado Solutions platform "comprises access to Ocado's physical infrastructure solutions to run highly efficient warehouse operations for the single pick of products, together with the entire end-to-end proprietary software applications required to operate an online grocery business - from user interfaces, through warehouse operating and control systems, to logistics, route planning and optimisation."

“We are actively creating a seamless digital experience for our customers. Our partnership with Ocado will speed up our efforts to redefine the food and grocery customer experience.”​ 

“We are actively creating a seamless digital experience for our customers. Our partnership with Ocado will speed up our efforts to redefine the food and grocery customer experience." Rodney McMullen, chairman and CEO, Kroger

“As we work through the terms of the services agreement with Kroger in the coming months, we will be preparing the business for a transformative relationship which will reshape the food retailing industry in the US in the years to come.” Tim Steiner, CEO, Ocado Group   

Related topics: Markets, Food retail and e-commerce

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