Kroger Co., the giant but aging supermarket chain, is trying to keep up in a post-Amazon-buying-Whole-Foods world with a big gamble: 20 automated grocery warehouses in the U.S.
In a partnership with British online grocer Ocado Group, the two plan to help Kroger turbocharge its e-commerce operation.
The grocery business has proved a uniquely tough one to bring into the online era. Orders often have dozens of items — some frozen, some cold, some room temperature — and much of the inventory is perishable. That makes for a different challenge than the one Amazon.com has successfully tackled by getting a package with a laptop computer or phone charger on your doorstep in one day.
At Ocado’s newest online grocery fulfillment center outside London, 1,000 robots zoom around a grid at a speed of 13 feet per second, extending grippers to pick up and transport bins of groceries. The system strips out labor costs and enables human workers to pack about 600 items per hour.
Every aspect of the process is designed for the quirks of grocery shopping, including systems that cue workers about what items in a given order they should put in a single grocery bag, ensuring that something heavy doesn’t plop onto a dozen eggs. Ocado estimates its system saves one hour of labor for every 50-item order — no small thing in a segment of retail with notoriously thin profit margins.
There is a real benefit to specializing in solving the grocery conundrum, as Ocado has done. The company’s sales increased 12% last year to 1.6 billion pounds ($2 billion), according to its annual report, and its active customer count increased 11 percent from the previous year.
It’s not hard to envision even more labor costs getting stripped out of Ocado’s system, enhancing the model’s profitability. But timing is everything in the fast-changing online grocery world. And right now, Amazon and Walmart are leading the pack.
Neither Amazon nor Walmart has a system with the exact sort of wizardry of Ocado’s. But even so, each is exploring its own ways of using automation to help with profitability and customer experience. Walmart is testing driverless cars for grocery delivery, and Amazon recently showed off some new warehouse robots of its own.
It will take Kroger up to five years to build out the fleet of Ocado warehouses it has committed to building. That may not be fast enough to vault it past Walmart and Amazon in the race for online grocery supremacy — no matter how advanced and efficient Ocado’s system is.
Investors have already punished Kroger this year for disappointing on comparable sales growth and its annual profit forecast. It’s hard to assess how much this project might further test their patience, especially because the companies haven’t offered specifics on how they will share the costs of establishing and maintaining these facilities. And, it won’t be cheap: Kroger has said it is investing $55 million to build the first of the Ocado-powered fulfillment centers.