CINCINNATI — So far, so good.
A week after the opening of the company’s first fulfillment center in partnership with Ocado Group, The Kroger Co. is pleased with how the initiative’s launch is unfolding, said Gary Millerchip, senior vice president and chief financial officer.
Speaking May 19 at the BMO Capital Markets Farm to Market Conference, Millerchip said while it’s too soon to offer specific figures, “everything is going in the way we would have expected in our heads, if you like, as we started to launch the plan.”
Located in Monroe, Ohio, north of Cincinnati, the 375,000-square-foot fulfillment center features more than 1,000 robots moving rapidly through a 3-D grid (known as a hive) to gather food and other grocery products that are packaged for e-commerce customers and loaded on trucks for delivery. A second Kroger fulfillment center is expected to open this spring west of Orlando, Fla. Six other locations have been announced for centers, and Kroger is expected to build up to 20 with Ocado in the next several years.
“Now we’re in that really important phase, if you like, of building the momentum with the customer and starting to gain traction with the experience and driving volume,” Millerchip said of the Cincinnati opening.
The fulfillment centers are a cornerstone of Kroger’s digital strategy. Millerchip said Kroger’s digital sales now represents a $10 billion business.
Fielding numerous questions about Ocado during the Kroger presentation, Millerchip said Kroger is looking at Ocado as an important component in a broader ecosystem that includes fulfillment centers, stores and perhaps smaller facilities between the two.
Ocado’s fulfillment centers will not be all things to all people, Millerchip said. For example, if a customer needs a food item within an hour, they will need to make a trip to the store.
“The store is probably always going to play a role, because you have to have that immediacy,” 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 sort of door delivery that feels like my local delivery person who I get to know is kind of consistently and routinely around the neighborhood.”
He said he expects the fulfillment centers to ensure Kroger reaches new customers.
“Ocado is able to get into some of those places where the customer would today define as not being convenient for them to shop at Kroger,” he said. “In Florida, it's obviously a new go-to-market strategy.”
Reducing store congestion represents another advantage of Ocado fulfillment centers, Millerchip said.
“One of the things that's happened during COVID is you've got a lot of people moving around the stores but aren't shopping as a customer,” he said. “They're shopping as a picker.”
He cited data indicating that when store congestion eases, “you actually see an improvement in the store sales.”
Millerchip began his presentation by highlighting numerous competitive advantages he said Kroger holds, giving the company confidence it will be able to deliver 8% to 11% annual total shareholder return consistently over time. He began citing the company’s long-term investment in actionable marketplace data.
“Our data, we believe, is a true competitive advantage,” he said. “We don't believe that anybody in the US market in our space has the same level of granularity and quality of data to be able to react and proactively drive value for our customers and create value for our shareholders. Our brands business is a huge asset at $26 billion.”
An acceleration of digital sales, larger average shopping basket sizes and an increased consumer priority on health and wellness were changes that emerged at Kroger during the COVID-19 pandemic, Millerchip said. Buying patterns were highly erratic during the first few months of the pandemic, but by June “customers started to move to more of a sort of a regular cadence pattern.”
Even as more consumers began using digital tools to shop, the average basket of a digital sale remained three times larger than the typical pre-pandemic basket, he said.
Despite a surge in demand early in the pandemic with same-store for 2020 growing by more than 10%, Kroger was careful not to dial back promotions too much, Millerchip said.
While such moves may have lifted margins, the company could have been negatively affected over time in terms of brand image and long-term loyalty, he said.
He continued, “(In some cases Kroger would) 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.”
He said an increase in promotions is expected this year and that Kroger is working closely with consumer-packaged goods suppliers to make plans.
Millerchip was asked to comment about a statement by Walmart that the gap between its prices and other retailers had widened, giving Walmart an increased advantage in the marketplace. He said Kroger was comfortable that its prices remained competitive.
“When we look at our position versus EDLP (everyday low pricing), we felt like, in 2020, all of our data shows that we essentially maintained our position there,” he said. “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 2020. And as I mentioned earlier, that was not because necessarily we expected it to significantly show up in sales in the year, but we do believe, over the long term, it will be important to driving sustained loyalty and maintaining market share.”
Several questions during the presentation addressed food inflation and Kroger’s attitude toward passing along higher costs. Millerchip said Kroger keeps a close eye on cost headwinds and is careful to ensure that when costs for items like ingredient prices reverse and become tailwinds, that finished goods prices are readjusted down the road.
“Once we’ve aligned on where those costs are, then certainly, our goal in general is to be proactive in making sure that we’re passing on those changes to the customer where it makes sense,” he said. “But obviously, making sure that we’re not doing anything to impact our competitive position overall.”
That said, Millerchip added that “some inflation” is typically healthy for the retail food business.
“Anything around 3% is generally a nice place to be for the food retail industry,” he said. “But at the end of the day, I think we’ve managed through periods that have been higher than that and of course in recent times lower.”