Kroger is expanding its autonomous grocery delivery service to Houston, following an earlier test in Scottsdale, Arizona.

Almost 1,000 deliveries completed as part of pilot program

Kroger is working with self-driving vehicle company, Nuro, for the expansion of this programme. It will operate from two Kroger stores in the Houston market, making deliveries into four zip codes. Like Scottsdale, the pilot will start with Nuro's self-driving Toyota Prius fleet before introducing the next generation of the custom driverless vehicle later this year. Through the first stage of the pilot, Kroger and Nuro have successfully and safely completed thousands of deliveries to customers in Scottsdale.

Source: Kroger

Potential to significantly scale-up in Houston

The initial pilot has confirmed for Kroger the the flexibility and benefits provided by autonomous vehicles. Customers have also been very receptive to having their groceries delivered in this way. Through moving the test to Houston, where Kroger has a significant presence, there is an opportunity to significantly scale up the programme in the future.

Improving the economics of grocery ecommerce

Self-driving vehicles could be an important component in improving the economics of grocery ecommerce. Last-mile delivery represent a significant proportion of overall costs. Retailers in North America are currently testing several fulfillment and delivery models as they look to reduce channel costs. These include hyper-local robotic fulfillment, third-party crowd-sourced delivery platforms and shared, centralised distribution models.

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We look at Kroger’s further quarter performance and progress against its strategic plan, Restock Kroger.

Kroger’s key numbers

Kroger’s fourth quarter sales fell by 9.5% to $28.1bn, reflecting a 53-week financial year in 2017 and the sale of its convenience store business. Excluding these impacts and the acquisition of Home chef, sales increased 1.6%. Identical store sales were up 1.9%. For the full year, total sales fell 1.2% to $121.2bn, with identical store sales up 1.8%.

A year of transformation

Under the Restock Kroger strategic plan, 2018 was designated as a year of transformation. Focused on redefining the customer experience, several new initiatives were launched in the quarter to support this including a new strategic partnership with Microsoft, the launch of Kroger Pay and the expansion of is Home Chef meal kits business. For the year ahead, Kroger anticipates identical store sales of 2.0-2.25%. Kroger expects the uptick in performance to come from the space optimisation programme, which negatively impacted sales last year.

Developing alternative profit streams

However, the investments to support its transformation and digital business led to earnings per share to come in below expectations. The first year of the strategic plan, which is focused on growing operating income by an additional $400m by 2020, was always going to be challenging as it pulled forward investments in pricing, digital and store improvements.

However, Kroger is developing a range of alternative businesses to deliver the incremental profit growth. These include its data-science business, 84.51, and its Digital Media unit, both of which beat their operating profit targets in 2018. The retailer also delivered cost savings of $1bn through process improvements. The retailer expects the investments undertaken over the last 12 months to be tailwinds in the year ahead, ensuring it remains on track with its 2020 goal.

Source: IGD Research

Digital sales up 58%

Digital sales increased by 58% as it continued to expand its programmes. Its pickup or delivery services currently reach 91% of Kroger households. By the end of the year, this will rise to 100% with the full integration of Kroger Ship. The retailer’s private brands also continue to grow at pace, with unit share rising to a record 30.5% in the quarter. This was led by its Simple Truth range, with sales up 15.3%. Annualised sales for the brand stand at $2.3bn, reflecting the continued strong demand for natural and organic products.

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Kroger and Ocado will open the second and third of 20 Customer Fulfillment Centres (CFC) in Central Florida and Mid-Atlantic.

Optimising new technologies

Ecommerce has been a major focus for Kroger over the last year. In 2018, Kroger announced a strategic partnership with Ocado which will see them jointly develop up to 20 automated fulfilment centres for grocery ecommerce in the US. These will optimise Ocado’s technology-led solutions. The deal gives Kroger the rights to use Ocado’s technology for grocery and other food distribution related activities in the US on an exclusive basis.

Following the announcement of the building of the first CFC in Monroe, Ohio in November 2018, the retailers are set to open two more along the East Coast. The same CFC model (an automated warehouse facility with digital and robotic capabilities), will be replicated for the two new CFCs. Through its robotic Customer Fulfillment Centres, Ocado believes that it can significantly lower the time and cost to pick an order, versus store-based picking.

Alex Tosolini, senior vice president of new business development at Kroger, commented: "Kroger is developing the retail model of the future through our exciting partnership with Ocado, a UK-based company with global ties. We will co-innovate with Ocado to develop the best possible experiences for our customers, leveraging advanced robotics technology and creative solutions”.

Source: Kroger

Entering new markets

The first CFC is located north of Cincinnati, where Kroger is based. The retailer has significant density in this area, including in the Indianapolis, Columbus and Louisville markets. However, Kroger does not currently operate any of its own stores in Florida. The strategic partnership with Ocado is enabling Kroger to expand into new areas and reach different customers. The opening of the new CFC in the area will enable Kroger to enter into a new market.   

Retail Analysis subscribers: read our insight reports, Strategic Outlook for Kroger and Strategic Outlook for Ocado to learn more.