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Kroger will acquire Home Chef, the largest private meal kit business in the US to complement its existing Prep + Pared range.

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UK-based Online grocer Ocado has announced its fifth international deal, with US grocery retailer Kroger. Under the terms of the agreement, Ocado's technology will be used in the US exclusively by Kroger, with the US firm also increasing its investment in the company by five percent. This will bring its investment in Ocado to more than six percent. 

Identifying up to 20 sites for development

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. In exchange, Kroger will pay monthly exclusivity and consultancy fees which will offset in part the total fees that are expected to be agreed between the two parties. The two companies are currently working to identify the first three sites in 2018 for the development of new, automated warehouse facilities, while up to a total of 20 sites will be identified over the first three years of the agreement. This highlights the scale of the deal for both companies. 

Ocado’s chief executive, Tim Steiner, said: “The opportunity to partner with Kroger to transform the way in which US customers buy grocery represents a huge opportunity to redefine the grocery experience of Kroger’s customers and create value for the stakeholders of both Kroger and Ocado.”

Shifting focus to delivery options in the US

The agreement comes as retailers continue to scale up in the channel. While store pickup options have been a major focus for US retailers, including Kroger, the focus this year has shifted to home delivery. Several retailers have signed agreements with the on-demand delivery platform, Instacart, to build a presence in the channel. Over the last year, these include Costco, Sam's Club, Wegmans and Publix. This year, Walmart has also started to roll-out home delivery in partnership with several companies to 100 metro areas, Amazon is expanding its Prime Now service at Whole Foods Market, while Target is optimising its acquisition of Shipt last year to roll-out same-day delivery.

Kroger digital sales up 90% last year

Kroger has also been partnering with Instacart and other on-demand services for home delivery, with the service available in just under 900 locations. Along with its store pickup model, ClickList, this helped the retailer to grow its digital sales more than 90% during its 2017 financial year. This year, it plans to add around 500 additional stores offering the ClickList service. The future of its existing delivery partnerships remains unclear, although they are likely to be in place for some time as it will take several years for the partnership with Ocado to scale up.

Source: IGD Research

Ocado’s growing number of international partners

The deal with Kroger is the latest in a number of tie-ups announced by Ocado in recent months. Earlier this month, it announced a deal to support Swedish supermarket ICA’s online grocery business, following deals with Canada-based Sobeys and France-based Casino. The retailer also announced an agreement with an unnamed partner last June, making Kroger its fifth international partner.

This latest deal for Ocado means that is has entry into the world’s biggest market, and its role as a provider of retail technology is continuing to gain momentum.

To understand more about how Ocado operates, subscribers can see our insight presentation about its Strategic Outlook.

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Lucky's Market, a specialist grocery chain that created a strategic partnership with Kroger in 2016, will look to almost double its store numbers over the next two years.

Expansion plans

 Lucky's, a farmers market style grocery chain, currently operates 28 stores but has announced plans to increase this to more than 40 over the next 18-24 months. It has signed leases for 20 new stores and is also looking for further sites. Much of the expansion will be focused on Florida, building on the success of its existing stores in the state. Its format features a range of organic and speciality products, including a large selection of made in house goods and fresh, local produce and seafood. However, it aims to still be affordable and 'Organic for the 99%' is its tagline.

Utilising its partnership with Kroger

One of the benefits of the Kroger and Lucky's partnership is the ability for growth to be accelerated, into both new and existing markets. The scale and expertise of Kroger has helped Lucky's to enhance its offer and for Kroger, it builds on its commitment to health and its aim to provide affordable organic and natural foods to shoppers. Kroger has also been expanding its food service offer and Lucky's provides expertise in this area. Stores have a wide selection of additional services, including a ramen bar, fresh sushi and juice bar, as well as cafe seating and a unique program called 'Sip 'n Stroll' where customers can purchase a $2 pint of local beer or $3 glass of wine to enjoy as part of the shopping experience.

Growing popularity of specialist stores

The popularity of specialist grocery stores continues to increase, with similar retailers such as Earth Fare and Sprouts Farmers Market also expanding their footprints. As well as offering natural, high quality products, these retailers also aim to provide a great shopping experience, elevating grocery shopping from a chore to an enjoyable experience. This is often achieved through the addition of food-to-go and restaurant offers, creating a destination for eating, alongside grocery shopping.

We look at how the on-demand shopping platform has crafted a range of new deals this year, enabling several retailers to enter, or extend their presence, in the grocery ecommerce channel.

Spurred on by Amazon Whole Foods Market deal

Founded in 2012, Instacart has become the leading on-demand delivery platform for grocery ecommerce in North America. Having partnered with Whole Foods Market to enable its entry into the channel, there were concerns that Amazon’s acquisition of the retailer would limit its growth. However, the opposite has been the case, with Instacart forging ahead with a range of new retailer partnerships. Last year, new deals were signed with Publix, Wegmans and Costco, while its partnership with Loblaw marked its entry into the Canadian market.

Source: Instacart

Significant period of new business development

Since the start of the year, a constant stream of additional partnerships have been signed. These include BJ’s Wholesale Club and Sam’s Club, which along with its programs with Costco, makes it the main ecommerce platform for the club channel. It has also started working with Fresh Thyme Farmers Market and expanded its partnerships with Aldi and Food Lion. At Albertsons and Kroger, new initiatives have seen it start to work alongside existing store pickup and delivery options, while at Sprouts Farmers Market, Instacart is a delivery option alongside Amazon Prime.

Spurred on by Amazon Whole Foods Market deal

Rather than restricting its growth, Amazon’s acquisition of Whole Foods Market is likely to have been a catalyst for the new business which Instacart has generated. For many retailers, the deal condensed the timelines for their channel entry/expansion plans, concerned by how the Whole Foods Market acquisition could accelerate Amazon’s plans to grab a bigger share of the grocery ecommerce channel.

Channel gaining momentum in 2018

Instacart’s progress is likely to continue gaining traction through 2018 as the channel gains momentum. Walmart is set to add around 1,000 grocery pickup locations this year, in addition to expanding its delivery service to more than 100 metro areas across the US. It is working with a range of delivery partners, including Uber and Deliv. Target’s acquisition of Shipt last year is enabling it to launch same-day grocery delivery, as it also expands its Drive Up and Restock programs, while Amazon is piloting free two-hour delivery at Whole Foods Market for Prime Now customers.

New funding to support growth and development

This year Instacart has raised $350m in funding which will support the growth of the team and the development of new products and services. This values the company at around $4.4bn. In January it acquired Toronto-based Unata, which provides grocery retailers with a white-label digital grocery platform. The long-term vision is to combine this with the Instcart platform to provide retailers with a “single powerhouse platform.”

Learn more about the US grocery ecommerce channel by signing up to our free newsletter here 

Stewart Samuel, Program Director, IGD Canada: based in Canada, Stewart heads up all of IGD's research and coverage on the US market. Contact Stewart at [email protected] for further insight on the region's markets, channels and retailers. Follow Stewart on Twitter: @Stewart_IGD

Presentations

11/05/2018
An essential summary of trading priorities, latest developments, and other key commercial insights for Kroger.
23/01/2018
As Seattle becomes a key destination for an increasing number of food and grocery suppliers, we've identified 15 great stores to visit in the city. These include innovative concepts such as Amazon Go and Starbucks Roastery, and inspirational independent operators, including PCC Community Markets and Metropolitan Market.
22/01/2018
As food-to-go becomes an increasingly important route to growth, we assess the key trends that will shape the development in the year ahead.
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Key presentations

We review Kroger’s retail outlook over the next five years and explore its priorities.

This in-depth guide to the USA explores the key trends in grocery retail and the growth strategies of the leading retailers in the country.

An essential summary of trading priorities, latest developments, and other key commercial insights for Kroger.

We've developed a single, universal methodology for calculating food and consumer goods retail data, supported by our programme of primary and secondary research. This makes Retail Analysis the most reliable and robust source available for data of this type. 

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