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Kroger’s Ocado Deal Further Proves Effectiveness of Its Acquire-Invest Strategy

Kroger’s Ocado Deal Further Proves Effectiveness of Its Acquire-Invest Strategy

News that the Kroger Co. launched an exclusive partnership with U.K.-based online supermarket Ocado to enhance its online ordering, automated fulfillment and home delivery was heralded as smart and bold by many experts, including the Cincinnati-based grocer’s own former VP of Loyalty Ken Fenyo. The partnership reminds him of Kroger’s deal 15 years ago with London-based data science company dunnhumby, where the two partnered to better understand and cater to Kroger’s shoppers, which in turn made Kroger’s data-driven customer centricity legendary.

“Grocery e-commerce is more expensive for grocery retailers than traditional operations,” said Fenyo, who now serves as head of consumer markets for New York-based consultancy McKinsey Fast Growth. “Grocery retailers must find ways to automate the supply chain if they have any hope of creating profitable e-commerce businesses. Although supply chain automation is a hot area right now for retail tech startups – including innovations in robotics, artificial intelligence, autonomous vehicles and more – Ocado is a clear leader in the space.”

Fenyo isn’t the only one heralding Ocado’s leadership, either. Marc Hubbard, VP client services USA with Toronto-based insights firm Advantage Group, calls the online grocer’s technology “world-class” – completely designed from the ground up to support a true online order-and-delivery model.

“Ocado never tried to retro fit or force fit anything, they built everything from scratch,” he stated. “If everything Ocado says is to be believed they are profitable, which is not something most companies selling groceries online can say.”

The warehouse picking and delivery efficiencies Ocado’s technology will bring to Kroger should help the retailer reduce its cost to serve its customers and help improve its margin, which clearly is an important priority to Kroger – as it is to all retailers.

“If the deal also included Ocado’s website technology and experience in promoting trial and repeat of new items, Kroger should be force to be reckoned with,” Hubbard noted.

A Smart Negotiation

Since 2014, Ocado has been exploring selling its technology and logistics expertise in a service model with an external retailer, said Diana Sheehan, VP of retail and shopper insights at London-based Kantar Consulting. But the move seems to have just hit its stride as it has partnered with Canadian grocer Sobeys, French grocer Casino and, in recent months, Kroger, which is taking the same acquire-invest approach it has been doing for years.

Much to the competition’s dismay, Kroger is now “significantly closer” to being the logistical leader in online grocery.

By negotiating for an exclusive on Ocado's technology – and keeping it out of rivals’ hands – Kroger can potentially leapfrog all its competitors not named Amazon, Fenyo noted. Its investment in Ocado will prove to be less costly time-, effort- and capital-wise than building similar technology in-house, added David Bishop, partner with Barrington, Ill.-based retail consultancy Brick Meets Click.

It also provides “ways to reduce supply-side cost that complement Kroger's demonstrated ability to manage the demand-side of the business,” Bishop noted.

But as with any deal, not just one side will benefit. Ocado has now locked up Kroger, by far the largest traditional U.S. grocery chain, Fenyo stated. With Walmart's continued investments in ecommerce, this announcement signals to the other players in the market that they need to take aggressive action if they want to stay relevant to shoppers. 

The move also helps Ocado execute a “pivot” in its strategy, Sheehan asserted. Before, it ran a fully integrated warehouse-to-home supply chain to deliver groceries to British consumers, sometimes with partners such as Marks & Spencer or Morrisons, but primarily using its own relationships with suppliers and consumers. Now, it is seeking to partner with a wide range of businesses – retailers, delivery agents, suppliers – to find solutions to consumer needs.

“This has taken them into monetizing their number one asset – software developers that understand how consumers like to shop for groceries,” she stated. “It has also attracted investments from some of the best retailers in the world enabling them to innovate at a much faster rate.”

Much to the competition’s dismay, Kroger is now “significantly closer” to being the logistical leader in online grocery, and able to capitalize on Ocado’s own learnings about operating profitably in ecommerce, Sheehan explained. But a bright side is that the grocer’s ramp-up will take time, as the technology must be implemented, and distribution centers need to be built to support the software implementation. Only then will Kroger start to see true ROI.

In the meantime, Bishop noted, other grocers should remember: Online grocery isn’t all about delivery – it also includes click-and-collect, which is expected to become a more fierce battleground for those seeking to develop stronger linkages with their in-store proposition. Progressive Grocer's 2018 Annual Report, in fact, shows 32 percent of polled grocers saying they offer click-and-collect, compared to just 15 percent in 2016's report.

And that could take some time to work out in the new deal. Hubbard pointed out that “how Kroger integrates this [new] online capability with in-store pickup … will be interesting, as those costs and complexities will not be solved by Ocado’s warehouse capabilities.”

About the Author

Randy Hofbauer

Randy Hofbauer is the former digital and technology editor of Progressive Grocer. He has more than a decade of experience as a content strategist, researcher and marketer, almost all of it covering CPG retailing. His insights and work have been cited in a number of media outlets, including The New York Times, the Associated Press and the Chicago Tribune, and he was named a finalist in the Software & Information Industry Association's 2018 Emerging Leader Awards. Follow him on Twitter or connect with him on LinkedIn.

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