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Here’s Kroger’s big bet to fight Amazon

Kroger wants to sell you more groceries online. And to do that, it’s banking on a strategy that’s drawing some skepticism on Wall Street.

Kroger this spring is opening a $55 million, 375,000 square-foot fully automated distribution center outside Cincinnati in partnership with Ocado— the British online supermarket and warehouse specialist. It’s the first of 10 such facilities that Kroger, the largest US supermarket chain, plans to complete over the next two years.

The purpose of these centers is to speed up your home delivery and curbside pickup orders. Kroger last month said it’s aiming to double its digital sales, which include both home delivery and curbside pickup, to more than $20 billion by the end of 2023.

Shopping for groceries online has taken off in the pandemic as consumers limit their trips to stores. Online food and beverage sales jumped 83% to $39 billion during the year ending on January 31, compared with the same period the year prior, according to the most recent data from Nielsen.

Kroger is competing for a bigger chunk of the online market against Amazon, Walmart and others.

In the race to grab a larger share of customers’ online orders, grocers currently are planning two different approaches to get you your food on time. One, like Kroger, is to open large standalone warehouses that can fulfill thousands of orders a day and cover customers’ orders in multiple markets.

The other, employed by stores like Walmart, Albertsons, and H-E-B, is to open mini warehouses in stores — a concept known as micro-fulfillment centers— to cater to online orders.

Kroger’s warehouses can fulfill more orders in a day than smaller micro-fulfillment centers — an advantage as online demand grows.

But in-store micro-fulfillment centers are better tailored to meet same-day delivery demand than large-scale warehouses, said Kelly Bania, an analyst at BMO Capital Markets. This is because large fulfillment centers are typically located further away from customers’ homes than stores.

“This is primarily a next-day service,” she said. “The US has really evolved into such a same-day market.”

Kroger’s approach could also hurt its profit since bigger warehouses are more expensive to build, she said.

On Wednesday, Ocado CEO Tim Steiner said the warehouses have the capability to fulfill same-day delivery orders. Kroger also offers same-day delivery from stores through a partnership with Instacart.

Kroger CEO Rodney McMullen said Wednesday that Kroger expects its profitability from these warehouses to be comparable to delivering orders from stores.

McMullen added that Kroger is not locked into its large-scale warehouse approach and may build smaller facilities in the future.

Article Topic Follows: Money

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