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Kroger is taking on Publix in Florida without opening a single grocery store

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Kroger’s delivery vans can double as billboards. They are being used by the company to spread the news that they now offer grocery delivery in Florida.

Melissa Repko

GROVELAND, Fla.— Kroger wants to attract tens of thousands of new customers in Florida — and it plans to do that without opening a single grocery store.

The supermarket operator instead relies on a giant warehouse of robots that help retrieve such products as bananas, milk and meatAlso, a team of delivery drivers drop online orders right at your doorstep. The automated warehouse — big enough to fit nearly eight football fields — is a pricey bet for the grocer and an illustration of its e-commerce ambitions.

This was 3 years ago Kroger struck a dealBritish Online Grocer OcadoTo build a network, or sheds, of customer fulfillment centres across the U.S. Ocado was chosen because it has a track record in the United Kingdom where it is popular with its customers. Kroger currently has 2 sheds and is planning to add at least 9 more within the next two-years.

Florida is the starting point for Kroger’s national strategy to be a dominant e-commerce company. Just for the construction of the shed, it has spent at least $55million. The state has employed over 900 workers. The company has plans to utilize the state’s resources to expand its reach and compete with grocery competitors, such as Florida-based Publix. AmazonAnd WalmartMarket values approximately 54x and 13x higher than Kroger.

Kroger has argued that the sheds will help it keep up with customers who are buying more food and household items online — while increasing the money it makes from each of those orders. The grocer’s Florida expansion will require it to prove that the sheds are able to power large and profitable ecommerce businesses in an industry with low margins. It must also attract customers from a new market. Kroger, while it may be the biggest supermarket operator in America, is still the state’s newcomer.

As the Northeast grows, the Kroger Delivery Florida playbook will prove to be a valuable tool. It announced last month that it would build a shed in New York to service customers in New Jersey, Connecticut, and New York. However, it has not yet shared its timeline.

It’s never too late to make it obvious

Rodney McMullen (61), is Kroger’s CEO. He joined Kroger as a stock clerk in 1978. To remain relevant, he said that the company should invest in digital technology and enter new markets.

He keeps a record of top food retailers in the Cincinnati area over the last few decades. The company names and their rise — or fall — from the list remind him how quickly retailers can go from dominant to obsolete.

“Everytime that it [the retail industry]”Transitions will be difficult, and there are going to some winners and others,” he told CNBC. You just have to be there for the change. Once it becomes obvious it is too late.

There are warning signs about its competitors just a short distance from Kroger campus. Publix is a popular regional grocery store that also advertises its delivery services through billboards. Instacart, a third-party delivery service, powers it.

Melissa Repko

“Tell your neighbor”

The delivery vans of Kroger serve as huge billboards that announce the arrival of the grocery store in Florida. Latoya Thornton, a Kroger employee, puts on her uniform each day and drives the van to deliver orders to customers. They keep groceries cool even in Florida heat and on long trips to remote rural areas with dirt roads.

But a short drive from Kroger’s central Florida shed is all it takes for Thornton to see the company’s competition — and its opportunity. Publix is a Florida-based grocery store that has billboards advertising their delivery service. Instacart, third-party delivery company, powers them. The area is dotted with construction cranes, which are adorned by big banners informing people that “New Homes Are Coming Soon”

Kroger chose to place its flag in Florida because of the Sun Belt’s migration. McMullen explained that Floridians are moving from other states, where they know the Grocer well, making it easier for the company to get business.

The U.S. Census Bureau reports that Florida has seen a 14% rise in population from 18.8 million people in 2010 and 21.5 million by 2020. While the U.S. has experienced a slowdown in its growth, Florida is still ahead of the curve. At least some of those new Floridians belong to wealthier households who moved to the state because of its low taxes — and they are an appealing customer base for grocers.

Kroger operates nearly 2800 locations in 35 states. However, there is only one Kroger store in Florida. It’s located near Georgia. It does not have any of the banners that Fred Meyer, King Soopers or Ralphs display elsewhere in Florida.

Publix stores are scattered throughout the Sunshine State. This privately-owned grocery chain has the highest market share in the state, and is the oldest. According to IRI market research firm, it holds the most sales of packaged consumer goods. Publix didn’t respond to our request for comment.

Publix sells 37% Florida’s groceries, WalmartIRI reports that the market share of IRI is 26%. IRI doesn’t monitor categories like fuel and prescription medication. It doesn’t even include CostcoRetailers in dollar stores

The market remains fragmented. Aldi is one of the other grocers. Sprouts Farmers MarketAnd AmazonWhole Foods Markets, which are owned by Whole Foods Markets, also see opportunities in Florida and plan to open new stores there.

Thornton explained that Kroger is a part of Thornton’s job. Sometimes drivers will honk at delivery vehicles when they approach traffic lights. They then roll down the windows to ask where the closest Kroger store is located. The woman hands the drivers business cards with details of her delivery services.

Homebound senior citizens or residents of older age who came to California for warmer weather, and then moved into larger retirement communities such as The Villages. Many others are parents, shoppers and busy people who use home delivery to cut down on their time.

“I told them, the greatest tip that you can give them is to tell your neighbours,” she stated.

McMullen claimed that Kroger’s online-only offerings help it stand out. How can you stand out from the rest if you don’t have physical locations? He agreed. He said, “By entering the market with a shed it offers something unique that isn’t offered today.”

Kroger Delivery charges a $6.95 delivery fee, in addition to grocery costs. Kroger’s Delivery Savings Pass can be purchased by Florida customers for $79 and unlimited delivery. Kroger is offering $15 discount on the first three order to lure new customers.

Make the change

McMullen refused to reveal how many Kroger customers he has in Florida so far. McMullen said that it was “tracking ahead” of where he expected. The service also has high repeat rates — a reflection, he said, that customers are pleased when they use it.

McMullen explained that customers who are new tend to order less items at the beginning. McMullen said that home delivery baskets become more like curbside pickup over time with baskets three times as large than someone going to a shop.

One shopper who made the switch is Caitlin Zausner, a 35-year-old mother of two who lives in Bradenton — about 100 miles from Kroger’s shed in Groveland. What time? the pandemicShe was pregnant when she started, trying to manage a toddler while she tried to lower her family’s chance of contracting Covid-19.

She began curbside picking up groceries instead of going to the Publix every day. She drove Emmy, her 2-year old daughter, to Walmart each Saturday to pick up online groceries.

While they waited, she kept the toddler entertained with dry Cheerios and kid’s music. This weekly routine took around an hour-and-a-half.

This changed when Zausner saw a post on Facebook from a neighbor who liked Kroger Delivery. Kroger was a brand Zausner learned about from her sister in law, who used to shop at the stores in Tennessee.

Zausner claimed that she used to associate stress with trips to the grocery stores even before the pandemic. She should put the baby in a carrier. Is it possible to keep her occupied?

She placed an order and said she was impressed by the fresh produce and meats — and the slightly lower prices than Publix. Every week, Kroger delivers to her home. She can now spend Saturdays in the playground.

“It is a bother to make time for it.” [to the grocery store]She said that she has a shopping list. “I never miss grocery shopping.”

Costs covered

Zausner may be a fan but not everyone is. For Kroger’s gamble to succeed, it will take a shift in American habits. As Kroger seeks to construct 20 facilities in the United States over the next few years, it is putting more than $1B on the line for its construction spend.

There are also labor costs. Kroger still needs to employ thousands of delivery and picker drivers, which are not gig economy workers, despite the automation. Starting at $19 an hour, driver pay.

Kroger will pay Ocado a portion of each sale in the interim as part of their agreement.

The grocer is banking on the premise that online grocery shopping will drive a larger and larger percentage of total grocery sales — and that customers will embrace home delivery.

Americans are more inclined to choose curbside pick-up when ordering online. This approach offers both retailers and consumers financial incentives, as shoppers are able to skip delivery fees while companies have lower shipping costs.

The online Kroger business exploded like other grocers when the pandemic hit. Consumers started cooking and dining at home more. In fiscal 2020, Kroger’s online sales more than doubled compared to the previous year. Kroger shares have increased 35% in the past year, making it a $31.94 billion market cap.

While online grocery shopping growth is slowing as people return to dining out and travelling, the rate of growth in this sector has been much greater than it was pre-pandemic. About half of U.S. households — 64.1 million in total — bought groceries online through ship to home, delivery or pickup in September, according to a survey in late September by Brick Meets Click, an independent research initiative, and sponsored by Mercatus, a digital commerce tech provider.

Customer wins because they can achieve what they desire in a more efficient way. It’s exciting to be there.

Rodney McMullen

Kroger CEO

Brick Meets Click/Mercatus has found that online grocery shopping now accounts for 12.3%, compared to 1.8% in the pre-pandemic. This equates to an $8 billion increase in grocery sales monthly, or roughly $65 billion.

Online grocery shoppers placed an average of 2.76 orders in September — a higher and more stable number than a year ago, its surveys said.

Ocado is a success story on home soil, which Kroger often points out to. British customers are more open to online shopping than Americans, and prefer delivery at home over pick up.

In the U.S., Kroger has said the sheds can churn out orders for curbside pickup, too — at least in markets where it has stores. Ohio already has this capability.

Karen Short, retail analyst at Barclays said that things have changed drastically since Kroger signed the Ocado agreement. Kroger had a sense of urgency at that time to catch up, she stated. AmazonAnd WalmartIt is. Amazon purchased Whole Foods almost one year later, which was an unfortunate move for traditional grocers. Walmart had been investing heavily in its E-commerce Business.

Short stated that grocers now have the option of choosing lower-cost options. Walmart, which is, by far, the nation’s biggest grocer in terms of revenue, is carving out parts of its stores and turning them into mini, automated warehouses — a strategy called micro-fulfillment. AlbertsonsDoorDash, a third party delivery company, reached an agreement.

According to her, Kroger’s high-capital expenditure commitment is what is causing the problems.

Latoya Thornton, one of approximately 500 Florida drivers who drop off grocery items for Kroger Delivery, is Latoya Thornton. Some are seniors living at home, while others just want to save some time.

Melissa Repko

She also said that construction costs are likely to have risen from initial estimates as labor and materials cost more. (Kroger refused to discuss the final cost.

Short estimates that Kroger pays 4% or 5% of every dollar of sales to Ocado — less than the estimated 8% it had paid Instacart in 2018 when it signed the deal with the British online grocer. According to her, the fee will be lower than third-party players such as Ocado. Uber EatsAnd DoorDashThis could be used to fulfill orders that do not require sheds.

Kroger has assigned her a sell rating and she targets a $37 price. This is approximately 14% less than Kroger’s closing Wednesday.

For grocers, including Kroger, a big challenge is turning e-commerce sales into ones that are just as profitable — or more profitable — than a sale at a store, even while taking on additional labor and delivery costs.

Kroger has said each shed will break even in its third year of operations By the fourth year It will be comparable to a retail store’s profitability. One shed can be equal to twenty stores in terms of sales. However, it requires only 60% capital investment and 60% labor.

Jefferies retail analyst Matt Fishbein said that the biggest challenge for grocers will be meeting this benchmark. It must lower the costs of shipping online orders. If this is not the case, adding sheds in the existing supermarket markets will likely divert foot-traffic away from their stores to make way for a sales that earns less. With a target price of $40, he has given Kroger a Hold rating. This is about 7% less than the current trading price of shares.

Short stated that Kroger’s Ocado deals could be the best. However, it is possible to gain market share in markets such as Florida, where there are no store sales losses. According to her, Kroger has the ability to outperform rivals when it comes down price in regions like Florida and Northern California.

The robots can glide over a grid to retrieve groceries from Kroger’s automated warehouses. Ocado software is what powers the robots. It’s based in U.K.

Kroger

“There’s pockets of the country where if you can do it and undercut your competitors and still maintain your margin — even with the fees that you pay Ocado — it seems kind of like a no-brainer,” she said.

Fishbein suggested that Kroger’s first-party approach might give it an advantage over other retailers that use third party vendors, even though this comes with higher cost. This is the same as restaurants that depend on delivery companies, Fishbein said. They lose customer service aspects such as making sure food arrives hot or having data that can be used to recommend products to customers.

Fishbein warned that Kroger could be hampered by simply recruiting new customers. Online shopping is not always easy for some shoppers, who prefer to see the product in person.

Kroger is going to deliver it fresher than you getting on your toes and walking down to Publix. He said.

McMullen stated that Ocado is only one aspect of the company’s e-commerce strategy. McMullen said that the company recently reached an agreement with Instacart. to offer deliveries in as little as 30 minutesNational

Kroger already doubles down on Florida. To serve Florida’s southern region, it will be adding two small fulfillment centers. Already having two hubs in Tampa and Jacksonville, it can fill orders with additional trucks and then spread out to expand its delivery areas. Ocado is launching a micro-fulfillment center.

Kroger stated that the expansion will enable it to ship to customers within 30 minutes, with an assortment totaling 10,000 products and deliver next day and same-day orders of 35,000 items in just 30 minutes. Kroger has not disclosed any details about the cost of this expansion or its timeline.

McMullen shrugs off critics. McMullen said that he is energized by the pace of change in his industry.

“The customer wins, as the customer can obtain what they desire in an easier manner,” he stated. “And it is cool for me to be right there with them,” he said.

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