What Kroger, Walmart, Target learned from China about grocery’s future

Now going on 140 years in business, Cincinnati-based Kroger sped up its push into digital retailing during the pandemic, and grocery store chain isn’t looking back.      

Kroger has adopted an omnichannel strategy, integration of offline or in-store sales with online orders and logistics. It’s a concept that originated in China in 2016 when founder Jack Ma of e-commerce giant Alibaba coined the term “New Retail” and proceeded to open 300 high-tech Freshippo-branded supermarkets in 27 Chinese cities.

This “New Retail” model has been “cut and pasted from businesses that worked in China,” said Michael Zakkour, founder of digital commerce and retail consultancy 5 New Digital in New York. “We are seeing it with Kroger, Target and Walmart. They looked at the New Retail model born in China for complete integration of offline and online channels,” he said. “Same-day delivery, restaurants in store, app-driven sales and QR codes are all bright spots in every single one of them, and all happened first in China.”

At first, the highly competitive and fragmented U.S. food retailing business was slow to catch on. But the action was jumpstarted when Amazon bought Whole Foods Market in 2017 and began introducing several advanced technologies to streamline in-store shopping, a shift that also spread to large retailers Walmart and Target.

“You just can’t be a 1990s grocer. You have to be courageous, break things, and quickly adapt,” said Yael Cosset, senior vice president and chief information officer at Kroger, who is leading its tech and digital initiatives. In a nod to Alibaba, he said the Chinese e-commerce company “has done a fantastic job in reinventing the retail model, a convergence of brick and mortar with e-commerce in an online and offline world.”

Cosset has been spearheading introduction of the omnichannel shopping experience. Kroger’s new retailing links together shopping, e-commerce and logistics: automated fulfillment centers bag groceries; vans make same-day deliveries to households; data analytics provide an early read on customer trends; mobile apps distribute customer promotions and coupons; on-premise “ghost kitchens” prepare meals for in-store pickup or van delivery; QR codes handle payments online at self check-outs; and large online fulfillment centers and warehouses rely on robots for packing, sorting and loading orders.

New automated fulfillment centers are a critical part of the technology effort. These centers use AI and robotics to replace labor-intensive work of sorting and bagging groceries for delivery, while on-site employees handle such operations as engineering and inventory management.

“When you look at retail, there are two big enablers: tech and data science, and secondly, supply chain logistics and fulfillment,” Zakkour said. “The lesson that American retailers are learning is that their operations can be more efficient with higher margins when retail and e-commerce are seamlessly integrated.”

Zakkour credited Kroger for being one of the more progressive U.S. retailers in implementing this omnichannel approach. Competitors Walmart and Target are spending heavily, even in a slowing economy, and with technology a focus among current capex investments. 

“A company that doesn’t have a laser beam focus on tech that Kroger does is vulnerable,” said Jim Russell, principal at investment firm Bahl & Gaynor in Cincinnati.  “These digital trends continue to roll forward, and Kroger is delivering very strong results in the pandemic and post-pandemic period.”

Digital grocery shopping took off during Covid, as customers favored e-commerce, eating at home, and prepared meals. Kroger’s digital business scaled to more than $10 billion in 2020, and has grown by 113 percent during the past two years. Building on this momentum, Kroger aims to double its digital revenues by the end of 2023. Kroger digital sales gained by 8 percent in the second quarter of 2022, while in-store and online combined gained 5.8 percent from a year earlier.

Supermarkets had been lagging other sectors in e-commerce with three to four percent of total sales but tripled during the pandemic, according to McKinsey, which predicts that e-commerce will represent 18 percent of supermarket sales within the next three to five years.

“We are finding out now how well this digital shift is working at Kroger,” Russell said. He pointed out that “half of Kroger’s app stores are bringing in incremental business and half are cannibalizing in-store sales.”  Total company sales rose 4.1 percent in 2021 to $137.9 billion, and Kroger is expecting a gain in the range of 4 percent to 4.5 percent for 2022.   

Under a Restock Kroger initiative begun five years ago, the grocer combined physical and digital experiences, a strategy that has required major, long-term investment in robotics and supply chain management, as well as data analytics to understand and predict customer habits, and to personalize marketing.  

“We are leveraging data to engage with customers through digital channels such as apps and web site logins to make the customer interactions relevant, and bring to life personalized shopping experiences,” Cosset said. He pointed out that large stores can lose the personal connection with customers that a local shop provides. But by using data and technology, Kroger can link better to customers and personalize ads and promotions online.

Cosset joined Kroger in 2015 when the grocery chain acquired the U.S. assets of its partner, London-based data science company dunnhumby, where he held leadership posts. Kroger created 84.51° as a new business out of dunnhumbyUSA, serving Kroger and other clients including Procter & Gamble, Coca-Cola and Tesco. Cosset began leading Kroger’s digital growth strategy and e-commerce in 2017, and was promoted in 2019 to also take charge of technology, and his role expanded again two years ago to include oversight of the grocer’s data insights unit 84.51°.  

Another acquisition that proved key to the new strategy was U.K.-based grocery e-commerce company Ocado Group, which Kroger bought in 2018 and partnered with to bring its home delivery platform to the U.S.. Kroger opened its first three Ocado-run centers near Cincinnati, Atlanta and Orlando in 2021, and this year has added Dallas and Wisconsin. Several more locations are planned. These giant hubs can handle thousands of online orders daily, and smaller facilities in spoke locations provide last-mile deliveries from delivery vans that can handle 20 orders at a time.

“Grocery in the U.S. has been behind the curve historically relative to the U.K., France and Germany,” said Hilding Anderson, head of retail strategy, North America, at Publicis Sapient.  “U.S. consumers were too slow and grocers were focused on survival. It took Covid for the U.S. to catch up with retailing trends.”