Ocado’s Luke Jensen Talks Kroger Partnership

From the prospect of virtually expanding to a national footprint to the question of whether sufficient customer appetite to support its considerable investment ever develops, much is riding on the success of The Kroger Co.’s ambitions to evolve its online grocery business behind an exclusive U.S. partnership with the technology firm Ocado.

Nearly three years in the making, the first two of as many as 20 multimillion-dollar fulfillment centers are set to open early next year in a move that will transform Kroger’s current e-commerce offering, which today is largely operated manually in its stores, to one also enabled by central warehouses powered by advanced robotics and artificial intelligence. The goal is to turn the money-losing proposition of shopping and delivering for customers into a profitable means of gaining share against the likes of giants such as Walmart and Amazon.

Will the biggest bet in U.S. food retail pay off? Luke Jensen is confident it will.

“The challenge of online grocery is not specific to Kroger,” Jensen, the CEO of Ocado Solutions, told WGB in an exclusive interview this month. “The challenge is that when you do the sums, you realize that it’s either impossible to make money doing it, or extremely, extremely difficult to do anything more than break even. This is a problem that every grocer has around the world.”

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Though the Kroger-Ocado partnership has encountered plenty of skepticism—investors worry about the costs of implementation, some industry observers note Kroger has little experience conquering new geographies, and others have questioned the wisdom of distant warehouses to serve the last mile in a spread-out country—most grocers, including Kroger, since the pandemic arrived this spring have seen e-commerce volumes soar to the point at which fulfilling from stores alone is no longer adequate and are being forced to think bigger. This further validates the company’s vision to invest with Ocado, Jensen said.

“Kroger took a very strategic view, which was to say, imagine a world in which online may end up being 20% of the market, or 30% of the market,” Jensen said. “You’re going to have to have a solution that delivers economically against that scale of business. You can’t think of this incrementally. You need to think of this radically.”

Ocado Solutions is the arm of the British e-grocer Ocado that licenses its software and robotic solutions, known as the Ocado Smart Platform, to worldwide grocers. Kroger and Ocado announced an exclusive U.S. agreement in 2018. The deal calls for the companies to build up to 20 U.S. fulfillment centers. Kroger, which invested in Ocado as part of the deal, is to pay monthly fees for Ocado’s service.

Degrees of Flexibility

Jensen is a former retail strategy consultant and executive of the U.K. grocer Sainsbury’s who joined Ocado in 2017 as it moved to license the software and solutions behind its groundbreaking U.K. retail business to grocers worldwide. In an interview, he leaves it to Kroger to reveal details about the forthcoming service—a brand name, for example—but is happy to extoll the virtues of an underpinning he describes as the most sustainable solution to orchestrating e-commerce for grocery at scale.

This is because Ocado’s large and efficient facilities address three plagues of the online experience for shoppers—selection, freshness and price—explaining how these issues play out differently in the physical and virtual worlds.

“When you’re in a store shopping, if you don’t find exactly what you went into the store to get, without even thinking about it you’ll pick something else yourself, and if [someone were to] survey you and ask if you found what you were looking for, you’ll say, 'Sure,’ ” he said. “But when you order online, you expect everything you’ve ordered to arrive, and you’re much less tolerant of any deviation.”

This is a problem that virtual shoppers can’t help but inherit when their orders are fulfilled through stores, where inventory is considerably less reliable than a gigantic warehouse that receives items directly.

“Statistically, you massively increase your probability to have products in stock because you haven’t devolved at/to multiple stocking points,” he said. “In addition, you can absolutely know what’s in your warehouse at any point in time, and you can even know what’s going to be in your warehouse at the next point in time, because you’ve got your flow of orders already in the system and you can be super accurate.”

A related benefit of Ocado’s system, Jensen added, is it provides items with guaranteed sell-by dates, obviating the inconsistencies associated with store inventories picked through for sell-by dates.

Photograph courtesy of Ocado

Finally, the hundreds of smart robots storing and retrieving the inventory from Ocado’s innovative grid warehouses, a system guided by AI that helps the process improve its reliability and speed as it goes, wipes costs from of the system by slashing touches and the relative labor required to prepare orders—savings that can more than make up for the costs of lengthier deliveries, though deliveries as well are guided by software that aids efficient routing.

Jensen echoes Kroger executives who’ve taken pains to point out that home delivery—primarily offered on a next-day basis from Ocado’s warehouse—is but one element of the e-commerce solution it is providing for Kroger. The companies earlier this month jointly announced that Ocado would provide software to aid the process of picking in-stores primarily to support faster deliveries and provide superior processes while Kroger awaits the completion of larger facilities. That will also get underway early next year.

“In-store fulfillment is going to continue to be a super important fulfillment channel for Kroger,” Jensen said, noting its software could tackle “any kind of routing,” including a shopper wandering a store picking orders.

The large sheds will in turn support a collection of smaller depots, microfulfillment centers and dark stores as needed to support a range of options between on-demand and next day.

“The curve that you can think of is that most cost-effective are the larger warehouses, and gradually your smaller warehouse micros, and then local fulfillment in the store, and you’ll have different degrees of flexibility around them,” he explained.

In Britain, the Ocado Zoom offering—a tech-enhanced on-demand service like a Walmart Express or Kroger Rush—supports deliveries of smaller orders in an average time of 34 minutes. That too is contemplated as part of the solution coming to Kroger.

The Direction of the Economy

Automation via robots that pick items is at the heart of Ocado’s warehouses, but the company is continuing to add to that stack. In recent months it has made strategic investments or acquisitions of tech companies that can support material handling like robotic arms and automated piece-pickers.

Photograph courtesy of Ocado

“We do technology for two reasons—and always where the two reasons are present, not one or the other,” Jensen said. “It’s going to save money. And the second reason it’s going to improve the quality of service.”

Ocado’s latest acquisitions are aimed at further streamlining the process of putting orders together—automating the final step of bagging individual orders before they’re out for delivery.

“Why are we looking to develop robotics to do that? We’re looking at it because ultimately, labor over time is getting more and more expensive, and tighter and tighter. And ultimately, these are not the jobs that are the most fun jobs to do for humans. That’s the direction of the economy in general,” Jensen said.

“We’re only going to do that when it is improving service,” he added. “You’re never going to use a robot if the result of the robot is a bunch of broken eggs in your shopping bags.”

Whirring robotic shuttles ferrying a basket of delicate fresh foods to a counterpart electronic arm that gently grips, extracts and places them into a shopping bag without crushing a single grape makes for dazzling visuals, and Ocado executives have never been shy about emphasizing the futuristic theater of its solution as a means of telling its story. But Jensen confesses that consumers won’t necessarily know—and may not even care—whether the grapes they receive as part of their home deliveries were picked by machines or people. They only want them fresh and affordable, insisting that difference will show for Kroger.

“Grocery shopping is not meant to be cool,” he said. “It’s meant to work—to give you great fresh products, at a great price, with great service, and on time.”

Conquering New Markets

The first two fulfillment centers Ocado will open with Kroger represent a contrast in extremes. Monroeville, Ohio, near Cincinnati, is deep in Kroger country, where its current market share exceeds 45%. But in Groveland, Fla., the nearest Kroger is some 200 miles across the Georgia state line.

Kroger has yet to detail exactly how it intends for its services and offering to differ between these disparate geographies—it’s certain to be a top topic at a scheduled strategy update in March—but Jensen notes they represent “the extremes of the spectrum between entering virgin territory and adding to the offering in some of your strongest territory. And I think what it signifies is that Kroger is approaching this in a way that really is going to follow that full spectrum of using online to conquer market share in new territory, and also to continue to add to its penetration in strong geographies.”

Jensen said he feels Kroger is uniquely suited for its solutions given its emphasis and leadership in fresh foods in the U.S., along with local market knowledge through its 2,700 stores, in most but not all geographies.

“If you look at Ocado retail in the U.K., the penetration of fresh food is actually higher than average U.K. supermarkets. We’ve been able to demonstrate that online can do a fantastic job with the right technology for fresh food,” Jensen said. “And so working with Kroger, who are really the No. 1 grocer nationally when it comes to a complete fresh offering really made it the most exciting partner. … They were the dream partner for us.”