Kroger allies with UK online grocer Ocado

A major move by The Kroger Co. has upped the ante in the online grocery game.

On Thursday, Kroger unveiled an exclusive partnership with leading British online supermarket Ocado to spur the Cincinnati-based company’s development of a seamless omnichannel shopping experience in the United States.

Plans call for Ocado to bolster Kroger's digital and robotics capabilities and help extend the retailer’s omnichannel reach, with a goal of being able to provide “every family in America with the convenience of shopping for anything, anytime and anywhere.”

Kroger and Ocado said they’re now mulling potential sites in the U.S. to build three new, automated warehouse facilities this year. The companies said they aim to identify up to 20 possible sites for the e-commerce facilities over the first three years of their pact.

The partnership not only brings Ocado’s technology to the U.S. but also provides a broad e-commerce solution that is exclusive to Kroger here, according to Mike Schlotman, executive vice president and chief financial officer at Kroger. The Ocado Smart Platform offers capabilities in online ordering, automated fulfillment and home delivery.  

“It’s an end-to-end solution, rather than solving a particular problem along the spectrum of what you need to be able to do [online grocery],” Schlotman told SN on Thursday at the BMO Farm to Market Conference in New York. “It’s a proven technology in the U.K., and we’re very comfortable that we can export that technology to the U.S.

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“We don’t look at this as just a home delivery mechanism in the U.S.,” he pointed out. “We think there are two, three or maybe four things you can wind up doing out of one of these sheds [automated warehouses]. If all we thought we could do out of one of these sheds was home delivery, it may not have been as exciting. But the multitude of things we think we can do was what really got us over the finish line.”

Financial terms of the agreement weren’t disclosed. Kroger said that, under the deal, it will raise its current investment in Ocado by 5% via a subscription rights agreement, bringing its stake in the U.K. company to over 6%.

"We see Ocado as an innovative, exciting and transformative partnership in pursuit of our Restock Kroger vision to serve America through food inspiration and uplift," Kroger chairman and CEO Rodney McMullen said in a statement. "We are actively creating a seamless digital experience for our customers. Our partnership with Ocado will speed up our efforts to redefine the food and grocery customer experience."

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Tim Steiner, CEO of Hatfield, England-based Ocado Group, noted that the alliance provides the opportunity to revamp the grocery shopping experience for Kroger’s customers as well as the way U.S. consumers buy groceries. 

“As we work through the terms of the services agreement with Kroger in the coming months, we will be preparing the business for a transformative relationship which will reshape the food retailing industry in the U.S. in the years to come,” Steiner stated.

Industry analysts called the partnership with Ocado a big win for Kroger and said it will turn up the heat on its grocery competitors in the online realm.

“With such a deal, Kroger is now primed to meaningfully improve upon its current scale advantages and omnichannel offerings versus peers, as Ocado will boost its online ordering, automated fulfillment and home delivery capabilities,” Jefferies analyst Christopher Mandeville said in a research note. “How competition will respond to the news with their own differentiated offerings is not yet understood. However, this does not bode well for their current margins/returns if a similar third-party service agreement can't be reached.”

Having Ocado as a partner will give Kroger a head start in realizing profitability in the online grocery arena, according to Diana Sheehan, vice president of retail and shopper insights at Kantar Consulting.

“This model — a pure-play retailer using its platform as service support — was very successful for Amazon a decade ago, and this could potentially be a similar game changer for Kroger,” she explained. “Ocado’s current logistics and technical expertise in supporting online grocery fulfillment in Europe allows Kroger to potentially leapfrog both Walmart and Amazon in this space. Not only does the knowledge make Kroger better positioned to succeed in e-commerce, but Ocado has also illustrated the ability to operate profitably in the e-commerce space, something yet to be realized in the U.S. across any major grocery retailer.”

Since 2014, Ocado has been exploring selling its technology and logistics expertise in a service model with an external retailer, and in recent months it has landed partnerships with Sobeys and Casino, Sheehan noted.

“The exclusivity of Kroger’s offer is unique,” she added, “because it keeps that technology out of competitors’ hands trying to get up to speed in the online grocery landscape in the U.S.”