For Ocado Group PLC, delivering groceries in Kentucky may not be so different from driving them through the streets of London, Kroger Co.'s CFO said May 17.
Kroger Executive Vice President and CFO J. Michael Schlotman said the grocer is considering sites around the country, including near cities where it has a strong presence, for automated warehouses designed to fill customer orders. Kroger plans to open up to 20 warehouses over the next three years and deploy Ocado's robots and software to fill orders, according to the terms of a distribution deal it announced May 17. Schlotman was speaking at a BMO Capital Markets-organized conference in New York that was webcast.
Ocado fine-tuned its technology in the U.K., a market that some industry analysts have said is better suited to grocery delivery than the U.S. due to its comparatively small geographic size and densely populated cities.
But Schlotman said Kroger could use Ocado's technology to fill orders in many parts of the U.S., including more sparsely populated areas, faster than Ocado is able to deliver them in the U.K.
With significant operations in and around London, for instance, Ocado's delivery trucks often fight traffic to make home deliveries on time, he said. In the same amount of time that some Ocado deliveries take to reach outer neighborhoods of London, orders could travel from a warehouse — which Schlotman called a "shed" — near Kroger's headquarters in Cincinnati to Lexington, Ky., about one hour away.
"I can probably get to a house in Lexington from the Northern Kentucky shed faster than Ocado gets from their shed to some of the homes in London because of traffic," he said.
Kroger also has the option to use the warehouses it builds with Ocado to fill orders that customers can pick up at its stores through the grocer's Clicklist service, Schlotman said. In results for its entire 2017 fiscal year, the supermarket operator said it offers the pickup service at about 1,000 stores out of the roughly 2,800 it runs across the U.S.
"Even if the American consumer never goes to home delivery in a big way ... this will be a phenomenal asset for us," Schlotman told the audience in New York.
Schlotman's comments — and Kroger's partnership with Ocado — come months after Kroger outlined a transformation strategy aimed at shaking up its digital presence. The initiative, called "Restock Kroger," includes efforts to expand the company's order fulfillment and distribution capabilities.
Some of those options, such as Clicklist, have been developed within the company. But Schlotman said Kroger's deal with Ocado would replace some of the company's in-house efforts.
"This partnership will actually be in the place of some of the things that we were trying to build ourselves," he said. Under the deal, he said, Kroger will take the lead on building warehouses, while Ocado will license its technology to the grocer.
Using third-party players for delivery is not new for Kroger: The chain began working with delivery startup Instacart in November 2017 and expanded the number of its stores that offered Instacart delivery as recently as March.
When asked about Instacart's pricing practices by an analyst at the May 17 conference, Schlotman pointed to the service's practice of charging more for some Kroger products than Kroger does in its stores.
"We don't like it when Instacart charges a different price because it creates a false impression of what our prices really are," he said, adding that fulfillment services that the company manages directly give Kroger more control over price perception among customers.