Kroger Raises Its Game Against AMZN & WMT With Ocado Deal

“Shop anything, anytime and anywhere” is the new mantra U.S. supermarket chains are passionately following to provide consumers a seamless experience. The latest instance of the same is The Kroger Co.’s (NYSE:KR) deal with British online grocery delivery company Ocado (LON:OCDO) that reinforces its position in the online ordering, automated fulfillment and home delivery space.

Industry experts believe that the competition in the U.S. grocery market is going to intensify further in the digital space and supermarket chains will have to constantly revisit their strategy in order to endure the same. This means either you “shape up or ship out”. Kroger has taken the stock of the situation, as it agreed to increase its stake in Ocado by 5% that will help it to create a niche in the burgeoning online grocery space.

Synopsis

The grocery industry has been grappling with stiff competition, volatility in food prices, aggressive promotional environment and thin margins. The industry witnessed a major shake-up when the news of Whole Foods takeover by Amazon (NASDAQ:AMZN) surfaced. This amalgamation of online marketplace with physical stores caused a tectonic shift in the grocery landscape.

Amazon can now leverage Whole Foods’ fresh foods procurements expertise with its own data mining techniques. Experts see this acquisition as a major step by Amazon to thwart any threat coming from Walmart (NYSE:WMT) , which holds a dominant position in the $700-$800 billion U.S. food market and has been gradually building up its e-commerce strength.

Walmart has been proactive in expanding in the fast-growing online grocery space. The company extended alliance with last mile logistics entity, Deliv, to support same-day delivery for groceries. Walmart also acquired delivery start-up company, Parcel Inc. to extend same-day deliveries. The company also partnered with ride hailing services Uber and Lyft for speedy online grocery deliveries. Latest to add in the list of same is Postmates.

Target (NYSE:TGT) has also made a concerted effort on the front of same-day delivery services by recently acquiring internet-based grocery delivery service, Shipt. Previously, the company had acquired Grand Junction in order to improve supply chain and expand delivery capabilities.

Kroger Upping the Ante

Kroger’s partnership with Ocado is in the right direction to overcome competition, which has intensified with the foray of Amazon. Both the companies are likely to develop three automated warehouse facilities this year and plans to take the count to 20 in the first three years.

The alliance under discussion is a part of the company’s “Restock Kroger” program, which is gaining traction. Kroger commenced “We Are Local” campaign; launched and opened a new restaurant concept, Kitchen 1883; and added two new product lines under “Our Brands”. As a part of the program management offloaded convenience stores to focus on its core operations and expects to generate $400 million in incremental operating margin by 2020.

Kroger is looking to expand its “Scan, Bag, Pay & Go and Self-CheckOut” program to nearly 400 locations in 2018. Further, Ralphs — a unit of grocery giant — in partnership with Instacart is offering home delivery at select locations in Southern California. Kroger remains optimistic about the buyouts of Vitacost.com, an online retailer of vitamins and health-oriented products and Harris Teeter, a grocery chain. The company also expanded ClickList to more than 1,000 locations.

Kroger’s Customer 1st strategy that enriches the consumers shopping experience and convinces them of returning to the store is also benefiting the company. We believe that its operational strategies present enormous opportunities to augment identical supermarket sales, alleviate gross margin pressure, improve operating margin and enhance return on invested capital.

Certainly, Kroger is leaving no stone unturned to attract consumers and attain incremental revenues. Kroger remains well on track to boost market share by expanding store base, introducing new items, digital coupons, and order online, pick up in store initiative. We believe that these strategies are likely to bolster the company’s performance and drive the stock further.

In the past six months, shares of this Zacks Rank #3 (Hold) have increased 9% comfortably outperforming the industry that declined 11%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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