By Lisa Baertlein
CINCINNATI (Reuters) - Kroger Co <KR.N>, the nation's biggest supermarket chain, whose founder delivered groceries by horse and buggy, is using a different kind of horsepower in its race with online grocery sellers.
The 135-year-old company is experimenting with a variety of technologies as it battles Amazon.com <AMZN.O> and Walmart Inc <WMT.N> to find a profitable formula to serve customers who want milk and eggs whisked to their doorsteps. These shoppers are a tiny but fast-growing segment of the $800-billion U.S. grocery market. Kroger must win them over to survive.
"We want to serve the customer on their terms," said Chief Executive Rodney McMullen, who for years has kept tabs on the economics of grocery delivery. "For us, every penny counts."
In a series of interviews with Reuters at Kroger headquarters in Cincinnati, McMullen and other executives outlined a host of experiments and initiatives. These include self-driving delivery vans, third-party delivery contractors and curbside pickup in Kroger parking lots. Most of these efforts are an attempt to leverage one of the company's most valuable assets: brick-and-mortar stores located within a mile or two of most of its current customers.
But Kroger is breaking with that familiar model for its next big push. It is betting big on giant warehouses staffed with fast robots to pack orders straight for delivery to shoppers.
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In May, Kroger paid roughly $248 million for a minority stake in Ocado <OCDO.L>, a British company whose newest machines can pull together a 50-item grocery order in as little as five minutes. That technology leapfrogs what is currently in use by any retailer in the United States. It has turned Ocado into the world's No. 1 online grocer, serving 679,000 active customers in the United Kingdom without operating a single supermarket.
This year Kroger and Ocado will pick U.S. sites for the first three of 20 planned high-tech warehouses, known as "sheds," that take a couple of years to build, Kroger executives said. They declined to name locations, but said Kroger plans to break into at least one new area where it does not have existing stores.
Industry veterans said Kroger's partnership with Ocado was a bold move that positions the company, which posted 2017 sales of $123 billion, to grab share from younger players seen as nimbler and more innovative.
"This will be a game-changer ... and probably the most likely catalyst for grocery e-commerce in the U.S. to take off," said London-based Bernstein analyst Bruno Monteyne, a former e-commerce executive at British food seller Tesco <TSCO.L>.
Kroger executives would not say whether they will use their own drivers or outsource delivery from the sheds.
Meanwhile, the company has teamed up with Silicon Valley self-driving startup Nuro to test a driverless delivery van in Phoenix. And Kroger continues to invest in curbside pickup.
Earlier this month it launched a beefed-up online shopping service called Kroger Ship that sends packages directly from its distribution centers via United Parcel Service Inc <UPS.N> and FedEx Corp <FDX.N>.
But competitors are not sitting still.
Walmart, which waged a brutal price war to become the top U.S. grocery seller, recently launched its own self-driving car project. Later this year it will begin testing automated grocery picking at a supercenter in Salem, New Hampshire.
Amazon, meanwhile, already sells more non-perishable groceries online than any other retailer. It spent $13.7 billion last year to acquire the Whole Foods supermarket chain with an eye to turning those stores into distribution hubs to bolster its AmazonFresh delivery service. The company just launched curbside pickup at Whole Foods, starting with stores in Sacramento, California and Virginia Beach, Virginia.
It is all largely a bet on the future.
Analysts say online grocery purchases currently account for just 1 percent to 4 percent of U.S. industry sales. Three-quarters of online shoppers surveyed said they rarely or never buy groceries that way, according to a new Reuters/Ipsos telephone poll of nearly 6,000 adults fielded from June 26 to July 11.
(For a look at why U.S. shoppers are not buying groceries online, see: https://tmsnrt.rs/2LYQUUV)
Investment in automation has spurred faster growth overseas. Online grocery sales account for 5.6 percent of the market in the United Kingdom and 3.8 percent in China, compared to 1 percent in the United States, according to market research firm IGD Retail.
Kroger is letting go of old models that have proven unprofitable.
Chief Financial Officer Mike Schlotman revealed for the first time that the company never made money on Home Shop, a roughly 30-year-old delivery service it shuttered in April. Kroger offered it in just 20 stores in the company's King Soopers division in the Rocky Mountain area, for prices ranging from $10.95 for an internet order to $20.90 for telephone orders. That was not enough to cover the cost of labor and the expense of operating a fleet of refrigerated trucks.
"It's highly inefficient to do that out of a store. You can't get the critical mass you need," Schlotman said.
Kroger replaced Home Shop with Instacart, one of a handful of third-party delivery firms that now serve more than 1,200 Kroger stores.
Monteyne, the supermarket analyst, said Kroger's new delivery push is a recognition of the value of online shoppers. These customers crave convenience and tend to spend more per order than those who just drop by the supermarket for a few items. The "first-mover" advantage is key to locking them in.
That is how Kroger lost Cincinnati shopper Alene Annan, 50. Tired of hauling dog food and Diet Coke up two flights of steps to her home, she switched to Meijer Inc [MEIJR.UL], which was among the first stores to offer delivery in her area.
Still, she said she is open to switching back to Kroger when its new service is ready.
"They just have to make it easy," Annan said.
(Reporting by Lisa Baertlein in Los Angeles; Editing by Vanessa O'Connell and Marla Dickerson)