How Kroger Solved the ROI of Home Delivery

Some of retail’s smartest brains believe profitable home delivery, especially in grocery, can’t be done. Kroger proves them wrong. Here’s how.

I wrote about Kroger’s impressive quarterly profit report in a recent blog that focused on its multi-year tech investment plan called “Restock Kroger.” Over the past three years the plan has optimized operations, omnichannel capabilities, data analytics, personalization, and accelerated its digital transformation from a legacy client-server, proprietary-application architecture in favor of distributed, as-a-service models.

This led Kroger to report 57% quarterly earnings growth (year over year). For a direct comparison, Albertson’s reported -50% earnings growth (YoY) for the same period.

Both retailers recorded big jumps in revenue, online sales and same-store-sales, as did many other “essential” retailers during the pandemic-influenced quarter. However, it is worth noting Kroger’s jump in profit was unique and it came during a time when other retailers suffered as their online sales increased.

Walmart, for example, recorded just 3.9% in quarterly earnings growth (YoY) during the same period and Target was slammed with a 64.3% decrease. Both are mass merchants that sell many more product categories than pure grocers. Clearly, some categories produce higher margins than grocery products and since sales in these categories declined a direct comparison with Kroger can’t be made.

However, it is worth noting that quarterly revenue growth rose for Walmart a healthy 8.6% (YoY) and 11.3% (YoY) for Target, so sales for these "essential" retailers was booming. The problem was that sales were not booming in their most profitable categories.  

What the Experts Say

A recent discussion on Retail Wire made it clear that Kroger’s amazing success in profiting while sharply increasing home-delivery sales was not fully appreciated by the website’s “Brain Trust.”

Here is a sample of “Brain Trust” insight into the profit potential of home delivery in grocery that misses the point when competing in a consumer-led marketplace:

• “Is there a path to profitable grocery delivery? Yes, charge the customer for it! There is no such thing as a free lunch!”
• “The myth that an incredible premium service, like grocery delivery should be essentially free has been mind blowing.”
• “While costs can be optimized, they will still be an added cost that someone has to pay for. Consumers can’t expect free delivery.”

To read the complete set of comments, many of which expressed a wide variety of opinions, click here.

Making Home Delivery Profitable

While some “Brain Trust” experts were hard pressed to offer recommendations to make home delivery profitable, others offered opinions that were a bit vague to be helpful.

Many of these focused on “eliminating data silos” or “aligning processes” or focusing on “agility, flexibility, scalability.” While these are sound steps and should be taken by all retailers who want to build a sustainable business, they are not specific enough to have an immediate impact on home delivery. Basically, they are pieces of good, overall strategy that every retailer should be following.

Some of the best recommendations in the home-delivery thread included points I raised in my previous blog about Kroger’s strong quarterly profit numbers. Here is a list of what I believe are key recommendations grocers (and all retailers) can implement to increase profitability for their home delivery operations.

• Automate as many processes as possible in warehouses and distribution centers. This includes robotics and, in the long-term, autonomous vehicles.
• Create a system of micro-fulfillment centers that deliver to homes with as much automation as possible including robotics.
• Create an ROI business model based on a growth rate of home delivery business over time to pay for current investments. Then drive that growth through marketing and promotions.
• Create end-to-end supply chain processes that take advantage of AI, machine learning and a common database layer to operate in real-time.
• Implement a two-tiered pricing approach: Prices remain competitive in-store using on-shelf labels that let shoppers know about instant discounts for loyalty card members, however do not make the discounts available on the website for home delivery. This allows retailers to pocket the difference between a sale price in-store and a full price online.

Without doubt the best advice a smart 'brain truster' could offer to retailers seeking to make home delivery profitable is to follow the example of Kroger. Three years ago, it embarked on a multi-year transformation called “Restock Kroger.” Today, it is reaping the rewards of its early investments even as later investments, such as the Ocado fully robotic warehouses, are set to go live in 2021.