Amazon.com (AMZN) expanding grocery home delivery service; should Kroger Co. (KR) be worried?

Kroger (KR) exec outlines possible response

CINCINNATI - The Kroger Co. faces a new competitive threat from Amazon.com, which expanded its online grocery delivery service into Southern California this week.

The AmazonFresh expansion could be the start of a 40-city rollout for the online retailer, according to recent media reports .

Amazon did not respond to WCPO Digital's request for information. Kroger declined to comment for this story.

But a Kroger executive told local real estate professionals recently that the company is exploring new business models that could combat encroachment from online rivals.

Ed Hudson, Kroger's director of strategic insights, spoke at a University of Cincinnati Real Estate Center event in May.

"What could we do perhaps about food drive-thrus?" Hudson said. "Pick up your groceries at the store, have somebody be your personal shopper. How do you do that efficiently? How do you replicate it for 7 million shoppers a week? That's the trick. Or what if we do home delivery. For a long time it simply has not worked … Some of the technology is now changing such that I think it becomes a real possibility."

Kroger offers home delivery through its King Soopers chain in Denver. It tried and abandoned the idea in Dallas and Atlanta in the late 1990s.

"Kroger is probably better prepared than most retailers," said Bill Bishop, a retail industry consultant known for his analysis on the impact of online sales on traditional retail outlets. "A growing number of shoppers want to at least occasionally buy some grocery products online. So, if a retailer has no ability for a customer to buy online, then they're going to lose more business to a competitor like Amazon."

Bishop does not expect Amazon to gain large chunks of market share against Kroger, Walmart or any of the industry's biggest players. But he predicts it will impair profitability for market leaders.

"When the market is growing as slowly as it is, every dollar that goes away from a retailer into the hands of a competitor hurts because … the top dollar in the pile of dollars is proportionately more profitable," said Bishop, chief architect at the Chicago -based consulting firm, Brick Meets Click.

Kroger already competes against AmazonFresh in Seattle, where research firm Retail Net Group estimates Amazon generated $66 million in revenue from grocery deliveries in 2012. That was less than 3 percent of all grocery sales in Seattle, according to an April 12 report by RNG analyst Logan Gallogly.

Kroger operates 89 stores in Seattle and 120 in Los Angeles, where AmazonFresh rolled out this week. RNG predicts San Francisco will be the next market for Amazon Fresh. Kroger has only five stores there.

Gallogly's report said Amazon's two-year pilot project in Seattle was break-even, suggesting its expansion to California is "more strategic than profit driven." It's a way for Amazon to get more engaged with its customers and get more revenue from its existing logistical network.

"Interviews with former executives also indicate that AmazonFresh's customer retention rate is very high and that once acquired, customers shift large shares of their grocery wallet to Amazon," Gallogly wrote.

The nation's largest online grocery retailer, Peapod, generated $525 million in revenue last year, according to RNG. That is barely a radar blip for a company like Kroger, expected to cross $100 billion in revenue this year. But RNG also notes that Safeway generated $196 million from home delivery sales last year and FreshDirect delivered $407 million in groceries to customers in New York and Philadelphia. It said Walmart is "quietly incubating its own delivery service" and is "the U.S. retailer best positioned to respond" to AmazonFresh.

Here in Cincinnati, an Indianapolis company has been quietly picking up grocery delivery customers with a product offering that includes organic and locally-grown produce. Green B.E.A.N. Delivery recently doubled the size of its Arlington Heights warehouse to 20,000 square feet, said John Freeland, the company's vice president of sales and marketing.

Operating in Cincinnati since 2009, Green B.E.A.N. now delivers to 2,700 homes a week. It has no delivery fee but requires a minimum purchase of $35 per order. It has gained the most customers in neighborhoods where a conventional grocery store is not a convenient option for residents.

"Places like the West Side of Cincinnati are really hot for us," Freeland said. "The I-71 corridor is prime."

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