Kroger on the hunt for new ideas to combat Amazon, Walmart

Expert: Alibaba could be worth billions for Kroger
Posted at 9:08 AM, Jan 29, 2018

CINCINNATI -- The Kroger Co. could generate billions of dollars in additional revenue from a new business partnership with the Alibaba Group Holding Ltd., but it might have to give up some operating control to attain that new growth.

That’s what experts are saying about published reports that Kroger is exploring an alliance with the Chinese e-commerce giant as a way of combating Amazon Inc.’s encroachment into the grocery industry and Walmart's price-cutting response to that invasion. Kroger declined to comment.

The New York Post quoted multiple unnamed sources as saying Kroger sent executives to China last month to explore the idea. China’s Ministry of Commerce said in a Jan. 13 press release the two companies have already “teamed up” to “speed up the integration of online and offline sales.”

This follows weeks of speculation about other deals Kroger is reportedly considering, including the purchase of online retailers and Kroger is also said to be exploring a partnership to open Ace Hardware locations inside Kroger stores.

“As (CEO) Rodney McMullen likes to say, ‘If there’s a potential deal out there, chances are Kroger has looked at it,’” said John Meyer, a portfolio manager at Anderson Township-based Meyer Capital Management. “They’re looking at everything.”

Meyer said any of the deals could help Kroger overcome its greatest competitive weakness: Its rivals don’t have to make money from groceries.

“Both Amazon and Walmart have higher-margin businesses that allow them to drive down pricing in grocery,” he said. “Kroger predominantly sells groceries with some general merchandise.”

Meyer thinks Kroger will choose only one transaction to advance its e-commerce initiatives and wouldn’t be surprised if Alibaba emerges the winner because it "tackles a few objectives for them" and might be “easier to get up and running.”

Retail consultant Bill Bishop said a deal could give Kroger “access to an extraordinary array of new technology” that would help it close the gap on Amazon “without the threat of having a direct competitor” using those same tools against the company.

“I think they’re going to partner," said Bishop, co-founder of Brick Meets Click, a Chicago-area consulting firm that helps retailers develop online strategies. "There’s very little downside risk.”

Bishop said Alibaba is trying to expand globally by offering a suite of services that could help Kroger grow in areas where it’s not already a major force. Those include business-to-business transactions in which Alibaba could improve Kroger’s access to merchandise and establish new sales channels to supply other companies with paper products, office supplies, furniture and lunch.

Bishop said digital storefronts represent another opportunity for Kroger – shipping grocery orders to regions where it doesn’t already have physical stores. The idea is hardly farfetched. Last June, Kroger told analysts that New York City typically ranks first or second in weekly sales of Simple Truth products through Vitacost, Kroger’s online health food subsidiary.

Bishop thinks the Simple Truth brand – which hit a milestone in 2017 by reaching $2 billion in annual sales – would perform well in China if Alibaba struck a deal to jointly market the line of organic offerings.

Finally, he thinks Alibaba could help Kroger close the gap on what he calls “basket bandit” orders that involve specialty products that can be hard to find on store shelves – but easily found with an Amazon search.

“I really think there is the potential for $10 billion in additional sales for Kroger in a well-exploited Alibaba partnership,” he said.

But such a partnership would alter Kroger’s pattern of acquiring talent and technology that it controls, Meyer notes. Kroger’s most impactful acquisitions to date – including the online retailer Vitacost, data-mining specialist 84.51 and grocery chains Harris Teeter and Mariano’s – all brought new ideas to the company that were incorporated into Kroger’s existing systems.

So, a partnership with Alibaba might come down to how adaptable its technology is to Kroger’s existing networks. Whether it chooses Alibaba or a partner it can own and control, Meyer expects Kroger will keep shopping for new ideas to combat Amazon.

“We’re in round three of a heavyweight boxing match,” he said. “Amazon took a big swing in buying Whole Foods. Now, Kroger has followed with a series of jabs.”