Author(s): Raghu Gopal
Amazon's popular same-day and next-day grocery delivery services have brought great convenience to many consumers. The online retailing giant has developed a way to closely mimic the physical store experience by getting products to shoppers impressively quickly.
Earlier in 2018, Amazon went a step further when it introduced its first checkout-free grocery store, Amazon Go. The store lets customers walk in, grab the items they want and walk out, automatically charging their accounts for the goods — it's approaching magic (see Comfort Food). And its acquisition of Whole Foods Market in 2017 has given traditional grocery retailers in the US lots of reasons to worry, given Amazon's track record of retail disruption.
Kroger is the largest grocery chain in the US with 2,800 stores spread across 35 states. It's also keenly pursuing a digital strategy. The company doubled its online sales during its past fiscal year; recently opened a new headquarters for its digital team in Cincinnati, and plans to expand the unit's headcount by 1,000 employees.
It's clear that Kroger is in fight-back mode. Its search for innovation has led it to partner with Nuro, maker of a fully autonomous road vehicle, to find a way to cut costs of delivering customer orders. The two companies are collaborating to offer grocery shoppers same-day delivery on orders they place. The programme is expected to start in fall 2018, but the location of the test market hasn't been announced as Nuro is still in the process of gaining regulatory approval for the project.
Nuro is a Silicon Valley start-up founded by veterans of Google's self-driving car initiative. It's competing in a crowded field, jostling to deploy driverless cars to deliver groceries to US consumers. Nuro's robot van, which resembles a gigantic toaster on wheels, is designed to operate along urban and residential streets.
The partnership with Kroger gives Nuro an opportunity to promote its technology. For Kroger, it's a step to stay ahead of, or at least keep up with the growing competition.
The retail market in the US and many other countries is evolving quickly, as customers become increasingly comfortable with the digital shopping experience. The audience is fickle; big names in the retail sphere like Barnes & Noble, JCPenney, Sears, Toys R Us, and Macy's, have either disappeared or diminished substantially.
The grocery business is beginning to feel the ripples of the "Amazon effect", which doesn't just mean a loss of business, but also a dilution of pricing power and the need for alternative business strategies. Retailers such as Kroger depend on steady traffic and positive, albeit thin margins to make a profit and pay dividends to investors. Amazon operates on the same tight margins, but another plane when it comes to scale, speed and investment.
Kroger and other grocery chains need to find ways to trim costs while seeking innovation and launching new services to address changing consumer behaviour. Kroger's management is aware of the new reality that surrounds it. The company needs to think big to stay big.
Developing an autonomous delivery system shows it's moving in the right direction. That said, we caution that autonomous driving is a hugely challenging area, and we remain hugely sceptical about how easily it can be deployed on a broad basis in real-life situations in the near term. We'll be watching closely to see if this initiative can really deliver or if it's little more than PR hype.