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By Heather Haddon 

Kroger Co. is betting driverless cars can speed up the adoption of grocery delivery in the U.S.

The largest U.S. supermarket chain by sales and stores on Thursday said it would work with electric-vehicle startup Nuro Inc. to test what they called the world's first driverless grocery deliveries.

Kroger and Nuro executives said delivering groceries without drivers -- while still years away -- would make such services cheaper and easier to introduce in less densely populated parts of the country. Nearly a third of 4,504 adults surveyed by Forrester Analytics earlier this year said they didn't do more grocery shopping online because those goods often cost more.

"We are not trying to be a dollar cheaper than regular delivery. We are trying to be an order of magnitude cheaper," said Dave Ferguson, who helped lead Google parent Alphabet Inc.'s self-driving vehicle arm before co-founding California-based Nuro in 2016.

The Nuro partnership is the third deal Kroger has made in the past two months that aims to aid in how it sells to customers as competitors Amazon.com Inc. and Walmart Inc. move deeper into online food retail.

Cincinnati-based Kroger last month took a $250 million stake in British online grocer Ocado Group PLC to run automated delivery warehouses and process digital orders. Kroger last week also closed its acquisition of Home Chef to sell its meal-kits in stores and online. On Wednesday, the company said it would nearly double its digital staff to more than 1,000 by 2020.

Kroger Chief Executive Rodney McMullen said he was talking to Nuro even before Amazon bought Whole Foods last year, ramping up the e-commerce giant's move into food. Amazon or no, Kroger needs to adapt to changing consumer habits, Mr. McMullen said.

"Technology is massively critical to our future," Mr. McMullen said in an interview. "It allows us to serve customer better."

Industry analysts say digital grocery currently accounts for roughly 2% of the $800 billion U.S. food retail market and many expect that share to remain small.

Kroger and Nuro said the grocer isn't investing any money in the partnership up front. Kroger could make an investment if it succeeds, executives said. They wouldn't say where they will test it first.

Nuro has raised $92 million in two funding rounds through January to build a driverless vehicle prototype that features locked compartments for groceries. The vehicle is about half the width of a sedan and navigates with a network of cameras and radar sensors.

After a customer places an order, Kroger employees would load those groceries into the vehicle and dispatch it to a customer's house or a pickup point. A shopper would use their phone or a code to unlock the vehicle and take their groceries.

Nuro is testing its vehicles for now at a parking lot in Sacramento and other private lots in California, Mr. Ferguson said. The company is in talks with several manufacturers and expects to begin mass production next year.

Nuro executives said they are working with state and federal regulators to have their vehicles properly licensed. Companies including Google and Uber Technologies Inc. are also testing driverless vehicles on public roads. Engineers say widespread deployment of such vehicles could be years away, as officials consider how to test and certify their safe use.

One challenge for Nuro is that its vehicle doesn't have room for a safety operator. Waymo, Alphabet's self-driving unit, began its testing on public roads with a person behind the steering wheel who could resume control when needed. General Motors Co. is trying to get a waiver from the federal government to put driverless cars on the road without steering wheels. Companies are also developing remote technology to allow human operators to monitor and guide these sorts of vehicles.

Deliveries are seen as an important potential market for the growing list of companies working to develop driverless cars. Half of more than 4,000 adults polled by the Pew Research Center last year said they wouldn't want to ride in a driverless car, but two-thirds said robots or drones would probably make deliveries in cities in the future.

Domino's Pizza Inc. and Yum Brands Inc.'s Pizza Hut also are exploring driverless vehicles for pizza deliveries. Startup Robomart plans to deploy six driverless mobile grocery stores in the San Francisco Bay area this fall.

Kroger last week said digital sales grew 66% during the company's first quarter, bolstering an unexpectedly strong earnings report. Kroger now offers two-hour delivery from more than 1,200 of its stores, and it has set up some 1,165 pickup points for digital orders.

Kroger has said its investments -- particularly a storewide review of what products it stocks -- would likely hurt profitability this year. And UBS analysts last week questioned the benefits of the acquisition Home Chef given the up-to $700 million price tag.

"They are investing an awful lot. I worry about that," said Bill Bishop, co-founder of Brick Meets Click digital grocery consultancy.

Kroger is expected to update shareholders on its business plans on Thursday during its annual investor meeting. Kroger plans to display a prototype of Nuro's driverless car at the gathering in Cincinnati.

Write to Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

June 28, 2018 11:00 ET (15:00 GMT)

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