By Jaewon Kang 

Kroger Co. has spent years -- and hundreds of millions of dollars -- investing in technology to give it a digital edge in the grocery business. But when the coronavirus changed customers' buying habits overnight, the grocery chain wasn't as ready for the online shift as some of its competitors.

The nation's biggest grocer, Kroger has poured money into projects ranging from a self-driving grocery delivery robot to a partnership to sell goods in China through Alibaba Group Holding Ltd. It also bet that a delivery model using remote fulfillment centers, popular in Europe, would resonate stateside. Yet, when the pandemic sent a tsunami of customers ordering groceries online for the first time, it was unable to meet higher demand.

The wide-ranging investments slowed adoption of technology for grocery delivery, leaving Kroger behind some of its competitors, said former executives, current employees and a vendor.

A Kroger spokeswoman said the technology investments and partnerships were timely and allowed the grocer to quickly expand e-commerce services.

In response to the pandemic, Kroger has expanded contact-free payments and introduced contact-free delivery and low-contact pickup. It is also testing a subscription program that provides a year of delivery for an annual fee of $79, she said.

Kroger has notched higher sales as customers have cooked more at home. During its first quarter ended May 23, same-store sales excluding fuel were up 19% from a year earlier, while profit jumped 57% and digital sales nearly doubled. But other chains have posted bigger gains. Albertsons Cos. said same-store sales rose 27% and digital sales nearly quadrupled in its quarter ended June 20. Target Corp.'s same-store sales jumped 24% and digital sales nearly tripled for its quarter ended Aug. 1.

Analysts expect Kroger's second-quarter results, scheduled for Friday, to show same-store sales excluding fuel up 10.5%. Kroger and other companies have said many customers' grocery purchases continue to exceed the previous norm as they remain mostly at home and work remotely.

Online demand has at times swamped Kroger and other grocers, despite their steps to enable more delivery and online orders. Retailers including Kroger added time slots for pickup or delivery, hired employees to handle online orders and relied more on Instacart Inc. to take and fulfill grocery-delivery orders.

Jeannie Wood, 60 years old, said she prefers in-person shopping at her local Houston Kroger because she finds Kroger's mobile app "clunky"; for example, she said, it doesn't always offer substitutes for out-of-stock items.

"It gets frustrating," she said.

To smooth the way for digital customers, Kroger eliminated service fees for pickup and introduced a mobile feature that allows shoppers to notify the store when they are en route to pick up an online order. It also rolled out a pilot phone-order program for customers who are elderly or lack internet access. And the Home Chef meal-kits business Kroger bought in 2018 has generated strong sales and user growth during the pandemic, Home Chef has said.

"We're really trying to be able to support our customers' needs," Jody Kalmbach, Kroger's group vice president of product experience, said in an August interview.

One of Kroger's main e-commerce investments in recent years was a deal with U.K.-based Ocado Group PLC to build remote, largely automated fulfillment centers that executives believed would help the grocer fill online orders efficiently and at great scale. The two companies said in May 2018 that Kroger would invest some $250 million for a 6% stake and planned for Orcado to build some 20 warehouses of up to 300,000 square feet in the U.S.

The first two sites are slated to open next spring. The companies have identified nine regions to build the centers in, including Ohio and Florida.

Kroger and Ocado didn't sign a contract until about six months after announcing the deal, said former executives, because the companies couldn't agree on which would control consumer-facing functions such as the website where shoppers would place orders.

Kroger's supply-chain leaders had advised against the Ocado partnership because they were skeptical the warehouses would generate profits, said former executives.

Meanwhile, Albertsons and other Kroger competitors started shifting last year to smaller warehouses near stores that allow them to deliver fresh food to consumers more quickly.

Kroger executives have said they continue to believe in the Ocado model. They have said that the warehouses will vary in size and proximity to Kroger stores and that Ocado's technology will improve the retailer's pickup operations, too.

Other tech initiatives remain nascent. The Alibaba tie-up focused on a narrow set of Kroger's store-branded products. And just two Kroger stores in Texas are testing the driverless-delivery technology the company is developing with electric-car startup Nuro Inc.

Kroger still seems in catch-up mode in e-commerce. This fall, it is launching a marketplace allowing third parties to sell items on its website for delivery via its direct-to-consumer service, Kroger Ship. The service, similar to Walmart Inc.'s marketplace, aims to broaden the company's product offering.

Kroger has added time slots for grocery pickup and hired more employees to support a rise in online orders. But the chain has struggled to keep up with demand because its tech and workforce plans for pickup orders didn't anticipate the current volume, current and former employees said.

Out of its nearly 2,800 stores, 2,100 offer pickup and 2,400 provide delivery, the Kroger spokeswoman said.

A Kroger store manager in Ohio said pickup volume at that location has nearly quadrupled since the pandemic started, to about 130 orders a day. He said employees struggle to meet demand and keep customer waits at no more than five minutes, as headquarters has instructed. Even with additional time slots and workers, pickup slots are full on most days, he added.

Write to Jaewon Kang at jaewon.kang@wsj.com

 

(END) Dow Jones Newswires

September 10, 2020 08:37 ET (12:37 GMT)

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