As Kroger's plans for Ocado in FL become visible, key challenges still exist

Kroger’s plans to leverage its exclusive access to Ocado’s automated fulfillment capabilities became clearer with the announcement that it has received a building permit for a 62,000 sq. ft. fulfillment center in North Jacksonville , Florida.

Big picture, the primary purpose of the new fulfillment center will be to grow Kroger’s online grocery business in Florida without having to build a network of stores – but significant challenges for this distribution method remain.

So far it appears that this center will support the second delivery spoke out of the Groveland facility, and more will be coming as Kroger wants to extend its reach into Southern Georgia and Alabama.

Per initial reports, the Jacksonville cross-dock will bring in preassembled orders from Kroger’s Groveland fulfillment center in central Florida and ship them out the next day to customers’ homes in refrigerated vans. Customers simply place their order on Kroger.com and/or the retailer’s app and the products will be delivered the next day.

Kroger owns more retail real estate in Florida, but currently has only one store open in the state (a Harris Teeter in the Jacksonville area).

BMC POV

As Kroger’s plans for leveraging Ocado become clearer, many questions remain about the challenges for this distribution model, especially in Florida.

How will Kroger deal with the "last mile" delivery cost?

Ocado’s technology worked well in the densely populated UK market, but in the U.S., the cost of covering the last mile has always been a big issue. It’s now clear that building cross-dock facilities is one big way Kroger intends to control these costs.

Kroger has long been recognized as a very efficient retail grocery operator, so it’s likely the company has modeled this two-step distribution process and found that it provides the necessary efficiency, especially as the business grows.

What's the plan for acquiring new customers and how much will it cost?

This could be an especially heavy lift in Florida where Kroger will be competing with Publix, which has high customer service and strong loyalty.

It’s also worth noting that Kroger will be competing directly with Amazon in northern Florida, where the giant retailer is building out its own capabilities.

Could the lack of a store presence impact Kroger's success?

It will be interesting to see how fast Kroger can build its customer base without the advantage of a store presence to remind customers that Kroger is now serving the market with its online capabilities.

Considering that Amazon’s new Fresh store chain appears to be a response to the slow growth of its online-only fresh business when it had no stores open in the markets it served, Kroger is also likely to struggle with this. Only time will tell if Kroger’s strategy for growing online sales without building more stores will be successful.

On a similar note . . .

Brick Meets Click has also been tracking another Kroger initiative to grow its sales without building new stores.

The company is testing a 28-store partnership with Walgreens in selct Tennesse and Kentucky locations that gives Kroger a “store within a store.” The Kroger Express grocery sections are called out on the store front and prominently located in-store.

We saw one of these stores in action on a recent visit to Tennessee and wanted to share this picture. This is not your typical Walgreens or Kroger experience.

Photo credit: Kaitlin Popp