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A note from the Content Guy: Yesterday MNB reported about Kroger taking a five percent stake in British e-commerce and logistics company Ocado, which will allow it to exclusively bring Ocado’s technology to the US.

It seems to me that this deserves a follow-up.

So first, you can see a video about Ocado’s robotics warehouse technology at left … it is quite impressive.

And second, I thought that it made sense to catch up with Tom Furphy, with whom I do The Innovation Conversation here on MNB every other Wednesday. (Tom is a former Amazon executive, the originator of Amazon Fresh, and currently CEO and Managing Director of Consumer Equity Partners (CEP), a venture capital and venture development firm in Seattle, WA, that works with many top retailers and manufacturers.)

However, because Tom spent most of the day in the air and in meetings, it wasn’t possible to do a full-on Conversation … but he squeezed in a couple of quick text messages as he went from place to place. Think of this as an Innovation Chat.

KC: So? What do you think of the Kroger-Ocado deal?

Tom Furphy:
I think it's a good move as efficient upstream capabilities are important. But it has to be leveraged properly within a multi-tiered strategy (direct, click & collect, local delivery).

KC: Were you surprised by the fact that it was Kroger making the deal?

Ocado has been shopping the capability for a decade, including to Amazon. You have to ask, "Why hasn't Amazon taken them up on it?”

KC: Other than Amazon and Kroger, I wonder how many other companies out there could’ve been players for what ended up being a minimum $5 billion play.  Albertsons?  Ahold?  Supervalu?  C&S?  Maybe SpartanNash?

Not sure. I'm sure all of these companies looked at it.

KC: Does this move address a specific weakness in the Kroger value proposition?

I'm sure it addresses an opportunity, but I don't think it necessarily addresses a glaring weakness. Developing a low operating cost path to the consumer in grocery e-commerce is very difficult. Traditional e-commerce doesn't work. Traditional grocery retail doesn't work. Amazon and Kroger are both figuring out their path to the customer in two different ways, from two very different starting points.

KC: In your first answer, you referred to a “multi-tiered strategy.” What exactly do you mean by that?

When I talk about tiers, I talk about the various levels of the supply chain and fulfillment infrastructure from manufacturer through to the home. Traditionally products have moved from manufacturer to warehouse to distribution center to stores, then to homes. E-commerce reshuffled the tiers with the introduction of the fulfillment center and delivery to the home.

The ultimate answer for grocery e-commerce likely involves some combination of practices across the tiers. Manufacturers may need to configure or pack products differently, products may need to be sorted differently upstream, the nature of the various facilities may need to change. These are the tiers.

KC's View:
The two words that I keep coming back to in Tom’s analysis are “leveraged properly.”

The Ocado deal is important, but it has to be part of continued and ongoing innovation that makes the business more responsive to the evolving needs of the marketplace.

It’s interesting. Reuters has a story about how it is possible that delivery company Instacart could suffer collateral damage from the Kroger-Ocado deal. Instacart delivers for Kroger in 45 markets, and Kroger says that these arrangements should not have any impact in the short term - it will probably take as long ass two years for it to get Ocado-powered robotic warehouses up and running.

But … Reuters also reports that “grocery industry analysts said the Kroger and Whole Foods deals could force a business model change or other strategic shift at Instacart, which so far has raised $1 billion from investors. If the Ocado partnership gives Kroger the confidence to bring delivery in-house, ‘that will be disastrous for Instacart,’ said Neil Saunders, managing director of GlobalData Retail.”

Put Instacart aside for a moment. (I’ve made clear my skepticism about Instacart’s role as any sort of ,long-term solution for retailers.) Especially for companies like Kroger, it is critical to find ways to differentiate its various businesses from those of Amazon and Walmart - and Albertsons and anyone else with which it competes - and that means owning as much of its as possible.

I agree with MNB fave Burt Flickinger, managing director of consultancy Strategic Resource Group, who tells Reuters that “the Ocado partnership is the best investment the Kroger Company’s ever made in the last 25 years … Ocado is a consumer’s dream and a competitor’s nightmare, and the competitor that’s going to get caught in the crossfire is clearly Amazon.”

That said, Amazon has proven itself pretty adept at avoiding crossfire and bringing its own weapons to any competitive battle. And remember what Tom Furphy said - Ocado has been shopping this technology around for a decade, and Amazon almost certainly considered it and then rejected it.

Amazon always starts with the customer and works backward. Just having the Ocado technology does not guarantee that Kroger will do the same … which means that they will be coming after the shopper from different directions.

The other important word to think about is “exclusive.”

This goes for everyone. You’ve got to be unique … because success is found in the places where you are different, not where you are the same.