business news in context, analysis with attitude

CNBC has a story about how financial services company Jefferies has downgraded Kroger's stock "due to what it believes was a key mistake: investing in centralized fulfillment centers instead of micro-fulfillment."

Jefferies analyst Christopher Mandeville wrote in a note to clients this week that retailers looking to compete with Amazon "are grappling with how to fulfill and deliver customers’ orders of fresh produce and groceries quickly and cheaply. Mandeville said a grocery chain’s fulfillment method is a make-or-break investment. It could opt for large, central warehouses, also known as centralized fulfillment, or it could go with so-called micro-fulfillment, in-store or store-adjacent spaces that are close to urban centers.

"Kroger’s decision to invest in centralized fulfillment centers could be a multiyear mistake, Mandeville wrote. A year after Amazon’s 2017 merger with Whole Foods, Kroger signed an agreement to build 20 centralized fulfillment centers with British online grocery Ocado’s robot technology."

The Mandeville argument is that "centralized fulfillment centers require high up-front costs" while micro-fulfillment "naturally puts the grocery picking closer to urban centers," which makes delivery "much cheaper. In particular, the notoriously difficult 'last mile,' or the final delivery step to a shopper’s home, is more efficient from a nearby micro-fulfillment center."

“We view Kroger’s centralized fulfillment center platform as a considerably more expensive, time-consuming model that carries higher risk in what is still a nascent market,” Mandeville wrote.
KC's View:
I love the micro-fulfillment model, but I'm not sure that I would go so far as to say that Kroger's Ocado-driven approach will put it at a competitive disadvantage. It can't be that simple … there are a lot of different approaches to these issues, and it remains to be seen which ones will be winners and which ones will be losers.