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Kroger yesterday announced that the first of its new Customer Fulfillment Centers (CFC), powered by robotics and machine learning technology developed by Ocado, is now online in Monroe, Ohio, about 30 miles north of the retailer's Cincinnati headquarters.

At the same time, Kroger said that it has begun a "soft" launch of a CFC in Groveland, Florida, about 30 miles west of Orlando, serving friends and family.  It is notable that Kroger has no stores in Florida, though it does say the CFC there will be able to serve stores in southern Georgia and southern Alabama.

Yael Cosset, Kroger's CIO and Chief Digital Officer, said yesterday that the Florida CFC will offer digital customers "an amazing experience," would be able leverage a high recognition level of Kroger's name in the state, though he also said the company would not yet "share too many details about our marketing approach" there.

At least another nine CFCs of varying sizes are expected to be embedded in the Kroger ecosystem by the end of next year, with each one able to serve customers within a 90-mile radius, part of an evolving hub-and-spoke scenario that Kroger believes can be most responsive to shoppers.

Rodney McMullen, Kroger’s chairman and CEO, emphasized in a virtual press conference yesterday that the CFCs need to be seen as a part of a broader ecosystem - in which stores remain the lynchpin - that "will be able to serve customers however they want to be served."  

The CFC network being built by the Kroger-Ocado partnership, however, is predicated on the bet that Kroger's digital business, which more than doubled during the pandemic year of 2020, will continue to accelerate and double yet again by 2023.

Here is Kroger's description of how the CFC works:

"Kroger Delivery is a vertically integrated network, enabling coverage of up to 90 miles from the hub location and significantly more territory when spoke locations are integrated. In these highly automated Customer Fulfillment Centers, over 1,000 bots whizz around giant 3D grids, orchestrated by proprietary air-traffic control systems in the unlicensed spectrum. The grid, known as The Hive, contains totes with products and ready customer orders.

"As customers’ orders near their delivery times, the bots retrieve products from The Hive and are presented at pick stations for items to be sorted for delivery, a process governed by algorithms that ensures items are intelligently packed. For example, fragile items are placed on top, bags are evenly weighted, and each order is optimized to fit into the lowest number of bags, reducing plastic use. 

"After being packed, orders are loaded into a temperature-controlled Kroger Delivery van, which can store up to 20 orders. Powerful machine learning algorithms dynamically optimize delivery routes, considering factors like road conditions and optimal fuel efficiency.

"The Monroe CFC measures 375,000 square feet, currently carries thousands of popular grocery products, and represents one of the models engineered for the flexible Kroger Delivery network, which will also include smaller facilities as well as spoke locations. The CFC can fulfill thousands of orders per day and has the capability to support fulfillment of pickup orders."

Here is a video provided by Kroger:

Bloomberg points out that Kroger's approach is different from that taken by others in the game:

"Competitors including Walmart, Albertsons and Ahold Delhaize are taking a simpler approach, testing so-called 'micro-fulfillment' centers that can fit snugly in the back of a store or nearby. They’re cheaper and faster to build, are located closer to customers’ homes and could eventually replace many of the human order pickers that now clog the aisles at supermarkets across the nation. Walmart, which currently employs 170,000 people just to pick and pack online orders, now plans to build 100 micro-fulfillment centers, with more likely to come."

USA Today provides its perspective:

"Kroger shoppers can already get groceries delivered to their homes across the country. Currently, most of that service is provided through Instacart and other third-party partners.

"What's changing is Kroger taking over a huge chunk of its own deliveries. With the switch, the company says, it will improve the consistency and quality of service … Customers could also save money as Kroger takes a hard look at its $9.95 delivery fee. The company is mulling lowering that for deliveries a few days in advance."

Kroger's own drivers will be able "to make on-the-spot adjustments to your order. They broke an egg? They'll give you a discount. Don't want the Diet Coke they swapped out for your Coke Zero Sugar? They'll leave that off and adjust your order.

"McMullen doesn't see home delivery replacing brick-and-mortar stores. Instead, he envisions many customers' shopping habits evolving to where they buy staples like cereal or toilet paper for home delivery while continuing to shop for items like produce in person."

Bloomberg also suggests that McMullen seems to be hedging his bets a bit, saying in an interview that the Ocado-powered CFCs are just "'one piece of the total puzzle' in digital, and that the sheds will be supplemented by an aggressive expansion of curbside pickup, which car-crazed Americans prefer. Ocado will also provide software to Kroger stores to help process those curbside orders. McMullen won’t say when the fancy Ocado sheds might actually be more profitable than the old-fashioned method of customers with shopping carts walking aisles. The process, he says, will be 'a journey'."

KC's View:

McMullen said yesterday that the launch of the CFC was a "momentous" day, and that would seem to be the appropriate word.

I have to be honest here.  I watch all those bots whizzing around, and it just seems so far away from what has always appealed to me about food retailing - the smell of a fresh bakery, the conversation with a fish monger who chooses a great piece of salmon for me, or the choosing of a great tomato that I can use when crafting a sandwich.

But that's where we are today.  Kroger is playing a different game, and has to - the pitched competition with the likes of Amazon, Walmart, Target and Albertsons is taking place at a different level, and so must the innovation that drives it.

I do think it is fair to say that if today was a momentous day, it also represents a momentous bet … I think about these ginormous CFCs, which take around three years of operation to break even, and that should be able to do everything from providing one or two hour delivery (though not just yet) to serving stores that are providing click-and-collect service (though not at the moment), and I do have to wonder if the MFC (micro-fulfillment center) approach is better, if only because these are closer to the action.

That said, part of the Kroger's bet is that the CFC technology actually will be able to drill down on what consumers want and need so effectively that the considerable investment will pay off not just in terms of sales and profits, but in terms of shopper satisfaction.

Big ask.  Big bet.  But it's a big game