Amazon’s (AMZN, Financial) implacable cross-market footprint is now starting to disrupt the retail grocery business.
Just as Amazon’s online retail business has had a dramatic impact on traditional brick-and-mortar retailers such as Macy’s (M, Financial), its entry into the grocery business, through its acquisition of Whole Foods, has upended another industry sector, forcing competitors to change the way they conduct business.
For the moment, Amazon can afford to absorb losses in its food-services business while it aggressively attempts to attract non-traditional Whole Foods customers, who previously found the grocer's high prices off-putting. Amazon responded by immediately cutting prices across the board and offering discounts to its Prime Services members
Amazon has offered its Whole Foods customers a food-delivery service as well as discounts to existing Whole Foods brands. The e-commerce giant has also been stocking the shelves with its own in-store brand of offerings.
One of Amazon’s chief competitors, Kroger (KR, Financial), has responded assiduously to the new challenges the company has presented to the traditional grocery business. Kroger offers a case study in adopting new business strategies for remaining competitive as regional grocers struggle to compete with a formidable online behemoth that entered the high-end grocery business just one year ago.
Kroger’s efforts at transforming its core operations have paid off and investors have taken notice. The company beat analysts’ expectations by posting stronger-than-expected earnings and sales growth, sending its stock up around 10% in early trading. Kroger, the largest supermarket chain in the U.S., reported $37.5 billion for its quarter ending in May, up from $36.3 billion in the prior year. Earnings per share doubled to 73 cents per share from 32 cents per share in the same period last year.
The company has aggressively transformed its shelving structure and inventory stocking while working with suppliers to drive costs down. Kroger has partnered with British online grocer Ocada Group (LSE:OCDO, Financial) to operate its automated warehouses and handle its online orders. These changes are in addition to the deliveries that Kroger already offers through third-party vendors. The company has also invested heavily in technology to facilitate its automation processes with online ordering so that operations are conducted efficiently and in a cost-effective manner.
Another aspect of its strategic initiatives is to increase online sales and automated ordering. These efforts have begun to bear fruit. Kroger stated that digital sales grew 66% during the first quarter. The company plans to offer digital ordering services nationwide, even in regions such as the Northeast, where Kroger doesn’t have a presence.
In response to changes in consumers' food consumption habits, Kroger also said it was buying Home Chef and would sell that company’s meal packages in its stores. That is part of a broader strategy of emphasizing more popular products and store-brand goods.
The company’s efforts have been commendable, but Amazon has a number of advantages and Kroger faces competition from overseas grocery chains as well as other regional stores. Time will tell if its strategy will pay off in the long run.
Disclosure: I have no positions in any of the securities referenced in this article.
