Kroger’s Rodney McMullen leans in to technology to win grocery sales online and in store.

“People will always eat, but the way people eat will always change,” Kroger Co. CEO Rodney McMullen said at the National Retail Federation 2019 conference in New York City this week.

The retailer has spent the past few years investing in technology and forming partnerships as part of its Kroger Restock strategy, which aims to transform Kroger to a growth company from a grocery company. Such initiatives include offering 100 SKUs on Alibaba’s T-Mall Chinese marketplace, an investment and exclusive agreement with U.K.-based Ocado Group PLC, developing products for its organic line of products Simple Truth, grocery order pickup at Walgreens stores and scan-and-go shopping in Kroger stores.

Kroger had a strong feeling that Amazon.com Inc. at some point would make a move in the physical world to accelerate their current position in grocery, McMullen said, based on Kroger’s own observations of shoppers. “The customer showed us they love the in-store experience and they love the online experience and they don’t distinguish between the two. It’s all about ‘what is my need at this point in time,’” he said.

So even before Amazon’s acquisition of Whole Foods in 2016, “we knew we needed to accelerate where we were,” McMullen said about its e-commerce capabilities.

In 2013, Kroger acquired grocery chain Harris Teeter. At the time, Harris Teeter’s online business was larger than Kroger’s, McMullen said. Acquiring Harris Teeter’s technology and its technology team allowed Kroger to accelerate its online business to where it is today, he said. Kroger (No. 86 in the Internet Retailer 2018 Top 500) reported digital sales increased 60% year over year for its third quarter ended Nov. 10.

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Its commitment to technology since the Harris Teeter acquisition then has only accelerated. Kroger has about 500 employees on its digital team, and McMullen expects that to grow to 1,000 employees over the next two to three years.

To get the talent it needs to further its e-commerce offerings, Kroger competes with technology giants like Google and Facebook Inc., McMullen said. To help recruit for the digital positions, he touts that at Kroger, “you’ll have more responsibility quicker than anywhere else,” McMullen said. “We have 25- and 30-year-olds running $200-300 million business units.”

Kroger’s partnerships with Walgreens, Ocado and Microsoft

At the end of 2018, Kroger announced it was testing a concept called “Kroger Express” inside 13 Walgreen stores in northern Kentucky. The test features 2,400 Kroger SKUs in Walgreens stores for shoppers to purchase, while also allowing shoppers to order groceries off of Kroger.com and pick them up at Walgreens. The idea is to put all shoppers in northern Kentucky within one mile of a Kroger or a Walgreens store, McMullen said.

Kroger also recently announced a scan-and-pay initiative with Microsoft technology. Shoppers in 1,000 stores can take products off the shelf and scan them in the Kroger app to purchase them (the retailer plans to add the technology to roughly 800 more stores by the end of the first quarter). About 5% of a store’s shoppers use the feature, the retailer says.

From interviewing more than 10,000 shoppers, the retailer finds that shoppers on a tight budget especially like scan and go, Kroger says. For example, if a shopper has $100 to work with, she may stop shopping once she adds up $85 in her head because she is afraid of going over at the register. Whereas in the app, she can see how much tax she will be charged and will keep shopping until her budget is maximized.

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Kroger is also experimenting with digital shelves that display the price of a product and also is selling ad space on them. Kroger charges $100 per ad per shelf per week and is working with 15 consumer packaged good companies for the ads. In its test stores, 80% of the shelves that have ad space are filled and products with ads have a 6-11% increase in sales, says Michael Zettler, business and product developer for Sunrise, which is a technology division of Kroger.

Plus the return on investment of the digital ad is usually less than a year, Zettler says. Kroger knows this because of a five-month test in 16 stores in 2017-2018.

In 2018, Kroger bought a 5% stake in web-only supermarket Ocado and is now the exclusive user of Ocado’s technology in the U.S. Kroger will license technology from Ocado that helps other grocers run automated warehouses and deliver food to customers’ doors. The warehouses use digital and robotic technology to improve efficiency.

McMullen described Ocado’s technology as “incredible,” and it would take Kroger a minimum of five or 10 years to have built what Ocado has on its own. Using Ocado’s technology is another piece of getting shoppers what they want anytime and anywhere, he said.

In November, Kroger announced the location of the first warehouse facility it will build with Ocado. Kroger will announce two more soon, one in a market where it already has stores and one in a new net market, McMullen said. The facilities will take about two years to build, McMullen said.

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Ocado is No. 22 in the Internet Retailer 2018 Europe 500.

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