Kroger to double online product sales by end of 2023

During a virtual investor conference, the supermarket operator shared its strategy for turning those growing e-commerce sales into a more profitable business.

Kroger Chief Executive Rodney McMullen said the company will attract customers for fresh food, grow its advertising business to add alternative revenue streams and fulfill online grocery orders more efficiently with the help of a large automated hub operated with British logistics technology company Ocado.

Kroger , which is made up of a number of grocery brands including Harris Teeter , Ralphs and King Soopers, has seen its e-commerce sales soar during the global health crisis. In its most recent fiscal year, which ended Jan. 30, digital sales grew 116% to more than $10 billion .

Kroger's stock has risen nearly 20% over the past year . However, its shares fell nearly 3% early Wednesday. They have fallen about 14% since hitting a 52-week high of $42.99 in late January .

The company expects 2021 earnings per share to be between $2.75 and $2.95.

The country’s largest supermarket chains face the same challenges as grocery rivals. They must cater to shoppers’ preferences, even as online sales hurt their bottom line. Grocery stores operate on razor-thin margins. For each online order, the company must absorb the additional costs of picking the items and preparing the bagged purchases — and in some cases, delivering them to customers’ homes. That requires higher labor costs, and grocers have struggled to pass on competition to shoppers in a fiercely competitive industry.

When shoppers buy groceries in stores, the operating margin on the sale is typically 2% to 4%, according to estimates by Bain & Co. For grocers that pick up groceries from stores and have customers pick up their orders via click-and-collect, the operating margin drops to 5%. If the grocer picks up groceries from stores and delivers them to customers’ homes, that drops even further to 15%.

Grocers have tried different solutions to be more cost-effective, from relying on third-party delivery services like Instacart to hiring contract workers to investing in expensive automated systems to reduce the number of employees needed to retrieve items in the aisles.

Kroger, like many other retailers, is also steering customers toward curbside pickup or grab-and-go options, which eliminate shipping costs.

Kroger struck a deal with Ocado in 2018 to open and operate U.S. facilities to fulfill online grocery orders and align their costs more closely with store sales. Its first two are set to come online in the next few weeks.

As part of the initial agreement, Kroger said it would identify up to 20 sites for automated warehouse facilities, or "sheds," in the first three years of the deal . Each shed would range in size from 135,000 to 375,000 square feet and cost between $50 million and $100 million to build.

McMurran said the upfront investment will pay off over time. “When they mature, facilities are actually more profitable than stores,” he said .

Kroger said it expects capital expenditures to be between $3.4 billion and $3.6 billion this year , including for facilities.

Company leaders have pointed to Kroger 's media and advertising business, Kroger Precision Marketing, as a way to offset the costs of online grocery orders.

The acceleration of online sales during the pandemic has forced consumer packaged goods companies to seek new ways to win over customers, said Cara Pratt, Kroger’s senior vice president of precision marketing . Brands are hungry for more data about shoppers’ preferences and want to make their ads more “shoppable.”

Other retailers, including Walmart , are also aiming to expand their advertising businesses by touting their knowledge of customer buying patterns and their ability to personalize offers.

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