Kroger And Walmart Try More Gimmicks To Thwart Amazon; They Will Fail...Again

Over the summer, we argued that the grocery business in the U.S. is, and always has been, a fairly miserable one.  From A&P to Grand Union, Dahl's, etc., bankruptcy courts have been littered with the industry's failures for decades.

The reason for the persistent failures is fairly simple...razor-thin operating margins that hover around 1-3% leave the entire industry completely incapable of absorbing even the slightest financial shock from things like increasing competition and food deflation. 

Meanwhile, if these retailers have difficultly absorbing even the slightest changes in competition and food inflation, you can only imagine how the efforts of Amazon to slash in-store employee headcounts, a line item which Kroger spends roughly 17% of their revenue on, might impact the fragile industry.  Unfortunately, at least for the traditional grocers of the world, a completely automated shopping experience may be closer than they had hoped just a couple of years ago.

All that said, the likes of Kroger and WalMart hardly plan to cede their grocery market share to Amazon without a fight.  So how do they plan to compete against a technologically superior new entrant that can offer all the same services but with a small fraction of the employee overhead...well, by adding more employees of course.

As Reuters points out today, both Kroger and WalMart are ramping up their "curbside pickup" programs which allow customers to place orders online then simply drive up to the grocery store and wait while an employee loads their order into the trunk. 

As Amazon.com looks to upend the U.S. grocery market with home delivery, some veteran supermarket operators are betting on a different strategy: curbside pickup. Americans have long loved the convenience of drive-through service for burgers and coffee. Kroger Co (KR.N) and Walmart Inc (WMT.N) are tweaking that formula for groceries.

 

The companies have invested heavily in online systems that allow customers to order ahead from their neighborhood store. Workers pick and pack the products, then run them out to shoppers in the parking lot, the grocery version of carry out pizza. For the retailers, the service is cheaper than delivery, because customers do the driving. For shoppers, it means skipping crowds and queues at their local market, and no worries about missing packages or melted ice cream if they are not at home to meet the delivery guy.

 

Tony Sacco, who lives in the Los Angeles beach community of Playa Del Rey, is a regular user of the service at a nearby Ralphs supermarket, owned by Cincinnati-based Kroger. Each pickup costs $6.95, but the time-crunched married father of three says it is worth it.

 

“This is easy. Time is money,” said Sacco, 47, as a worker loaded bags into his SUV on a recent morning.

Unfortunately, such programs don't implement any new technology but rather rely on an army of new "pickers" that run around the store fulfilling customer orders while adding a fortune in costs to the P&L.  And while these chains are presumably betting on market share gains to offset the higher per store employee costs, given that there are no barriers to other retailers implementing the exact same strategy, we're going to go out on a limb and bet that those market share gains will remain elusive on future earnings calls.

Of course, this is not to say that curbside pickup won't play a role in the future of grocery retailing.  In fact, Amazon is likely to implement such a strategy as well...the only difference is that your curbside order from Amazon won't be packed by a $15 per hour minimum wage worker but rather a robot that performs all the same functions but works works for free, doesn't require a pension and never takes a vacation day...