An interesting fact that I’ve pointed out in several articles I’ve written about the grocery industry is that Walmart has been selling groceries for over 30 years, and Kroger has been selling groceries for over 100 years. One would think that with so much experience, Walmart and Kroger would lead the grocery industry in innovation and thought leadership. They don’t. That honor goes to Amazon. A company that has only been selling groceries since 2007.

I bring a unique perspective to the grocery industry due to the fact I wrote the first research paper recommending that Amazon acquire Whole Foods. In addition, I designed one of the first micro-fulfillment systems capable of being installed inside a grocery store. I worked for Amazon leading the worldwide expansion of AmazonFresh and Pantry; I contributed multiple strategies to make Amazon a major player in groceries; and I designed the mutli-format store which is eerily similar to the Amazon Go Grocery stores.

When I left Amazon and opened my own consulting practice, Kroger was the first grocery retailer to hire me as a consultant. (Kroger hired me after reading this article that I wrote on the day they announced the acquisition of Whole Foods). The article contains the majority of the strategies I recommended to Kroger; most of which they adopted including the partnership with Ocado.

I have not worked as a paid consultant for Walmart but I have maintained a gentleman’s agreement with several executives at Walmart who turn to me for my advice regarding their grocery and M&A strategy. I find the agreement is valuable because I learn so much about what Walmart is working on. I also learn how Walmart thinks.

I continue to provide consulting to the largest grocery retailers globally.

As it relates to Walmart, Kroger and Amazon, what I have discovered is this: Walmart and Kroger are struggling when it comes to innovation. Instead of leading, they’re following and copying Amazon. Worse, Walmart and Kroger are having their version of  ‘We Too’ moments where they constantly try and convince consumers, the media and investors that they too are just as innovative as Amazon.

To clarify, a ‘We Too’ moment goes something like this:

  • Amazon announces something related to groceries (technology, new store format, etc.)
  • Walmart and Kroger soon announce something similar to Amazon; sort of a “Amazon isn’t the only company that can innovate. We too are innovative.”

Although there are many examples of what I refer to as ‘We Too’ moments from Walmart and Kroger, I am using the most recent examples in this article.

Walmart: Following Isn’t Leading 

On September 9, 2020, Walmart announced that they are “piloting on-demand drone delivery with Flytrex.” According to the press release, Walmart is an innovator always looking to “take things beyond where they’ve been.” To an extent, that’s true. However, Walmart didn’t come up with the idea for using drones, Amazon did that in 2014. Based on the amount of press that Walmart has received regarding their drone announcement, one would expect that Walmart had actually done something new. They haven’t. Walmart has only followed Amazon’s lead. Walmart’s drone program is no more advanced than any of the drone programs I’ve evaluated globally.

Walmart is also copying Amazon with the launch of Walmart+, its Prime-like service that offers free same-day delivery of groceries and other in-store products for a $98-a-year subscription. Members of the press have wisely made the argument that Walmart+ appears to be a dated program. Amazon launched Prime 15 years ago. (I believe the actual strategy of Walmart+ is to retain Walmart’s most loyal grocery customers).

When I have discussions with current and former Walmart executives, they often bemoan the lack of true innovation. Walmart tries to give the appearance that they’re a well-oiled execution engine but comments from their senior executives lead me to believe otherwise. Many executives believe that the company lacks a coherent strategy to fend off Amazon over the long-term. On the topic of groceries, none of the executives I spoke with believe in the strategy. Why is that?

As I stated earlier, Amazon launched Fresh online in 2007, and then acquired Whole Foods in 2017. Amazon has every intention of winning the $800 billion grocery war. However, Amazon lack of stores puts it at a significant disadvantage in the grocery battle against Walmart and Kroger. Walmart has more than 4,000 stores across the country and claims to have a location within 10 miles of 90% of the U.S. population. That allows Walmart to offer pickup and delivery from thousands of stores, giving it a scale that Amazon can’t match. Stated more accurately, Walmart currently has scale that Amazon can’t match.

Walmart (and most retail analysts) continue to believe that Walmart’s large number of stores gives them an insurmountable advantage. This is simply not true. It’s also why I compare Walmart’s strategy to that of France in WW II who believed that the Maginot Line would prevent Germany from invading the country. It didn’t work. Walmart’s stores only give them an advantage only if Amazon’s strategy is to compete against Walmart in head to head competition. Amazon won’t do that. More on Amazon’s strategy later.

I am not dismissing the importance of Walmart’s stores. However, I am incredulous that Walmart has failed to invest in a strategy to make their stores even more strategic and valuable. For example, even though Walmart has signed a partnership with Instacart to fulfill online orders and deliver groceries to customers, the process utilized by Instacart requires manually picking products off of store shelves to fulfill orders for customers. It is a slow and expensive process. (Walmart uses it’s own associates to also roam aisles fulfilling orders). It doesn’t have to be this way.

Walmart should have a laser-like focus on leveraging micro-fulfillment centers inside its stores or in offsite dark stores to automate the process for fulfilling orders. The fact that Walmart isn’t leading the retail industry on the use of micro-fulfillment is not only shocking, it is a massive strategic misstep by Walmart.

Kroger: Good Isn’t Enough 

As expected, Kroger reported exceptional results for its second quarter earnings with quarterly sales exceeding $30.5B and gross margin of 22.8%. No one can deny that Kroger hasn’t benefitted from the COVID-19 pandemic. However, the purpose of this article isn’t only about the Kroger of today, it’s about the future of Kroger. Do not construe my comments in this article as being anti-Kroger. I’m not. What I want is for Kroger to achieve its full potential as a company and retailer.

When I worked for Kroger, I was responsible for evaluating their entire corporate strategy which included the supply chain, stores and technology. I frequently encountered executives who would say to me, “Amazon can’t touch us. We’re too good at innovation.” I struggled not to burst out laughing whenever I would hear such comments. For the record: Kroger doesn’t innovate anywhere near as effectively as Amazon.

There are many reasons why Amazon is more innovative than Kroger. Among them is the fact that Kroger lacks one of the key strengths of Amazon: Qualified and competent executives who Think Big, and an insistence on only hiring the best and brightest. It doesn’t help that Kroger’s headquarters is in Cincinnati, OH. I was asked by Kroger’s Human Resources department to provide a list of recommendations for increasing the ability to Kroger to attract better talent. I submitted one recommendation: Move Kroger’s headquarters to Seattle, WA; Austin, TX; or Salt Lake City, UT.

I did stress to Kroger that they had to terminate or retire a large number of their executives and hire highly skilled talent from Amazon, Google, Microsoft and several leading grocery retailers. I went so far as to recommend that Sergei Goncharov, CEO of the Pyaterochka retail chain in Russia, be hired as the new CEO. Kroger must hire their next CEO from outside the company to take Kroger to the next level.

I was required to interview many executives at Kroger. I asked each one to walk me through their strategies and big ideas. Most of the executives were too focused on maintaining the status quo. I also interviewed  several executives who were too focused on technology that in my opinion, would do nothing to reduce costs and complexity, increase customer experience, or create a competitive advantage.

Case in point: Kroger has invested hundreds of millions of dollars on technology and programs with little to no material impact on the company. (This Wall Street Journal article confirms my argument). The improved performance of Kroger in 2020 is a direct result of the pandemic.

As a consultant, I never hold back. Ever. I warned Kroger not to waste capital on something as ridiculous as the autonomous grocery delivery vehicle, Nuro, or a marketplace to compete with Amazon or Walmart. In a classic ‘We Too’ moment, Kroger announced on August 11, 2020, that they’re opening a marketplace as a way to “turn up the heat on Amazon…” Don’t the words ‘you can’t be serious’ roll off the tongue when you read the quote?

Kroger doesn’t need to compete with Amazon. Instead of opening a marketplace, I made the recommendation for Kroger to acquire Overstock.Com or form a partnership with Shopify. Acquiring Overstock.Com would give Kroger a leading e-commerce platform that can easily be scaled into a marketplace. In addition, Kroger can relocate their technology and e-commerce team to Overstock’s headquarters in Salt Lake City, UT. I am not against a marketplace, I don’t believe Kroger’s marketplace strategy is optimal.

I pushed Kroger to engage in discussions with Alibaba to convince them to acquire Kroger. Kroger was only willing to sell some of their products on Alibaba’s platform. I pushed Kroger to explore a merger with Target, Ahold-Delhaize and Costco. I wasn’t surprised by Kroger’s refusal to engage in discussions with Alibaba. In 2013, I reached out to Kroger to inform them of my intention to write a research report recommending that Amazon acquire Whole Foods. I warned Kroger that they should acquire Whole Foods to deprive Amazon of the opportunity to do so. No one from Kroger returned my call and instead of acquiring Whole Foods, Kroger acquired Harris Teeter.

Kroger did attempt to acquire Boxed Wholesale, something I recommended, but Kroger didn’t offer Boxed the right price and Boxed declined the acquisition.

The WSJ article also references the partnership Kroger has with Ocado. Yes, it is true that I am the person who is credited with first making the argument that Kroger and Ocado should partner (2010), however, let me be clear – Kroger is not using the full strategy that I recommended. Let me explain.

I made the argument to Kroger that they should implement a micro-fulfillment strategy across their grocery ecosystem first, and then after a period of several months, assess the best way to leverage Ocado. In addition, I stressed to Kroger that they should leverage Ocado’s facilities to fulfill online grocery orders, assemble Click and Collect orders, and replenish groceries to their store shelves from Ocado’s facilities. Kroger has 46 distribution centers, many of which are older and labor-intensive. It’s conceivable that Kroger could close 3/4 of their distribution centers using the recommended Ocado model. (Wall Street analysts and consultants that reviewed my Ocado recommendations agreed with the strategy).

According to the WSJ article, and based on my own experience, I believe Kroger has made a serious mistake in their strategy. The long shadow of Amazon hangs over Kroger. In my opinion, Kroger confused the decision to enter into a partnership with Ocado as thinking big. Bad idea. Ocado was a piece of the strategy I designed for Kroger, not the whole strategy.

I respect Kroger and I want them to succeed. However, in my opinion, Kroger should call a halt to the project with Ocado, and revisit the topic of micro-fulfillment. A parallel strategy of installing micro-fulfillment technology from AutoStore (or another vendor), in conjunction with a revised Ocado strategy, should be pursued. In addition, Kroger’s Board of Directors should step up and insist that the next CEO of Kroger be hired from outside the company. Sergei Goncharov remains my preferred candidate to become Kroger’s next CEO once Kroger’s current CEO retires.

Amazon: There Will Be Blood

It is a mistake to judge Amazon’s ability to eventually sell more groceries than Kroger or Walmart based on Amazon’s current capabilities. Walmart has 21% of the grocery market share and Kroger has 10%. Amazon controls 2.2%. However, Amazon will close the gap faster than most grocery retailers and analysts believe possible. How? By utilizing technology far better than any other grocery retailer.

For example, I am convinced that Amazon will do the following when it comes to micro-fulfillment:

  1. Open super-micro fulfillment centers (sometimes called Nano fulfillment) inside most if not all Whole Foods Markets. I estimate that the centers will be 2,000 to 2,500 square feet and will be used to store top-selling and fast-moving SKUs for ease of automated fulfillment.
  2. Open a 20,000 square feet micro-fulfillment center inside a supermarket for testing. Another option is to open dark stores among a cluster of stores powered by a 20,000 to 30,000 square feet micro-fulfillment center.
  3. Introduce technology to remove cashiers in its new supermarkets and Whole Foods.

Amazon will go big into micro-fulfillment. It’s conceivable that Amazon will be the leader in micro-fulfillment within two years.

Amazon will utilize Kohl’s 1,200 stores to open Amazon-branded grocery stores inside select Kohl’s location. (I wrote in 2018 about the value of groceries to Kohl’s with a recommendation to partner with Amazon, Lidl or ALDI). Amazon will continue to acquire available real estate to open stores and it’s plausible that Amazon will acquire another retailer to increase its store count even more.

What Amazon won’t do is copy or follow. Amazon will lead. Amazon doesn’t have ‘We Too’ moments.

As for Kroger and Walmart? I’ve spoken to many analysts who believe Walmart and Kroger are at the top of their game. I disagree. I believe we in the first inning of Amazon competing directly with Walmart and Kroger. Yes, Walmart and Kroger are successful but they are not at the top of their game.

Instead of merging with Ahold-Delhaize or Target, being acquired by Alibaba, or forming a strategic partnership or being acquired by Costco, Kroger will continue to walk the path they’re currently on. Hiring Sergei Goncharov, or another highly qualified executive from outside the company to become CEO, is unlikely. Too bad. Kroger needs someone to come in and rip the company apart and question the strategy. One more time: I don’t think Kroger is broken. However, I do believe Kroger needs an outsider to lead the organization and evaluate the company’s strategy and operations. Good isn’t good enough when Amazon is a competitor.

I believe Kroger will wrongfully continue its relationship with Nuro. Bad Idea. Kroger (and Walmart) would be wise to explore leveraging technology from Tortoise to reduce costs and increase customer experience in last mile delivery.

Walmart will continue to aim high only to fall short. I will change my opinion of Walmart if they sign an agreement with AutoStore, instead of chasing micro-fulfillment solutions from startups that cannot make Walmart a leader in micro-fulfillment. I will change my mind if Walmart takes the lead in drone delivery vs. copying what Amazon and others are doing. Optimal drone delivery isn’t from ground launched vehicles, it’s best to launch drones from floating warehouses similar to blimps. If launched from the ground or from a vehicle such as the roof of a trailer pulled by a truck, multiple issues are encountered. There are lots of issues to workout with drone delivery but Walmart should be up to the challenge.

What’s next for Amazon?

As described in this video, I anticipate that Amazon will continue to acquire mall properties. For example, I remain convinced that Amazon will acquire JCP anchor stores and convert them into fulfillment centers. JCP may have been acquired out of bankruptcy but the company is worth more as a real estate play than a retailer. I won’t be surprised if Amazon acquires JCP’s warehouses and other facilities used to support JCP’s logistics and transportation needs. In Class A malls where JCP has a presence, it’s plausible that Amazon will open grocery stores and mixed-use retail space.

Amazon has a large number of options it can pursue to grow its retail store footprint. Amazon doesn’t just want to be closer to their customers, Amazon wants to be as close to every other retailers customers as possible. This can only be accomplished by operating large numbers of fulfillment centers and having an integrated nationwide logistics network.

I must also point out that Amazon doesn’t want to “beat” Walmart or Kroger, Instead, Amazon wants to outlast Walmart and Kroger eventually leading to increased market share for Amazon. The way Amazon will outlast Kroger and Walmart is by creating the most advanced grocery and value chain ecosystem in existence.

Watch Amazon closely. They have big plans for groceries and no one, not Walmart or Kroger, can stop them.