Kroger Reevaluates Robotics Investment Strategy After Overreach

Kroger has announced the closure of three robotic e-commerce fulfillment facilities, signaling a significant pivot in its automation strategy. Previously, the grocery giant had expressed optimism about its partnership with U.K.-based warehouse automation firm Ocado, intending to expand its fleet of high-tech distribution centers.

However, recent developments reveal that Kroger's confidence was misplaced, as the Ocado network failed to meet performance benchmarks. The company paused further development on the Ocado project in September 2023, indicating a reassessment of its reliance on automation for profitability in online grocery sales.

Interim CEO Ron Sargent, who took over following former CEO Rodney McMullen's departure amidst an ethics probe, stated that a thorough evaluation of the Ocado network would be conducted. Sargent emphasized a strategic shift towards leveraging Kroger's existing 2,700 grocery supermarkets to enhance e-commerce capabilities without incurring large capital expenditures.

The closures of the robotic facilities are expected to yield a $400 million boost to e-commerce profitability, albeit at the cost of approximately $2.6 billion in charges. Ken Fenyo, a former Kroger executive, highlighted that the shift reflects a broader industry reality where grocery e-commerce has not reached anticipated growth levels post-COVID-19.

He noted that the decision to locate Ocado's facilities outside of urban areas proved detrimental, as the centers struggled to process enough orders to justify the technological investments made. Kroger's model, which relied on consumers prioritizing cost over delivery speed, contrasts sharply with the rapid expansion of competitors like Instacart and DoorDash, who focus on swift delivery times.

In light of these challenges, Kroger announced plans to strengthen partnerships with third-party delivery services and pilot capital-light, store-based automation in high-demand markets. This move aligns with emerging trends in micro-fulfillment technology, although experts caution that such systems may not be economically viable outside areas with high online ordering volumes.

Kroger's decision to scale back its automation initiatives represents a notable setback for Ocado, which has relied on its relationship with Kroger as a key validation of its technology. The fallout has resulted in a significant drop in Ocado's stock value, returning it to levels not seen since its public debut 15 years ago.