(CNN) – Kroger wants to sell you more groceries online. And to do that, you use a strategy that arouses some skepticism on Wall Street.
Kroger is opening a $ 55 million, 375,000 square meter, fully automated distribution center outside of Cincinnati this spring in partnership with Ocado, the UK’s online supermarket and warehouse specialist. It is the first of ten such facilities that Kroger, the largest US supermarket chain, plans to complete over the next two years.
The purpose of these centers is to expedite home delivery and roadside collection. Kroger announced last month that digital revenue, which includes both home delivery and roadside collection, is expected to double to over $ 20 billion by the end of 2023.
Shopping for groceries online has increased in the pandemic as consumers restrict their trips to stores. According to the latest data from Nielsen, online food and beverage sales increased 83% to $ 39 billion for the fiscal year ended Jan. 31 compared to the same period last year.
Kroger is competing for a larger chunk of the online market against Amazon, Walmart, and others.
In the race to get a larger share of customer orders online, grocers are currently planning two different approaches to getting your food on time. One of them, like Kroger, is opening large standalone warehouses that can process thousands of orders every day and cover customer orders in multiple markets.
The other job of stores like Walmart, Albertsons, and HEB is to open mini-warehouses in stores – a concept called micro-fulfillment centers – to fulfill online orders.
Kroger’s warehouses can process more orders in a day than smaller micro-fulfillment centers – an advantage when online demand grows.
However, in-store micro-fulfillment centers are better tailored to same-day delivery needs than large warehouses, said Kelly Bania, an analyst at BMO Capital Markets. This is because large fulfillment centers are typically farther from customers’ homes than the stores.
“This is primarily a next day service,” she said. “The US has really turned into a same day market.”
Kroger’s approach could also hurt profits as larger warehouses are more expensive to build, she said.
On Wednesday, Tim Steiner, Ocado CEO, said warehouses will have the ability to fulfill delivery orders on the same day. As part of a partnership with Instacart, Kroger also offers same-day delivery from the branches.
Rodney McMullen, Kroger CEO, said Wednesday that Kroger expects the profitability of these warehouses to be on par with delivering orders from stores.
McMullen added that Kroger is not bound by its large-scale inventory approach and may build smaller facilities in the future.