Grocer Kroger ramps up home delivery tests with Uber as online competition heats up

Kroger CFO: We've experienced deflation again this quarter
Kroger CFO: We've experienced deflation again this quarter

Kroger said Thursday it plans to continue investing in its digital and technology initiatives as it also ramps up grocery delivery tests with Uber.

It also comes as the Cincinnati-based supermarket chain grows its online-ordering service called ClickList, which offers same-day ordering and pickup at brick-and-mortar locations. Kroger also is generating digital sales with its online order platform known as Express Lane.

"As our customers change and evolve, we are taking steps to meet them where they are and more importantly where they are going," Rodney McMullen, Kroger's chairman and CEO, said on the company's fourth-quarter earnings call Thursday. "We're making meaningful investments in digital. We feel great about these investments because customers tell us they are important to them."

Kroger indicated it grew the number of ClickList and Express Lane locations by just over 50 percent in fiscal 2017, from 420 to more than 640 online order service locations.

The CEO said the Uber tests are underway currently in several locations and the grocer plans to expand them this year. Under the test program, customers can order through ClickList and choose to have their groceries delivered by a local Uber driver.

"We have a couple of other home delivery tests as well," McMullen added, although not providing specifics.

The Kroger CEO also took a dig at competitors in the online grocery space.

"There are a lot of companies out there right now investing in digital and e-commerce in opportunistic ways that will likely never create value for their shareholders," he said. "A core strength of Kroger is our ability to both create shareholder value today and to make meaningfully strategic investments for the future."

Shares of Kroger were down 3 percent in early trading. The company's fourth-quarter earnings per share for the quarter ended Jan. 28, 2017, were in line with estimates but analysts were concerned with the challenging outlook the company provided for the current full year. Comps also were seen as lighter than some Street estimates and the capital expenditures guidance for fiscal 2018 was lower too.

"In sum, this was not an impressive print, and we expect the stock to underperform today," said JPMorgan analyst Ken Goldman in a morning note.

  • EPS: 53 cents per share, versus 52 cents expected by Thomson Reuters consensus estimate.
  • Revenue: $27.6 billion, versus $27.3 billion expected by Thomson Reuters.
  • Comparable sales (or identical supermarket sales without fuel): down 0.7 percent, versus 0.10 percent expected by Consensus Metrix.

Kroger's expansion into the online grocery space comes as Amazon is becoming more aggressive too.

A Cowen research report released Wednesday forecasts Amazon's growth in grocery will allow the e-commerce giant to go from the ninth-largest U.S. grocery retailer in 2017 to the third-largest grocer by 2021, putting it only behind Wal-Mart Stores and Kroger.

An employee bags a customer's purchases at a Kroger store in Peoria, Illinois.
Daniel Acker | Bloomberg | Getty Images

Cowen survey data shows Amazon's domestic grocery business also "started off well in 2017," according to analyst John Blackledge. His report indicated that the Seattle-based e-commerce company saw total purchasers grow by 36 percent on a year-over-year basis — a stronger pace than the 15 percent increase averaged last year.

"We believe Amazon's multi-platform approach to the U.S. grocery market affords Amazon the flexibility to address different aspects of the market," said the analyst.

Overall, Cowen projects the U.S. online grocery market will see more rapid longer-term growth than the larger e-commerce market.

Cowen estimates the U.S. online grocery sales will grow from an estimated $71 billion this year to $177 billion by 2022, representing a 20 percent compound annual growth rate. That is faster than the 12 percent compound annual growth rate of the larger e-commerce category.

Fueling the demand in online grocery is the older millennial customers, according to Cowen. The research firm's survey data shows consumers aged 25 to 34 "were the biggest consumers" buying groceries online last year, adding that "they would likely buy groceries online in the future."