Kroger and Walgreens want to buy products together to cut supplier costs

Key Points
  • Kroger and Walgreens Boots Alliance are teaming up to cut costs by sourcing more merchandise together.
  • The companies say they plan to merge resources to be able to improve their supply chains.
  • They welcome other retailers to join them.
Kroger and Walgreens have been working together since 2018 on various pilot tests.
Source: Kroger

Kroger and Walgreens Boots Alliance are teaming up to cut costs by sourcing more merchandise together.

With what they call the Retail Procurement Alliance, the chain retailers will look for overlaps in the products they are receiving so that they can combine their orders. Doing so would increase scale and lower costs. The two will also see if Kroger can start manufacturing items in-house for Walgreens, and vice versa, Kroger CFO Gary Millerchip told CNBC.

"Kroger manufactures many of our own food products," Millerchip said. "We can do that more collectively and cheaply ... when we have the volume from Walgreens to increase in efficiencies in our model."

Kroger and Walgreens hope more retailers will join their alliance. "If another organization thinks they have significant buying in these areas, they could partner with Kroger and Walgreens to save and reduce waste," Millerchip said.

The alliance comes at a time when traditional retailers are under pressure as more consumers shop online and, as a result, are looking to find cost savings where they can. The joint venture builds on work that Kroger and Walgreens have already been doing together.

In October 2018, the companies announced they were beginning to test selling some of Kroger's owned food brands at select Walgreens stores, in addition to allowing customers to pick up their online orders from Kroger at some Walgreens locations.

This August, the companies said they were expanding this pilot test to 35 Walgreens locations, from the original 13. Walgreens also put a selection of its health and beauty merchandise in 17 Kroger stores as a trial. In addition to its namesake brand, Kroger owns a variety of other supermarket and retail brands including Fred Meyer, Ralphs, Harris Teeter and Food 4 Less.

"Clearly we are seeing ... offering customers convenience with smaller shopping trips is improving the overall experience," Millerchip said about adding Kroger products to Walgreens stores. "But it's still very early in the process."

Kroger and Walgreens aim to compete with e-commerce behemoth Amazon, which continues to push further into food and health. Amazon, which owns grocery chain Whole Foods, dropped the fee for two-hour grocery delivery for all of its paying Prime members. It also owns internet pharmacy company PillPack.

And Amazon is expected to open what will be its first location of a new kind of grocery chain, in Los Angeles, next year. This will be separate from Whole Foods.

Kroger's market cap is $22.4 billion, and its stock is roughly flat this year. Walgreens, which is valued at about $52 billion, has seen its stock fall about 15% in 2019.

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