May 23, 2018 • Volume 15
Kroger brings Ocado's high tech grocery business to the U.S.
Along with Pets.com, Webvan was among an ignominious group of online retailers that, in a rush to lock in share early in a channel that they believed was going to revolutionize retail, blew through investors’ money like rain down a sewer drain.
Pets.com’s successor, Chewy.com, was recently given a $3.35 billion valuation as it was acquired by PetSmart, giving some solace to Pets.com investors who can at least tell themselves that they had the right idea, but were just too early.
Are we there yet -- is timing right for Kroger and online grocery retail?
More recently, Kroger announced that it was partnering with Ocado, the U.K.-based online grocery retailer, to roll out Ocado’s highly mechanized warehouse/distribution center model in up to 20 markets in the U.S. in the next three years. Ocado, launched in 2000 in the U.K., had the benefit of building and refining its model in the more amenable U.K. market, where a number of retailers were profitable by the time that Webvan was compelled to call it quits.
Left behind in the dust after the $770 million failure of Webvan in the U.S. were a number of retailers that hunkered down, shaved costs, got out of poorly performing markets, and persevered. Peapod, which launched in the 1990’s, picked inventory from local stores. Fresh Direct, with a centralized warehouse akin to Ocado’s model [without all the robots] stayed within a narrow geographic range to keep costs manageable. Other retailers, like Safeway, ShopRite and Kroger pursued relatively conservative models like that of Peapod, picking inventory from stores to keep fixed costs down.
Can Kroger compete with Goliath?
But the environment in the U.S. fundamentally changed when Amazon announced its intent to acquire Whole Foods. It suddenly became obvious to us all that slow and steady wasn’t going to win what had become a high-stakes race - the Kentucky Derby of e-commerce - online grocery. Kroger’s plan to expand so quickly with Ocado is more than a competitive response to Amazon, it is an attempt at a supercharged leapfrog over Amazon/Whole Foods.
The question of course, is whether Kroger is getting ahead of itself. Are U.S. consumers ready to spend enough to support such high fixed-cost operations that will require significant volume to make money? Or is the U.K. inherently different than the U.S., with tighter population density, expensive gas, and cramped stores?
In today’s environment, where a retailer can see billions of dollars in company valuation disappear when Amazon so much as glances in its direction, it was inevitable that someone, if not Amazon, was going to make the bet that Kroger has made. Especially given that the stakes are so high, with the U.S. grocery market worth about $700 billion per year.
In my mind, Webvan made two mistakes: first, Webvan was too early. It was trying to turn the online grocery industry upside down at a time when most Americans didn’t even have broadband access at home. Second, it tried to expand to too many markets before it had a successful model in even one market that it could try to scale.
The grocery retail battle rages on
Kroger has the benefit of drafting off of Ocado’s technology learnings, but Ocado’s technology was born in a market that has proven very different than ours. I believe that market fit trumps technology.
Retailers need to innovate, but innovation can happen in a measured way. Those setting strategy at Kroger ought to move as quickly as they possibly can to build out Ocado-style warehouses in two very different types of markets as quickly as they can.
One should be in a densely populated urban market [Chicago, San Francisco, or New York], the other should be a densely populated suburban market [Phoenix, Austin, Nashville, or something similar]. See what works and what doesn’t. Get a feel for whether they need to deliver today, or if tomorrow is OK. Figure out whether they need to deliver within a narrow 30-minute window, or if consumers will accept wider time windows.
Try to deliver with an Uber-like crowdsourced model, and try it with trucks with multiple temperature zones. To aspire to potentially put these warehouses in 20 markets in three years is a fine idea, but not one that Kroger ought to lock itself into too early.
I simply don’t know what will work most effectively in the U.S., nor does Kroger. What I do know is that a program of fast experimentation is most likely to lead to success that won’t turn Kroger into the next Webvan.
Amazon’s private label brand universe
In April, our friends at Gartner L2 released a list of 70 private label brands that Amazon owns. Amazon’s private label products range from commodity charging cables to not-even-close-to-commodity Echo voice powered speakers. Amazon acknowledges a traditional approach to private label with ‘perfectly fine’ low priced undifferentiated commodities at the same time that it invents entirely new categories under its own brands.
Leveraging L2’s work in identifying these brands, we thought that we would see which brands were winning in Amazon’s ecosystem. The Echo franchise wins, hands down, on any metric that you can imagine – most clever, most game changing, and most sales. After Echo though, it is the AmazonBasics brand that stands well above the rest.
AmazonBasics is Amazon’s spin on private label as we used to know it – white label, black letters, who can really tell the difference anyway? And it is 26 times [no, not 26 percent, 2,600 percent] larger than the next biggest private label brand, Amazon Essentials.
In the chart above, we show the relative sizing (in dollars) of Amazon’s private label brands, over the past 12 months, and then dive into the breakout of products that fall under that brand. The pie chart on the right breaks AmazonBasics sales down by category, and is far more diverse than we might have guessed. As we might expect, the biggest share comes from electronics & accessories, but this collection of batteries, charging cords, Bluetooth speakers and whatnot only account for 43 percent of AmazonBasics sales.
In total, Amazon’s private label brands (excluding Echo) account for less than one percent of Amazon’s total sales over the past 12 months. And 80 percent of those sales fall under Amazon’s white label/black letter brand, AmazonBasics.
Perhaps brands can relax a bit? For many, the answer, at least in the short run, is probably yes. Amazon private label doesn’t yet seem to be a mortal threat. Unless you happen to manufacture disposable batteries, where AmazonBasics’ share on Amazon over the past 12 months is 32 percent, more than twice its next nearest competitor, Energizer.
What's next for the private label juggernaut?
The takeaway for brands is, unfortunately, mushier than we might like. Amazon’s private label brands can be a huge threat, but for the most part are not yet wreaking havoc on the brand landscape. If Amazon is going to turn the US retail into a European-like marketplace where store brands dominate, we don’t have a ton of evidence to support it yet. But we see that it can happen, at least in isolated spots.
In a shameless pitch for an upcoming webinar, I’ll be presenting many more private label insights on a webinar June 7th with our partners at the Category Management Association. We’ll look at more Amazon private brand activity, and we’ll look private label activity on Jet and Brandless. The link to register for that event is here.
Join Ken Cassar (Slice Intelligence) and Lauren Freedman (the e-tailing group) at the 2018 Internet Retailer Conference + Expo in Chicago. Where they'll discuss: when it comes to delivery, how fast is fast enough?
In this session, they will benchmark e-commerce delivery speeds and reveal fresh insights into what consumers say they want and what they are willing to accept. For instance, does shaving a day off delivery actually improve repeat customer metrics? How critical is in-store pickup and how are store associates meeting online shoppers’ expectations? The speakers will address these key delivery issues and provide valuable insights that retailers can take home to benchmark their own performance.
Ken Cassar is vice president, principal analyst at Slice Intelligence, where he looks at trends in the e-commerce industry armed with Slice’s robust set of online sales data.
Ken brings a rich online retail background to Slice Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet.
Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Slice profile. He also has the appropriate jacket for every occasion.