In our last blog post about the grocery industry, we discussed how grocers should address rapid changes in customer behavior during the age of COVID, including accelerating shifts to becoming micro-fulfillment centers. In this update, we will review recent, non-COVID-related developments that promise to reshape the grocery industry, and we will suggest strategies to reposition grocers as the hub of our food ecosystem.
The future of grocery is about flexibility
Flexible spaces: Anchoring food production
During the pandemic, the divergence in food supply chains that served businesses and consumers, respectively, resulted in unnecessary waste and inefficiencies due to inflexibility. We believe that a reconvergence of the B2B and B2C supply chains is not only possible, but also beneficial to grocers as food industry players reshuffle their role in the food ecosystem. The Kroger Company has taken a step in this direction by implementing the ultimate sharing economy mashup-up: after a successful pilot in 2019, Kroger announced in early October that it will partner with ClusterTruck to lease “ghost kitchen” spaces in Indianapolis and Columbus for production of an expansive list restaurant-quality meals available for pick-up or delivery. Aside from the obvious benefits of space optimization in its real estate, the relationship between Kroger and ClusterTruck allows Kroger to serve as the nexus of food production, whether in the raw ingredients it sells (to consumers or to businesses) or the prepared meals available from kitchens within stores. What’s more, this move plays to Kroger’s strengths as a food platform, allowing Kroger to delegate opportunities like restaurant-quality food production to a player with those skills, while owning other elements of the food ecosystem in which it excels.
Kroger has made investments and acquisitions a core part of its strategy to deepen its understanding of consumers, build lasting relationships, and diversify its offerings. In recent years, Kroger has purchased e-commerce site Vitacost, meal kit company Home Chef, and even legendary New York City cheese shop Murray’s Cheese. With its latest investment in ClusterTruck and a wider launch of the partnership, Kroger can feed data to its insights business (84.51°) and leverage its flexible spaces to maximize the value of its platform. Could future purchases include larger food production companies that serve restaurants, like premium soup producer Kettle Cuisine? Or might Kroger lean more heavily into beauty and personal care with a DTC acquisition? Both such moves would fit squarely into their platform approach.
For as long as the grocery store has existed, products have flowed from farms to stores.
If Berlin-based Infarm is successful, it will no longer be a euphemism for grocers to call their produce farm-fresh; the startup has raised some $170 MM to launch in-store vertical farming inside grocery stores, resulting in fresher produce, reduced costs for production and transport, diminished environmental impact, and an experience that will engage and delight customers with the sights, sounds, and smells of brightly-colored vegetables growing before their eyes. Farming fresh produce is a decisive way for grocers to position themselves as the center of the food ecosystem. And given the higher efficiency of hydroponic or aeroponic micro-farming, the reduced need for pesticides, and the obviation of transportation, in-store food production should result in cost savings and environmental benefits. In-store food production like Infarm is supremely well-suited to the flexible spaces afforded by a store-as-platform approach, and it seems likely that large players like Amazon/Whole Foods Market could seize upon this opportunity to solidify their competitive advantages.
As we discussed in our previous post, the transformation of grocery supply chains is already underway. At the low-tech end, Whole Foods Market recently launched a “dark store” in Brooklyn last month: a warehouse-cum-store environment that is only open to employees shopping for fulfillment of delivery orders. At the high-tech end, Kroger has recently announced the opening of yet another (now the company’s sixth) sophisticated, automated customer fulfillment center in Michigan, as part of their partnership with Ocado. Both of these approaches reflect a deep commitment to delivering goods directly to customers. Whether grocers choose to incorporate the micro-fulfillment center concept into existing stores or to launch dark stores or new fulfillment centers, executive leadership should plan for several years of transition and consider the attendant operating model changes to people, process, and technology as they adapt to the new reality.
The changes we highlight in this post reflect sweeping shifts in the food ecosystem, and they impact not only grocers and suppliers, but also customers, partners, and adjacent industries.