Please ensure Javascript is enabled for purposes of website accessibility

Kroger's Plan to Fight Back Against Amazon Includes Microsoft

By Adam Levy - Updated Apr 15, 2019 at 12:39PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The grocer is partnering with Microsoft to introduce some innovative technology to its shoppers.

Check out the latest Kroger earnings call transcript.

Kroger (KR 1.71%) is the second-biggest grocery retailer in the United States after Walmart (WMT 0.86%). Walmart has rapidly expanded its online grocery services in light of the impending threat of Amazon (AMZN 3.15%), but Kroger hasn't made the transition nearly as successfully. Kroger offers curbside grocery pickup and home delivery, but it charges customers more than Walmart or Amazon.

Meanwhile, Kroger is investing in technology behind the scenes. It's working on unmanned delivery vehicles and robot-filled warehouses that could easily fit in as part of Amazon's fulfillment network. Its most recent investment includes "digital shelves" and sensors throughout two of its stores in order to guide shoppers through the store more quickly. Kroger is partnering with Microsoft's (MSFT 1.07%) Azure cloud computing to support the new store features.

While digital shelves might seem like an also-ran compared to the technology in Amazon Go stores, it could be a bigger threat to Amazon than it first appears.

Kroger CEO Rodney McMullen and Microsoft CEO Satya Nadella standing on either side of sample store shelving.

Image source: Microsoft.

Improving store efficiency

Digital shelves and sensors throughout Kroger stores could help increase the speed of shoppers' trips through the store. Shoppers can make grocery lists in Kroger's phone app before heading to the store, and the app will help guide them through the store to find everything on the list. Digital shelves can help indicate the items shoppers are looking for once they enter an aisle, so they don't have to spend time perusing the labels on the shelf.

While it doesn't allow customers to skip the checkout line like Amazon Go or Walmart's experiments with Sam's Club, it should enable them to have a more convenient shopping experience. That could increase foot traffic and inventory turnover at Kroger stores. Amazon Go stores have higher than average foot traffic, sales, and inventory turnover than the average convenience store thanks in large part to its technology.

Digital shelves can also help cut costs by reducing the need for labor. Since the shelves are digital, stores can update pricing instantly. No need to make new labels every time a store needs to change the price. Additionally, the technology may help keep shelves stocked more efficiently.

While it's not the marginal cost-reducing measure of getting rid of cashiers, the technology ought to save costs in the long term.

The bigger threat to Amazon

Kroger taking back share of the grocery market isn't a big threat to Amazon. Amazon has a massive retail operation and grocery is just a small -- albeit growing -- portion of that business.

The real threat of Kroger's technology investments are its reported plans to license the technology to other stores. Analysts have suggested Amazon could license the technology in Amazon Go stores as a way to boost sales of Amazon Web Services, its cloud computing division.

Kroger's technology uses Microsoft Azure for the back end. If Kroger proves the efficacy of its digital shelves and store sensors in its own stores, it could prove a major competitor in a promising blue ocean market Amazon was poised to take. Not only that, but it would also provide business for Amazon's biggest competitor in public cloud computing.

If that weren't enough, Kroger has plans to use shopper data and Microsoft's technology to target ads based on predicted demographic data. The data Amazon collects from Amazon Go stores could be incredibly valuable in its own advertising business, and Kroger and Microsoft could become a competitive threat in that area. Microsoft already has years of experience in digital advertising, and it could provide a lot of insight and expertise to help Kroger sell ads.

To be sure, Amazon has a head start and superior technology. But Amazon's solution is very expensive -- an estimated $1 million in hardware per store -- and it's only proven viable for smaller-format convenience stores. Kroger's solution could be a more viable product for most retailers to improve sales and save money.

Kroger is stepping up the competition against Amazon, and it's taking a very Amazon-like approach to fighting back.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Kroger Co. Stock Quote
The Kroger Co.
$48.14 (1.71%) $0.81
Microsoft Corporation Stock Quote
Microsoft Corporation
$259.58 (1.07%) $2.75, Inc. Stock Quote, Inc.
$109.56 (3.15%) $3.35
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$122.63 (0.86%) $1.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.