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Kroger Kicks Off In-House Home Delivery: Should REITs Rejoice?

Apr 16, 2021 by Marc Rapport
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Kroger (NYSE: KR) has now gone live with a revved-up bid to take on Amazon (NASDAQ: AMZN), Walmart (NYSE: WMT), and other fierce competitors in the fast-growing online grocery delivery business.

The company's new service relies on robots doing their thing in highly automated warehouses, beginning with a 375,000-square-foot facility that already has soft-launched about 30 miles north of Kroger's Cincinnati headquarters, and on Kroger employees doing the deliveries themselves.

"It's another piece -- a critical piece -- to serving our customers anywhere they want, whenever they want," Kroger CEO Rodney McMullen says in an article posted today by The Enquirer after he gave the hometown newspaper a tour of the facility.

Thousands of digital orders a day, with nationwide growth plans

That warehouse is expected to handle thousands of digital orders a day for delivery to consumers in markets stretching from Cincinnati to nearby Dayton, Ohio, and on to Louisville, Kentucky, and Indianapolis.

The Enquirer says that $55 million facility, which has been in testing mode for the past month, will be the hub for spoke operations to be established in those cities, and a similar soft opening is underway in the Orlando, Florida, suburb of Groveland, at a warehouse expected to serve as the hub for deliveries to markets from Tampa to Miami.

Also on the drawing board are warehouses in Atlanta; Dallas; Frederick, Maryland; Phoenix; Pleasant Prairie, Wisconsin; and the Detroit suburb of Romulus, Michigan.

The Enquirer says Kroger is also eyeing locations in the Pacific Northwest and Western states, and as the network expands, Kroger will announce additional locations.

Putting into action a plan first announced in 2018

Kroger first announced in 2018 that it had partnered with Ocado (OTCMKTS: OCDDY), a British retailer that's digital only, to ramp up a network of 20 automated warehouses on this side of the pond.

The investment extends to people, too. Kroger says it will be doing its own deliveries, bypassing Instacart and the like in favor of company employees in Kroger-branded trucks, which it says will help ensure consistency and reliability. The company also is considering lowering the $9.95 delivery fee for deliveries ordered a few days in advance, The Enquirer says.

The big grocer has done well during the pandemic, leveraging its ability as an essential business to stay open and more than doubling its digital business to $10 billion in 2020, and "Kroger has promised to double that by the end of 2023," the newspaper says.

A big commitment for a very big company

This is a major step forward for a 138-year-old company that has grown into one of the world's largest retailers, with 2,800 stores operating under two dozen banners in 35 states and annual sales of more than $121 billion.

Not everyone is wowed by the huge commitment to digital delivery -- its tech ventures extend to testing a digital cart for in-store shopping -- and physical delivery. "This is a pretty big gamble in untested waters," Robert Moskow, an analyst at Credit Suisse (NYSE: CS), told Bloomberg. "I would have chosen a more flexible, less capital-intensive approach. There's a lot of unknowns out there."

The Millionacres bottom line

But what's the takeaway for individual investors? Beyond considering the future of Kroger stock itself, the company's strategies impact the owners of the property it occupies, often serving as anchors for shopping centers owned by retail real estate investment trusts (REITs), for example.

And those hub warehouses and the smaller spokes? Those could be future prime property for industrial REITs and local developers.

One also might wonder if doing so much from the warehouse would cannibalize the company's stores, but my hunch is maybe not so much. People do like to shop in person when they can, as we addressed recently in this: "Instacart Says Online Grocery Shopping Isn't Just a Trend."

Indeed, there's room for both in this basic business that directly addresses one of our species' two primal needs -- food (lots of REITs do shelter, too). Keeping shoppers shopping with Kroger seems to be a winning strategy, either online or in person. And when a company is as large, successful, and time-tested as Kroger, with a rock-solid brand, it's earned the benefit of the doubt.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Marc Rapport owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.