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Kroger Embraces Technology in Search of Sustained Growth

Long-standing grocery chain Kroger (NYSE: KR) is harnessing technology to stand out from other major players in the grocery industry.

Image source: Getty Images.

The company's new tech focus is part of an overall "Restock Kroger" program, an aggressive three-year plan to optimize costs, retain employees, and modernize standard company practices.

Even though Kroger only has physical locations in 35 states at present, CEO Rodney McMullen is aiming to make Kroger shopping accessible to 100% of American grocery consumers. To achieve this, the company has partnered with Microsoft (NASDAQ: MSFT), and made investments in infrastructure for online ordering and home delivery.

These business model changes — along with the company's favorable metrics and regular dividend — make this stock an intriguing pick for the value investor.

Bigger is better

Kroger is a mainstay of the grocery industry, controlling well over 2,500 grocery stores across multiple brands across the country. However, management has ambitions to grow the company beyond its current footprint. Kroger wants to change the way people buy groceries, betting that technological advancements in both consumer and enterprise technology will radically transform opportunities for shoppers.

At a strong presentation at the company's investor day early this month, management announced a billion share repurchase program and reconfirmed 2019 earnings guidance. Kroger leadership is targeting more consistent growth in an era where consumers' tastes are changing rapidly and online grocery shopping is becoming the norm. To do this, the company is investing in the still-nascent industry of online grocery ordering and home delivery and expanding its infrastructure to serve areas that do not currently have Kroger stores.

Making a better experience

Recently, Kroger has partnered with Microsoft to transform the tech behind the tools customers use to shop. Kroger has piloted a few key tech advancements in two of its stores, one in Microsoft's hometown of Redmond, Washington, and another in the Ohio town of Monroe.

One of these pilot programs is the Enhanced Display for Grocery Environment (or EDGE) tool. EDGE supplements products' paper price tags with a host of new information. Customers will be able to scan the EDGE tags with their phones and pull up not only pricing, but also unit information, nutritional facts, and allergy warnings. In addition, store employees who assemble orders for curbside pickup have new indicators for where to find the necessary products, shortening the time it takes for these employees to complete an order.

This retail-as-a-service (RaaS) technology is backed by Microsoft Azure AI, which is in competition with Amazon (NASDAQ: AMZN)'s AWS cloud services suite.

A different world for shoppers

One of the most threatening new players in the grocery industry is Amazon's Whole Foods Market, which focuses on natural and craft products. Like Kroger, Amazon and Whole Foods are using store technology to change how people shop for groceries. However, while Kroger has invested in technology to increase customer convenience, Amazon has targeted its tech advancements towards other goals.

Many major retailers — including Kroger and Walmart — heavily compete on price, but Whole Foods has historically attracted a less price-sensitive clientele. As a result, its efforts to innovate through technology have targeted supply chain and logistics to increase options and lower the prices of organic produce and other "premium" products.

But without the pressing need to push prices on its products even lower, Kroger has a head start on Whole Foods. Kroger can instead focus more closely on using technology to improve the experience in the grocery store and build an infrastructure for supporting customers who order their groceries online. Kroger has kept competitive with other major players in this regard: the company had 13% of its customers shopping online in 2018, compared to 17% at Walmart, 10% at Costco, and 9% at Target.

Even though Walmart leads the pack in terms of online grocery ordering, it's critical for all these companies to grow the number of overall customers opting for online ordering. And with Kroger's investments in this field, the company should continue to be in a competitive position as online ordering grows.

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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. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Nicholas Ezyk has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Microsoft. The Motley Fool recommends Costco Wholesale and recommends the following options: long January 2020 5 calls on Costco Wholesale, short January 2020 calls on Costco Wholesale, and long January 2021 calls on Microsoft. The Motley Fool has a disclosure policy.


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