I recently wrote about how Kroger (KR, Financial) bucked the retail trend by showing steady growth over the past 10 years and the reasons why that was so. The ecommerce problem isn’t going to go away for brick-and-mortar retailers, and the sooner they move into that space, the better.
What’s worse, however, is that Amazon (AMZN, Financial) is now exploring physical retail. It already has a bookstore in its hometown of Seattle, but it recently announced plans to extend that further. Chicago could be soon getting its own Amazon Books, and other cities will surely follow suit. Although Amazon has yet to enter the hardcore consumer good retail segment with its stores, customers can look at the latest Kindle and Fire products while they browse for their favorite paperbacks and hardbacks.
Although it’s not likely that Amazon will mount a full-scale attack on the brick-and-mortar segment, the move should make physical retailers at least a little nervous. Its numbers are already being hit by ecommerce growth, and it simply cannot afford to have another deep-pocketed competitor on its own turf.
The only thing that can save it now is if it pushes its own online agenda and attempts to take market share from Amazon. It has the pricing power to do that, and the massive physical network to offer pickup services as a way to offset any last-mile delivery costs, which has long been the bane of e-tailers.
In my previous article titled "The Role of Kroger's Convenience Stores in Future Growth," I wrote about how ClickList could be the ace up its sleeve and how its C-store format could play a major role in the company's ecommerce growth. I’d like to explore that in some detail here.
More about ClickList
Kroger’s online shopping service, which is currently available in 25 markets, allows users to order online and collect their goods at the store. The concept has been a hit so far with some rave reviews to show for it.
According to Business Insider:
"Parents are raving about ClickList, Kroger's new online-grocery ordering service. It allows customers to order and purchase from a selection of 40,000 groceries online and then pick them up at a Kroger.
"Store employees will pack the items and load them into customers' cars at a designated time. It costs $4.95 for regular orders and $7.99 for expedited ones."
It is still way too early to say that Kroger will be a winner in the ecommerce war, but with 2,778 supermarkets and 784 convenience stores by the end of 2015, Kroger does have the footprint that will allow it to reach large number of users quickly.
In a way, the ClickList model is financially superior to the one that Amazon currently has to follow. In Amazon’s case, it pays for shipping each product to its buyer and manages to recover some of that as shipping fees. But Amazon buyers tend to buy piecemeal rather than multiple items in one order. The more the orders, therefore, the higher the expense for Amazon. With free shipping being practically given away on millions of SKUs, the shipping equation is a major puzzler for the ecommerce giant.
On the other hand, Kroger’s model actually makes it money. All it does is put together an order and take it out to the customer’s car and it makes five bucks minimum each time – eight if you’re in a hurry.
And that’s what makes this a highly sustainable and profitable way to conduct ecommerce. It has the right blend of physical appeal and online convenience, and it will go a long way in staving off the attack from pure-play e-tailers like Amazon.
But there’s a painful caveat there: This can only happen if physical retailers understand the significance of the model they have in their hands and grow their online presence at a much faster rate than they are now. For all the time and effort spent on it, Walmart (WMT, Financial) only gets 3% of its revenues from ecommerce. Of course, its neighborhood market concept nicely complements its online ordering system, but it's not really pushing this as a viable revenue stream for the future.
At least with Kroger, the effort it's put into ClickList is netting it a fair amount of revenue, but even that’s not nearly enough.
Blending ecommerce with physical shopping
Both retailers have the money to spend on developing technologies that will create a moat around Amazon, but neither is taking that direction seriously. If they did, they’d be thinking up scenarios like this:
Imagine that you have an app on your smartphone where you can stroll through the aisles of Kroger and simply point at an item and tap your phone to add it to a virtual shopping cart. While you’re doing that, an employee is actually filling up a physical shopping cart with your items without you even realizing it. Once you’re done, you just head over to the billing counter with nothing in your hands but your phone, and your shopping cart is just waiting for you with all the items you picked on your phone. No waiting while the items are billed one at a time and no fussing about with a fully loaded shopping cart. You check and approve the bill, pay virtually right from your phone using Apple (AAPL, Financial) Pay or PayPal (PYPL, Financial) or Visa (V, Financial), and an employee carts over your order to your car.
How much time do you think the average shopper can save with a system like that in place? The retailer can easily charge a premium for the service, and customers will be more than happy to pay the $5 or $8 or $10 for the sheer convenience of shopping this way.
Such a system would be revolutionary because it gives the customer the satisfaction of actually seeing the item before buying it (something ecommerce players will never be able to do), the convenience of shopping in mere minutes instead of an hour or two and the convenience of having everything done for them.
And where would struggling comparable store sales go with that sort of system in place? Up is the only direction I can think of.
For Kroger it would only be a matter of extending the ClickList service to include in-store ordering capabilities with a point and click feature. It wouldn’t even feel the pinch of spending a few thousand dollars to develop that kind of functionality in a mobile app. If it integrated a simple electronic payment option within the app, that would simply be the icing on the cake.
It’s definitely doable, but someone at Kroger or Walmart has to think of it first. The impact of a brick-and-mortar storewide rollout of such a system, however, would be tremendously positive – not only for top-line growth but also for customer satisfaction and loyalty. If you could head over to your local Kroger or Walmart with just your phone in your hand, would you even think of buying groceries from Amazon – same day delivery or no?
Right now there’s a huge disparity between shopping online and shopping at a supermarket. If Kroger can make that one simple move to marry the best of both worlds, that’s a moat that neither physical retailer nor online player would be able to cross.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
Start a free seven-day trial of Premium Membership to GuruFocus.
