Safeway Owner, Rival Grocers Bet on Smaller Warehouses -- Update
December 12 2019 - 10:53AM
Dow Jones News
By Jaewon Kang
Food retailers are making big bets on small warehouses to bulk
up their growing delivery businesses, as supermarkets try different
approaches to get groceries to customers more efficiently.
Albertsons Cos., Walmart Inc. and other chains are building
small fulfillment centers near existing stores and customers to
quickly fill orders placed online. More grocers are choosing this
strategy over the larger, remote distribution centers that Kroger
Co. and Koninklijke Ahold Delhaize NV's Peapod division are
building to make deliveries over wider areas.
"We have a broader assortment of fresher items, and we are
closer to the customers," said Narayan Iyengar, senior vice
president of digital and e-commerce at Albertsons.
The owner of the Safeway and Jewel-Osco chains is adding small
fulfillment facilities at two stores in South San Francisco,
Calif., and San Jose, Calif., in partnership with Takeoff
Technologies Inc., which builds automated warehouses. Albertsons
said it is establishing more of these 10,000-square-foot
distribution centers, which each cost about $3 million to
build.
According to Jefferies Group LLC, facilities known as
micro-fulfillment centers typically range from 10,000 to 20,000
square feet and can fulfill about 4,000 orders a week. These
warehouses can be built in three to six months and reach
profitability in a year.
Bigger facilities can be larger than 300,000 square feet and
fulfill about 65,000 orders a week, Jefferies said. These
centralized centers can be built in two to three years and reach
profitability in four years.
Food sellers were slower to embrace e-commerce than other
retailers because many of their customers still want to inspect
fruit and steaks before buying. That is changing quickly. Online
grocery sales rose 15% in 2019, according to a survey by advisory
firm Brick Meets Click.
Supermarkets are adding the additional storage and new
warehouses in part to keep stock and couriers for delivery out of
existing store space, where some customers have complained of
crowding as delivery has taken off.
"It's an entire paradigm shift for companies," said Steve
Hornyak, chief commercial officer at Fabric, a four-year-old
builder of small fulfillment centers for grocers and other
retailers.
Walmart and Meijer Inc. are testing small fulfillment centers.
Ahold Delhaize's Stop & Shop LLC said it would open several
more of these warehouses this year, while its Peapod delivery
division continues to build bigger distribution centers.
In contrast, Kroger, the nation's biggest supermarket operator,
is building bigger distribution centers for delivery, wagering that
economies of scale will make the larger investment worthwhile.
"You control and you know exactly what's in the facility," Yael
Cosset, chief digital officer, said in an interview.
Kroger took a stake of more than 6% last year in U.K.-based
warehouse company Ocado Group PLC and said the partnership would
build as many as 20 largely automated facilities in the U.S. by
2021. They will vary in size from 20,000 square feet to more than
300,000 square feet, Mr. Cosset said.
Kroger is investing about $55 million in the first warehouse
with Ocado in Monroe, Ohio. Analysts have said the centralized
facilities take too long to build when coming up with a timely
formula for delivery is critical for Kroger. Executives have said
they are sticking with the Ocado strategy and remain open to other
models.
Big fulfillment centers that are best suited to next-day
delivery are already behind the times as consumers come to expect
their order to show up in as little as a few hours, said Mike
Montani, an analyst at Evercore.
Smaller grocers aren't adding their own delivery capabilities,
relying instead on companies including Instacart Inc. Price
Chopper, a chain in the Northeast, formed a partnership with
Instacart a year ago and now offers delivery from 90% of its
roughly 100 stores.
"We don't see the economic benefit to having stand-alone
fulfillment centers," said Jim Peterson, Price Chopper's chief
financial officer and treasurer. Some analysts caution that food
retailers might lose control of their customer relationships when
solely using services like Instacart. Instacart shoppers are also
crowding aisles of stores.
Instacart, valued at roughly $7.8 billion when it raised $871
million last year, delivers from more than 300 supermarket
chains.
"Not every grocer has the desire, time or capital to build their
own fulfillment center," Instacart President Nilam Ganenthiran
said.
Write to Jaewon Kang at jaewon.kang@wsj.com
(END) Dow Jones Newswires
December 12, 2019 10:38 ET (15:38 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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