US Insights

Did Amazon Push Kroger and Walgreens Closer Together?

Tory Gundelach

Vice President

Retail 10.09.2018 / 09:00

Kroger

Retailers respond as Amazon jumps into the grocery and pharmacy spaces.

Kroger and Walgreens announced that they are testing a new format and concept that allows shoppers to pick up their online Kroger grocery orders at 13 northern Kentucky Walgreens stores that will also carry Kroger store-brand grocery items, including Simple Truth, the largest natural and organic brand in the U.S. The exploratory pilot aims to provide a one-stop shopping experience where shoppers can access products and services from both companies.

This partnership is the latest in a line of similar retail collaborations that have formed recently to capture more health and wellness trips, including Amazon/Whole Foods, Amazon/Bartell Drugs, and CVS Health/Target. As the cost of healthcare shifts to the consumer, retailers are increasingly investing in new ways to expand access, improve adherence, and bring more transparency to the role of food. For example, Medicare Advantage plans are looking at ways to deliver healthy foods to certain enrollees to improve health outcomes and reduce the likelihood of adverse health events related to chronic conditions, such as diabetes.

Increased demands to meet consumer needs for convenience and on-demand shopping also put more pressure on retailers like Kroger and Walgreens to provide a more differentiated shopping experience. This test, which combines Kroger’s food authority with Walgreens’ pharmacy expertise, can also be viewed as a response to the growing threat from Amazon, which continues to jump into the grocery and pharmacy spaces.

As these two competitors find common ground in this pilot, here are key benefits, key questions, and supplier implications to keep in mind.

Key Benefits to Kroger

  • Store brand expansion: The concept brings Kroger’s Grocery Pickup to small formats overnight, something that would take Kroger a long time to build out on its own. If the partnership expands, Kroger could distribute into places where it currently does not play — both geographic markets and urban centers where a large supermarket format is not possible.
  • Reinventing the business model: Like other initiatives Kroger is currently testing, this pilot signals to investors that Kroger is willing to experiment and is not satisfied with the grocery status quo, which is yielding only low single-digit growth.

Key Benefits to Walgreens

  • Increased traffic: As the Walgreens pharmacy business moves to more mail-order replenishment, this pilot presents a new opportunity to drive traffic to its 9,800 drugstores. “This innovative new concept is an opportunity to test and learn, as we determine how we can best work together to further elevate our customer offering,” said Walgreens Boots Alliance CEO Stefano Pessina.
  • Global brand expansion: Walgreens Boots Alliance is a global company with iconic store brands such as No7 and Liz Earle. As the Kroger and Walgreens pilot test progresses, it would not be surprising to see Walgreens expand Simple Truth and other Kroger grocery store brands into its international stores. Since Walgreens aspires to be a global health champion, we could see it make a more targeted food-as-science play in markets where its pharmacy offering is underdeveloped.  

Key Questions

  • How will Kroger and Walgreens sort out their overlapping businesses (food, private label, beauty, health and wellness)?
  • Who is managing the inventory and how fast will the order turnaround be?
  • Will orders be fulfilled by local Kroger stores or from a warehouse? 
  • Will the pilot drive incremental sales, or will it cannibalize Kroger and Walgreens stores?
  • Will Walgreens replace CPG brands to make room for Kroger store brands?

Supplier Implications

This partnership could be an industry-changing, innovative collaboration, but we want to hear more about the details and logistics first. As a supplier, begin an internal review of the overlapping SKUs the retailers carry as well as the difference in costing you may be giving each side. While the retailers’ internal teams are most likely still getting organized since the announcement, be prepared for conversations down the road.

Source: Kantar Consulting

Editor's Notes

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