Kroger Restructures E-Commerce Strategy to Enhance Profitability

Kroger is restructuring its e-commerce strategy to address unprofitability, despite a 16% increase in digital sales in Q2 and five consecutive quarters of double-digit growth. The company's digital sales have consistently shown promise, with a 16% increase in the second quarter and five consecutive quarters of double-digit growth. New fulfillment centers are planned for Charlotte and Phoenix by fiscal 2026.

In a significant strategic shift, Kroger is restructuring its e-commerce business in an effort to enhance profitability. This move comes as the company faces the challenge of an unprofitable digital sales division, despite notable growth in e-commerce that outpaces its same-store sales.

Expansion and Evolution of Fulfillment Centers

Kroger's journey in digital transformation began with its partnership with Ocado in 2018, which led to the establishment of eight Customer Fulfillment Centers (CFCs) across the United States. The first of these, located in Groveland, Florida, was opened in June 2021. This facility spans 375,000 square feet and was a cornerstone in Kroger's strategy to improve its e-commerce capabilities.

Following the Groveland center, Kroger expanded its network with the opening of the Pleasant Prairie, Wisconsin, CFC in June 2022, and the Frederick, Maryland, CFC in June 2023. These centers were part of Kroger's broader plan to have 20 CFCs nationwide. The company's e-commerce infrastructure is set to grow further with new centers planned in Charlotte, North Carolina, and Phoenix, Arizona, by fiscal 2026.

Phasing Out and Strategic Realignment

Despite the expansion, Kroger announced the closure of three fulfillment centers in Groveland, Pleasant Prairie, and Frederick, with operations expected to cease in January 2026. The company has also decided to suspend its Kroger Delivery service in Orlando, with delivery services to end on February 1, 2026. Customers were notified in advance, with the last delivery orders scheduled for January 31, 2026.

This decision aligns with Kroger's efforts to restructure its e-commerce model and enhance profitability. As part of this realignment, Kroger plans to pilot store-based automation, which may provide a more efficient and cost-effective means of fulfilling online orders.

Partnerships and Technological Integration

To bolster its digital capabilities, Kroger has expanded partnerships with Instacart and DoorDash. These collaborations have been instrumental in enhancing delivery services and integrating advanced technologies such as Instacart's AI Assistant for more efficient operations.

Kroger's chief digital officer, Yael Cosset, has been pivotal in steering the e-commerce unit towards sustainable growth. The company's digital sales have consistently shown promise, with a 16% increase in the second quarter and five consecutive quarters of double-digit growth. This momentum underscores the potential for further digital expansion and profitability.

Future Outlook and Commitment to E-Commerce Growth

Looking ahead, Kroger remains committed to expanding its e-commerce footprint. The planned openings of CFCs in Charlotte and Phoenix by 2026 are indicative of its long-term strategy to grow its digital presence. Moreover, by continuing to refine its operational efficiencies and technological integrations, Kroger aims to deliver groceries to tens of millions of families across multiple U.S. cities.

The restructuring efforts, while challenging, are part of Kroger's broader vision to not only enhance profitability but also to adapt to the evolving retail landscape. As the company navigates these changes, its focus on leveraging technology and strategic partnerships will be crucial in achieving its e-commerce objectives.