What's going on in the last mile?

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A look at how Kroger, Target, and Home Depot are adjusting their supply chains to meet customers’ omni-channel fulfillment needs

Overview

Free two day delivery and grocery pickup are quickly becoming customers’ ‘standard’ delivery expectations. However, customers’ expectations won’t stop there as more and more retailers figure out better ways to meet customers’ desires for where I want it, exactly when I want it, and cheap delivery. So, how are retailers enabling themselves to provide the next generation of delivery options while still maintaining reasonable profitably? We’ll take a look at how Kroger, Target, and Home Depot are adjusting their supply networks to do it, and, we’d love to hear more from you on what you’re seeing.

Kroger & the Omni-channel world

While Kroger joined the omni-channel world later than many of the other players, they’ve made huge steps in the last 6 months to meet customers’ new delivery expectations. Today Kroger Pickup has expanded to the majority of their stores, and they’re rapidly expanding home delivery through their partnership with Instacart. They’ve also acquired Home Chef to enter the meal kit delivery service. So, how are they doing it today and what are their plans for the future?

Currently, all of Kroger’s picking and packing for digital orders is done in store, but they’re rapidly building out the capability to do that at dedicated fulfillment centers. They’ve entered a partnership with Ocado Group, the UK grocer and technology company, to build 20 highly automated fulfillment centers over the next 3 years. Rodney McMullen, Kroger CEO, described the overall strategy in their Q1 investor call as “what we’re really trying to do is to make sure that we have an overall infrastructure for digital that can support whether it’s 5% of share or 30% of share. If [digital] ends up being 30% of share in grocery…, you’ll have more [Ocado] sheds and they’ll be used to take pressure off of the store, and the store will become more of a distribution point.”

In addition to the investments in picking and packing, they’re working to add more convenient and efficient distribution options. Kroger has entered into a partnership with Walgreens that will enable customers to pick up their Kroger online grocery orders at their local Walgreens store.* And, in more of a moonshot, they’ve partnered with Nuro to pilot the use self-driving cars for same-day grocery deliveries.

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Target & the Omni-channel world

Target is leading the pack on fast and free delivery by offering free 2-day shipping without a minimum purchase. They’ve also expanded their delivery options by adding ‘Drive Up’, their store pickup option, to over 50% of their stores and have expanded the availability of same day delivery through Shipt which they acquired the end of last year.

Unlike Kroger

Target is looking to make the store the center of their fulfillment and distribution network. At their 2018 financial community meeting, Target’s COO, John Mulligan, stated “[b]ecause our stores are the fastest and most efficient fulfillment method, they’ll continue to be our preferred shipping point in the long run.” Mulligan also explained that the economics of store based fulfillment trump that of fulfillment centers due to lower shipping and capital costs. They also see store based fulfillment as a huge enabler for serving peak demand because they don’t have the same physical capacity constraints as fulfillment centers and can easily scale up their volume.

To support the strategy of fulfilling digital orders from stores, Target is adapting how inventory flows into their stores. They are looking to stock stores with exactly what they need and then be able to quickly respond when things change. They’re moving from a typical forward replenishment inventory strategy that ships in packs or pallets to a strategy that replaces exactly what was sold in or fulfilled from a store. And they do mean replacing exactly what sold; they’re adding robotics and other material handling equipment in their store distribution centers to enable them to ship to stores in any quantity from eaches to pallets.

Finally, they’re also increasing the frequency that they ship to stores which allows them to respond faster to unexpected changes. They report that their test in the Northeast has cut out of stocks in half and has lowered store backroom stock. They plan to use the newly freed backroom space to add sorting and packing stations to support fulfillment from stores.

Home Depot & the Omni-channel world

Home Depot has long offered a wide variety of delivery options from same-day in-store pickup to delivery in the next few days to delivery within a specific time window. Most recently, they added same-day delivery through their partnerships with Roadie and Deliv. While they offer a nearly complete set of delivery options, they’re focused on making each option more cost-effective.

Home Depot describes its “downstream” supply network as fragmented. The service pro customers’ deliveries and all next-day and same-day orders out of their stores. They have specialized facilities dedicated to appliance delivery. Home Depot has facilities dedicated to serving their maintenance, repair, and operations (MRO) business, which they acquired from Interline Brands. Finally, they have 3 fulfillment centers dedicated to consumers’ 2-day and ground home delivery orders.

With all this fragmentation, they see a great opportunity to provide faster delivery at lower cost by consolidating, regionalizing, and specializing their “downstream” supply network. So, over the next 5 years, they plan to invest $1.2 billion and completely revamp their downstream network. Here are some of the major changes they’ve announced –

Increasing the number of large fulfillment centers (moving from 3 to 7) Adding 25 local fulfillment centers to support next-day and same-day delivery in their top 40 markets. These facilities will support both their consumer, pro, and MRO businesses. Adding 40 flatbed fulfillment centers to support delivery of lumber, drywall, and other bulky goods. Removing all fulfillment from stores in their top 40 markets. Supporting same-day, next-day, and bulky fulfillment for their non-top 40 markets from a limited # of “market delivery” stores. Adding 100 cross-dock/market delivery operations to support the delivery of bulky products such as appliances and patio furniture.

What do you think about the omni-channel world?

Three big players are plotting out very different strategies to meet the demands of customers’ omni-channel order fulfillment. Kroger is focused on centralizing and automating it’s network, Target on making stores the center of its delivery network, and Home Depot on regionalizing and consolidating its specialized network. We’d love to hear what you think about how the supply chain should evolve to support the next generation of fulfillment. A few questions that come to mind –

What’s the role of stores in supporting digital orders?

Target is charting a very different course than Home Depot and Kroger. Can the economics at stores be better than at fulfillment centers? If so, what will drive that? Does a focus on fulfillment in stores distract from assisting customers?

What role does automation and robotics play in warehouses and fulfillment centers of the future? Will they be highly automated, high capital cost options, like Ocado, or more along the lines of traditional sortation systems?

Does it make sense to invest in more pickup locations like Kroger is doing with Walgreens? While the costs are significantly lower, this method is still less convenient than home delivery.

When will autonomous vehicles or other highly efficient home delivery options become feasible/practical?

How should smaller retailers, which don’t have the same scale, look to provide these same delivery options efficiently? Will 3PL’s step in to provide local delivery options?

What other changes should retailers be making to their supply network?

About Cognira

Cognira is the leading artificial intelligence solutions provider for retailers. Cognira is passionate about helping retailers unlock valuable, transformative business insights from their data.

We know retail. We love data.

To learn more, check out our website at cognira.com or contact us today to get started.

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