Kroger's $2.6 Billion Automation Retreat | Fast Five Shorts

Kroger is closing some of its automated fulfillment facilities to bolster its E commerce profitability.

According to GroceryDive.

In a bid to improve digital profitability by $400 million in 2026, the grocer is shuttering three CFCs leaning into in store fulfillment and expanding third party e commerce partnerships.

It will incur impairment and related charges of $2.6 billion in fiscal Q3 of this year as as a result of those changes.

This announcement comes months after the company initiated a quote, full site by site analysis, end quote, of its automated order fulfillment network in an effort to improve digital profitability.

Chris, do you agree with the approach Kroger is taking here in shutting down its automation facilities?

On the whole, I'd say yes.

Yes, I agree with the approach.

You know, a site by site evaluation seems like it makes sense.

It seems like it's always the right thing to do.

And what people have always said is that the sites really need to be able to accommodate the demand.

And you look at the sites that were that are shutting down, at least from the reporting.

There are sites in Wisconsin, which surprised me.

Maryland, Florida, where Kroger doesn't even have a presence.

So it's no surprise there.

When you step back and you say, yeah, the demand's probably not there to support a large scale automated fulfillment center.

Now there are two things about the headline that I don't like.

Number one of which is $2.6 billion write off to close three facilities.

That seems like a hell of a lot of money.

And so you have to ask the question of like, holy cow, why is that?

Like how big of an error was this in strategy from the get go?

And then second of all, you know, you have to question like the, the way the headline is spinning, it is they're going to really rely on in store fulfillment, you know, to, to become profitable via E commerce.

But I still wonder if there's a middle ground there.

And I think companies like Voloke, which is spun out from the Roller group and they're having success with this type of operation in smaller ways in Europe and it's a smaller automated facility approach.

So I think, I think the industry is going to get there.

I hope Kroger's still looking at that option.

My guess is that they are.

But I think the industry just needs to find the right cocktail mix to use the analog.

That's the analogy I would use here.

Yeah, I agree.

I think, you know, is this the end of CFCs as we know it?

I don't think so.

I think like you said, Kroger is just running another parallel experimen experiment here with the third party delivery and with the in store automation that they have.

As Kim Beaudry we, who we had on from Dematic a long time ago predicted, you know, this is, this is a way to try to figure out how to do this much more efficiently and to really test what the throughput is going to be.

So I think, I think while it's a lot of money to lose, it's a big write off.

I do think that it makes sense to, to start to pause this sooner rather than later because obviously there's more and more and more that's continuing to be invested in operating these CFCs the way that they are.

I also wonder, and I'm curious to get your thoughts on this too.

CFCs are great for and, and even automation in the back of house of grocery stores.

It's great when you have center store items, things that are ambient temperatures.

But I'm curious, you know, what does the cost for this stuff look like and the layout?

Because you and I have been in several of these.

As we start to hear more and more grocers around the US talking about how the customer is looking for more fresh product, more, you know, more refrigerated product, more perishables, how does that cost impact what they're able to do from you know, picking from a CFC or from an automated warehouse in the store behind the scenes or you know, somebody just going through and picking up those items in a store via instacart or doordash like Kroger is doing.

I'm, I'm curious as the, the product set starts to evolve in what customers are demanding of their grocery stores, how the cost for this might fluctuate because more things are requiring refrigeration.

I don't know if that's coming into play here at all, but.

Curious to get your thoughts on that, Chris?

Well, I think it's always in play.

I mean that's the tough part is the refrigerated and frozen items.

You know, being able to pick and pack them or the loose items is always the right challenge in this.

And you know, I, you know I alluded to loke earlier.

We're going to have their CEO Richard McKenzie on five insightful minutes with us hopefully here upcoming.

And you know, I think that's a question we should ask him is like, you know, how do you think about this now but also in the context of how the grocery product choices are evolving both internationally and particularly here in the United States with GLP1s, because I think that's what you're alluding to here in terms of the mix of what people are wanting is changing and will that impact the eventual migration and cost benefit analysis of standards standing up automation across grocery.

So yeah, I think it's an interesting question.

We should keep that on the roadmap for them and Domatic and whomever else we have gone.