Can Kroger make money selling tech to other retailers?

Dive Brief:

Kroger is partnering with Microsoft on a lineup of store technology enhancements that it plans to roll out across its chain and sell to other retailers, according to a company release. This "connected store" system, which utilizes Kroger's store technology programs, internet-of-things sensors and Microsoft Azure cloud platform, will pilot in two stores — one in Monroe, Ohio, close to Kroger's headquarters; the other in Redmond, Washington, near Microsoft's home office.
The "Retail as a Service" (RaaS) product collaboration includes EDGE Shelf, the digital shelf system Kroger and Microsoft first announced last year. EDGE displays feature digital pricing, advertisements, promotional offers that tie in with consumers' smartphones, and a "pick-to-light" system that helps employees quickly identify products for online orders. Other tech enhancements that are part of the collaboration include inventory management systems; a virtual store manager program; temperature sensors for perishables; and Kroger's Scan, Bag & Go checkout app.
"Kroger is building a seamless ecosystem driven by data and technology to provide our customers with personalized food inspiration," Kroger chairman and CEO Rodney McMullen said in the release. "We are identifying partners through Restock Kroger who will help us reinvent the customer experience and create new profit streams that will also accelerate our core business growth."

Dive Insight:

Kroger’s collaboration with tech giant Microsoft is not only a clear play against Amazon and Walmart. It's also a revenue stream for the grocer that could help it further invest in its own innovation strategies.

Supplying technology to other retailers at a time when the industry is undergoing a digital transformation could prove to be very profitable for Kroger. The company is in a unique position to develop proprietary technology that could boost its own store sales while also making money from other retailers. To make its offering all the more enticing to consumers and businesses, Kroger has forged yet another creative partnership with an expert in its chosen field.

But the platform’s success depends on if retailers actually purchase the service. It’s unlikely that Kroger’s large-scale competitors will want or need the technology, so the platform’s fate really lies with smaller, regional retailers that might need help boosting their customer experience. It’s unclear if these smaller grocers will be able to afford this platform or even want it.

Kroger is also relying on CPG firms to spend more trade dollars with it — a potentially risky bet, according to at least one analyst.

"To us, the challenge is how much incremental dollars can be generated from CPGs through this initiative, as these firms are already spending significant trade dollars on sponsoring end caps at Kroger stores," Scott Mushkin, an analyst with Wolfe Research, wrote in a note to investors. "Moreover, the idea that the broader retail industry will be open to have Kroger technology in stores through a commercial RaaS product is still open for debate."

This isn’t Kroger’s first time investing in technology and licensing it out to other businesses either. Earlier this year, Kroger formed Sunrise Technologies, which commercializes the proprietary technology the company’s IT team built including its EDGE shelf system, remote temperature control system, its employee management system called RAD, and Zooter, a camera that helps employees track merchandise and inventory.

Whether or not Kroger's RaaS commercial venture pans out or not, the company has given its own stores another vital technology boost. Amazon and Walmart are investing in store and e-commerce enhancements that threaten to take market share from the nation's leading grocer. Moreover, consumers are doing more shopping online and using their phones as they peruse store aisles. According to eMarketer, last year 18 million U.S. consumers used a grocery app at least once a month — a 49.6% increase over 2017.

Creating a fluid omnichannel experience is painful for Kroger's bottom line, but it's what the company has to do. Kroger has its sights fixed on the far horizon with investments in automated fulfillment, direct-to-consumer shipping, meal kits and store brand sales abroad. Whether these moves can help it stay ahead of a barrage of competitive pressures and evolving consumer demands is what experts and investors will be following closely.