Dive Brief:
- Kroger and Walgreens have formed a group purchasing organization (GPO) called Retail Procurement Alliance that is aimed at combining their resources to increase purchasing efficiencies, reduce costs and drive innovation, according to a press release.
- Kroger will focus on food and grocery while Walgreens focuses on health and wellness. The retailers will look for products that overlap with each other so that they can combine orders. They will also see if both companies can manufacture products in-house for the other retailer, CNBC reported.
- Kroger's CFO Gary Millerchip told CNBC they hope more retailers will join the GPO.
Dive Insight:
Kroger and Walgreens are leaning into their partnership, this time around combining resources to cut costs associated with sourcing. If successful, the GPO could boost margins and drive shopper traffic.
Back in December 2018, only two months after announcing its initial collaboration, Kroger Express launched in 13 Walgreens stores in northern Kentucky. The mini grocery outlets offer 2,300 products ranging from produce to private label items, Home Chef meal kits, frozen goods, meats and dairy. By August 2019, the pilot expanded to an additional 35 Walgreens and a curated assortment of Walgreens' health and beauty products in 17 Kroger stores.
Both retailers have significant scale — Walgreens with more than 9,200 stores in the U.S. and Kroger with close to 3,000 grocery stores — but industry experts still question if the alliance is strong enough to dent top competitors like CVS Health and Walmart. Walmart has rapidly expanded its grocery e-commerce business while also competing fiercely on pricing. According to a survey from Citi, Walmart's grocery service outranked Amazon's grocery delivery. Meanwhile, CVS' purchase of health insurer Aetna and its pilot of HealthHUB stores has sent the drug store's profits soaring.
Kroger's digital and same-store sales are improving, but its margins are under pressure and long-term profitability remains uncertain. The company recently launched a new marketing campaign and reaffirmed its Restock strategy, which looks to alternative investments for around $150 million in annual profit. But experts have criticized the company for making too many investments. "The criticism is you have too many things going on to get them effectively executed," Neil Stern senior partner at McMillanDoolittle recently told Grocery Dive.
The retailer may be heeding this advice with its GPO announcement, which builds on an existing partnership. For Walgreens, the partnership could help it make headwinds in its beauty department, which has seen lackluster sales. Walgreens is even rumored to be mulling a potential private equity buyout by KKR & Co., which previously acquired Dollar General.
