Number Sense is a regular column that uses data to help understand the grocery landscape.
Five years after the onset of the COVID-19 pandemic, the sharp digital sales jolt grocers saw as the health crisis gripped the economy seems like a distant memory.
Although experts predicted at the time that many consumers who moved their food purchases online out of necessity would never look back and forever redefine the grocery retail sector, grocery e-commerce returned to earth as shoppers reverted to their old habits.
But while digital sales in the industry might not be rising at the lofty levels seen in 2020, an examination of data from the past few years makes clear that e-commerce expansion has consistently outpaced overall sales growth in the grocery industry.
Kroger’s results are a perfect example of this trend. The retailer — which runs more supermarkets in the U.S. than any other company — has reported year-over-year digital sales increases that have exceeded its same-store sales growth for nearly every quarter since the start of 2022. The only exception was during the first quarter of that year, when the retailer saw online sales fall 6% on an annual basis as it lapped unfavorable comparisons with the sales patterns from the pandemic.
Looking at the figures from the past year, the powerful role e-commerce is playing in driving Kroger’s results forward is even more stark. The company has seen digital sales growth of 11% during each of its past three quarters even as it has been consistently unable to bring its comps, excluding fuel sales, much above 2%.
Kroger executives have pointed to the company’s strong digital sales as a linchpin in its overall performance. Speaking during a call with analysts on March 6, interim CFO Todd Foley said Kroger has reached a point where it can deploy capital that in the past would have gone to building out its digital capabilities to expand its brick-and-mortar store footprint instead. Foley added that the retailer recorded the best digital profits it has ever seen during its latest quarter, noting that Kroger saw improvements in its delivery and pickup operations.
Kroger announced earlier this month that it has formed a business unit that brings together the teams that focus on its e-commerce operations, underscoring the importance the company is placing on its digital business.
“[M]ore and more, our most loyal customers and our most profitable customers are the ones that engage with us in both modalities — those that engage with us digitally and they also engage with us in store,” Foley said.
Kroger’s online sales are growing faster than its comps
Foley noted that the company covets digital shoppers because they spend nearly three times more than other customers and because they also fuel Kroger’s margin-rich alternative profit businesses, which include its 84.51° data analytics service and Kroger Personal Finance.
Yet as robust as Kroger’s digital sales have been in recent quarters, they are nowhere near the levels Walmart has posted, highlighting the tough road the nation’s biggest traditional grocery store operator faces as it looks to keep up with the seemingly unstoppable mass retailer.
Walmart has recorded digital sales growth in the U.S. of at least 20% for the past four quarters — about twice the figures for Kroger. Walmart’s comps excluding fuel have also outpaced Kroger’s during those periods.
That’s in line with findings from e-commerce analysis firm Brick Meets Click, which has reported for months that mass retailers led by Walmart are dominating the digital grocery space.
David Bishop, partner at Brick Meets Click, pointed out to me that Kroger's online sales outpace other traditional grocery chains but that the chain still struggles mightily with Walmart to win over online shoppers.
“There’s good news and bad news, depending on how you frame it,” Bishop said. “They’re not catching the leader, but they’re pulling away from the rest of the pack.”
Kroger’s success at improving the growth and profitability of its digital operations — even if it’s behind Walmart in that arena — might be a sign that the company is making progress in a key aspect of its business, but the fact that Kroger’s online sales are growing so much more quickly than its overall business could also raise red flags about the company’s prospects, Scott Mushkin, CEO of R5 Capital, told me.
Mushkin’s concern is that the sales Kroger is pulling in online could weaken its ability to invest in running its stores, which account for the vast majority of its revenue. Kroger brought in around $13 billion in digital sales for all of fiscal year 2024, representing less than 9% of its approximately $147 billion in total sales.
“You hold out a great growth rate of digital, but in a lot of ways, you’re cannibalizing your current stores … which means it’s harder to leverage the labor and electricity and everything in the store,” Mushkin told me.
Another looming issue for Kroger as it works to improve the efficiency of its online operations is the company’s multi billion-dollar investment in the fleet of automated order-assembly facilities it has developed in partnership with Ocado. Beyond their cost, those centralized fulfillment centers can slow down delivery times, putting Kroger at a disadvantage compared with Walmart, which uses individual stores to fulfill online orders, Mushkin observed.
To be sure, Kroger executives acknowledge that the grocer’s fleet of Ocado-built facilities have a ways to go before they’ll fully earn their keep, but the company says its latest e-commerce sales results indicate that it is on the right track. The question is whether Kroger can leverage its online strength to bolster its ability to keep up as the grocery industry continues to evolve.
