Bloomberg: Kroger, Microsoft Create Futuristic Grocery Store. Amazon, Take Note

The supermarket chain and technology giant are using the cloud to make it faster to navigate the grocery aisles and pick up online orders.

By Matthew Boyle and Dina Bass, 8‎ ‎January‎ ‎2019

‎Kroger Co. and Microsoft Corp. are joining forces to bring the ease of online shopping to brick-and-mortar grocery stores. 

Kroger, America’s biggest supermarket chain, has remodeled two stores to test out the new features, which include “digital shelves” that can show ads and change prices on the fly along with a network of sensors that keep track of products and help speed shoppers through the aisles. Kroger could eventually roll out the cloud-based system it developed with Microsoft in all of its 2,780 supermarkets.

The alliance is the latest example of how big U.S. retailers are deploying data-rich technology to improve the often-tedious ritual of food shopping and keep pace with Amazon.com Inc., which is bent on grabbing a bigger share of the $860 billion U.S. food retail market. For Microsoft the deal helps grow its cloud business, which lags behind Amazon’s but has found willing customers like Kroger and Walmart Inc. that are loath to line the pockets of Jeff Bezos. Kroger also hopes to sell the technology to other retailers, potentially opening up a new revenue stream with fatter profit margins than selling groceries. 

“Together we can create something that, separately, we could not,” Kroger Chief Executive Officer Rodney McMullen said in a joint interview with Microsoft chief Satya Nadella.

The two companies have worked on projects before but deepened their collaboration over the last 18 months. The digital shelving system debuted in the fall and can now be found at the end of the aisles at 92 Kroger locations. At the two test stores, located near Kroger and Microsoft’s respective headquarters in Cincinnati and Redmond, Washington, customers using Kroger’s self-checkout app will be guided through the store to items on their shopping list. When they enter an aisle, the digital shelf will display a personalized icon chosen by the shopper—a  banana, say, or a pumpkin—below the relevant product. 

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Nadella and McMullen

Amazon already grabs about 50 cents of every dollar spent online, but that dominance doesn’t yet extend to groceries, which are still mainly bought in stores. To break into the market, Amazon acquired upscale grocer Whole Foods Market, a deal that sent Kroger’s shares plummeting. The e-commerce king now offers free grocery deliveries from Whole Foods stores for its Prime customers in 60 U.S. cities, and its growing network of cashierless Go convenience stores have also taken a bite out of supermarket sales.

At the test store 10 minutes from Microsoft headquarters, a little more than half of the shelves have been converted into digital displays that light up with a personalized icon when shoppers reach an item they put on the shopping list in the Kroger app. Ellipse-shaped black-and-white devices that look like a cross between a camera and a smoke detector are mounted on ceilings, crunching data and monitoring for out-of-stock items. In a refrigerated meat case, temperature sensors appear every few feet, automatically flagging workers if the case warms up too much, helping prevent  the roughly $10,000 worth of meat inside from spoiling.

The smart shelves light up to help store employees pick orders for Kroger’s curbside grocery pickup service, where customers order online and then later in the day have their bags brought out to their car in the parking lot. The companies say this “pick-to-light” system can cut in half the time required to pick each order, a possible advantage as rivals such as Walmart and Target perfect their own curbside pickup services.

Microsoft artificial intelligence software can predict a shopper’s age and gender, data that will help the likes of Procter & Gamble Co., PepsiCo Inc. and Kraft Heinz Co. tailor ads to  particular customer segments. Kroger also plans, with a user’s permission, to more specifically target products and ads to a shopper’s preferences, highlighting products for gluten-free eaters, say. Video trailers for upcoming Hollywood movies could also be part of the advertising mix.

Kroger isn’t the first big retailer to entrust valuable data and tasks to Microsoft’s Azure cloud service. Microsoft has also signed up the likes of Macy’s, Walmart and European grocer Ahold Delhaize, which would prefer not to pay Amazon for critical technology. 

But what’s unique about this tie-up is Kroger’s plan to sell the technology to other retailers; several are already testing it. The revenue could help Kroger meet a pledge to generate an additional $400 million in operating profit by the end of 2020, a plan that includes remodeling stores, revamping product assortments and boosting online efforts. Kroger’s technology investments also include robot-filled warehouses and unmanned grocery deliveries.

Kroger’s plan to commercialize its futuristic shopping experience could provide a lift to Microsoft’s Azure cloud business, which is critical to Nadella’s ongoing efforts to reinvent the software pioneer. The Kroger pilot makes use of several types of Microsoft cloud technology, including the ability to analyze data generated by a host of sensors spread through the store. The two companies are also working on a Virtual Store Manager, which would alert the human store manager when, say, there aren’t enough shopping carts for customers at the front of the store.

In an effort to speed up the consumer experience, the data crunching could be divided between Microsoft server farms and the stores themselves—using those black-and-white devices on the ceiling. The grocery applications also make use the “hybrid cloud,” which combines customers’ corporate data centers with Microsoft’s own. Microsoft’s efforts in the hybrid cloud space has given it bragging rights over Amazon, which unveiled a significant new effort late last year.

In the interview, Nadella said the technology will help shoppers find food in the “most seamless way” and hopefully inspire other grocery chains to adopt it in their own stores. “It’s not just about Kroger,” he said.

(1) Microsoft (2) Amazon (3) IBM: In Q1, MSFT Remains Cloud Revenue King

Bob Evans

(Note: After an award-winning career in the media business covering the tech industry, Bob Evans was VP of Strategic Communications at SAP in 2011, and Chief Communications Officer at Oracle from 2012 to 2016. He now runs his own firm, Evans Strategic Communications LLC.)

Despite posting excellent first-quarter cloud-revenue growth of 49% to $5.44 billion, Amazon actually lost ground in its efforts to overtake Microsoft as the world's leading enterprise-cloud provider as Satya Nadella's company reported its commercial-cloud revenue jumped 58% to $6.0 billion.

With Microsoft Azure Q1 revenue soaring 93% and Dynamics 365 SaaS revenue rising 65%, the better-than-expected growth is directly attributable to businesses across every industry "moving quickly to seize the digital dividend using data and AI," said executive vice-president Judson Althoff in a blog post released with the earnings.

The gap between Microsoft's cloud revenue and Amazon's is widening as earlier this year, Microsoft posted fourth-quarter 2017 enterprise-cloud revenue of $5.3 billion while Amazon came in at $5.1 billion.

IBM, which in Q4 shocked the market by beating both Microsoft and Amazon with Q4 cloud revenue of $5.5 billion, last week posted Q1 cloud revenue of $4.2 billion, up 20%, with the relative quarter-on-quarter decline being the result of seasonality in IBM's business.

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Those inside-the-industry competitive issues aside, the big story in pushed by Microsoft in Althoff's blog post was the rapid, sweeping and worldwide move by businesses across all industries into digital-first strategies that are allowing them to understand customers and opportunities more clearly, make better decisions more quickly, reduce costs while boosting quality, and embrace AI and data as indispensable elements within their operations.

Here are summaries of a handful of the customer stories cited in the Microsoft blog:

  • Saxo Bank, which offers “banking as a service” and access to 35,000 financial instruments in 170 countries is moving most of its technology stack to Azure to boost the power and scale of its services
  • Eagle Investment Systems, which oversees $21 trillion in managed assets, is helping investment managers capture data and ensure its validity through a cloud-based data-management platform running on Azure that Eagle created in partnership with Microsoft.
  • UPS is deploying AI to improve customer service via Azure Bot Service and Cognitive Services for the UPS Bot, which converses in text and voice with customers.
  • 24 Hour Fitness is deploying Dynamics 365 and Adobe Experience Cloud across its network of more than 420 clubs to offer more personalized and unified physical/digital experiences during workouts—or as Microsoft called it, "their fitness journey."
  • Toyota Material Handling Europe is using Azure, AI and Mixed Reality to train pallet drones to recognize patterns, automate processes and learn the flow of a manufacturing factory floor.
  • Bühler AG is improving its food-safety practices via a faster and more precise grain-sorting solution that screens out 85 to 90 percent of contaminated and toxic grain, compared to 50 percent for conventional sorting machines.
  • Coca-Cola Co. is using Microsoft 365 and Microsoft Azure to simplify its architecture, drive automation, deliver technology updates with less disruption, improve employee experiences and deliver proactive threat-protection.

Over the past year, I've made the case repeatedly that Microsoft's the top cloud company in the world not only because of its revenue numbers but also because of its customer-centric vision for how it weaves its vast arsenal of traditional and new technologies together via the cloud.

And the company's latest financial results prove beyond a doubt that Microsoft's ability to deliver innovative and data-centric solutions across all three layers of the cloud—IaaS, PaaS and SaaS—is being endorsed strongly by companies in every industry in the world.

To Amazon and IBM: well done, and keep those chins up—it's a big world with tons of opportunity for great enterprise-tech companies that can provide help businesses seamlessly connect traditional technology running core operations with new tools that are becoming absolutely indispensable in the emergent digital age.

But in the Cloud Wars, Microsoft's setting a standard that—at least for now—is becoming very, very hard to meet, let alone exceed.

Children of the '80s and '90s will miss Toys R Us

The iconic brand is closing all its US stores.

In the ‘80s and ‘90s, Toys R Us was the closest a kid could get to stepping inside Willy Wonka’s chocolate factory. The place was massive—thousands of brightly-lit square feet dedicated to a consumer toy appetite that could never be satiated.

Now, the company is bankrupt and is closing all 740 of its U.S. stores. There are a number of reasons for the demise of Toys R Us

  • Digital competition—namely Amazon, and the company’s own inability to capture e-commerce dollars.
  • Bricks and mortar competitors such as Walmart and Target who discounted the price of toys to a price Toys R Us couldn’t match
  • The move to electronic games, everyone has a mobile device these days, watch the kids, they are playing electronic games, not playing with toys or watching TV
  • Mismanagement is also to blame: Toys R Us is saddled with billions in debt through corporate financial restructuring

And on top of this Amazon, Walmart and Target dealt the death blow to Toys R Us by deeply discounting products when the ailing chain was at its weakest point, the liquidating retailer said Thursday in court filings.

Toys R Us blamed its archrivals for helping to seal its fate during the crucial 2017 holiday season. The company said its holiday profit fell a quarter-billion-dollars short of its expectations. 

Amazon, Walmart and Target priced toys "at low-margins or as loss-leaders" during the holiday shopping season and offered aggressive online shipping options, Toys R Us attorneys said early Thursday in a court filing.

The retailer said it simply "could not compete" with those prices because it relies "exclusively on toys for profit."

However it’s not just Toys R Us, more than 8,600 retail stores could close this year in the US — more than the previous two years combined, Meanwhile, e-commerce pure plays are riding the rise of digital commerce to success — none more so than Amazon, which accounted for 53% of online sales growth in the US last year.

Brick-and-mortar retailers are caught on the wrong side of the digital shift in retail, with many stuck in a dangerous cycle of falling foot traffic, declining comparable-store sales, and increasing store closures.

In response, many brick-and-mortar retailers have started to leverage their store locations and in-store inventory in order to better compete in e-commerce. This multichannel approach to sales that seeks to provide the customer with a seamless shopping experience whether the customer is shopping online from a desktop or mobile device, by telephone or in a bricks and mortar store, including ship-from-store and click-and-collect, can help retailers manage the transition to digital by:

  • Increasing online sales by offering cheaper, more convenient delivery options for online shoppers.
  • Limiting the growth of shipping costs as online sales volumes increase by leveraging store networks for delivery.
  • Keeping stores relevant by turning them into fulfillment centers that pull customers in to pick up online orders.

While these companies have spent years automating their supply chain for delivering goods to their stores or directly to customers’ doorsteps, most have yet to figure out how to profitably bring their store locations into the e-commerce delivery process.

  • Brick-and-mortar retailers must cut delivery times and costs to meet online shoppers’ expectations of free and fast shipping.
  • Omnichannel fulfillment services can help retailers achieve that goal while also keeping their stores relevant. 
  • However, few retailers have mastered these services, which has led to increasing shipping costs eating into their profit margins.
  • In order to optimize costs and realize the full benefits of these omnichannel services, retailers must undertake costly and time-consuming transformations of their logistics, inventory, and store systems and operations.