Looking for avocados? They’re near the Aleve.
The partnership comes as brick-and-mortar retailers look for new ways to compete with e-commerce giants, especially when it comes to groceries. Analysts say both companies could stand to benefit: Kroger could see a major boost to its national footprint if the pilot expands, for example. And Walgreens could reel in foot traffic as shoppers regularly refill their prescriptions and decide to pick up dinner, too.
But analysts also have a lot of questions: How will profits be divided between the companies? Will the space inside Walgreens stores be leased out to Kroger? Will Walgreens pay its own employees to stock Kroger items? Could there be any overlap between Kroger-brand and Walgreens-brand items sold on the same shelves?
“There are so many things we don’t know,” said Bill Kirk, a food retail analyst at RBC Capital Markets. “And frankly, I think it’s because they don’t know yet.”
A Kroger official said the company would not share the pilot’s financial details.
“We’re in test-and-learn mode,” the official said.
Walgreens said its own employees will stock Kroger Express shelves, and that Kroger is responsible for supplying the products to Walgreens locations. Kroger’s groceries will take up about 4,000 square feet of a Walgreens store, which average about 10,000 square feet of inventory. Walgreens declined to say whether that space would be leased or shared under some other arrangement.
Grocery sales is tricky territory for big-box retailers. Food spoils quickly and doesn’t necessarily reel in huge profits. Plus, drug stores like Walgreens aren’t only competing with existing grocery stores, but also with a slew of companies that deliver groceries to peoples' homes, fast-casual restaurants and subscription meal kits.
The pilot suggests Kroger plans to sell a lot of food. Kirk said the 2,300 food items to be stocked at Walgreens are likely to be popular items that won’t sit on the shelves for long. Think apples and avocados. Not organic wild salmon.
At the same time, the grocery industry is growing more competitive. Amazon bought Whole Foods Market last year for $13.7 billion, and Whole Foods allows Amazon to warehouse and ship groceries. In June, Amazon also put in a $1 billion bid for the online pharmacy PillPack.
“In an age of Amazon, you’re trying to figure out how to remerchandise,” said Ross Muken, senior managing director at Evercore ISI.
(Jeffrey P. Bezos, founder and chief executive of Amazon, owns The Washington Post.)
It’s not only grocers that have had to branch out, but drug stores too, said John Ransom, managing director of health-care equity research at Raymond James. Selling prescriptions isn’t enough to compete with e-commerce giants, dollar stores or discount retailers that promise lower prices.
Similar partnerships have been tried before. The grocery chain Albertsons tried to merge this year with the drug store chain Rite Aid. But that deal failed after Rite Aid investors protested the share price offered. CVS Health also closed a nearly $70 billion merger with Aetna, the health insurance company. The Wall Street Journal also reported that Walgreens and Humana are in talks to take equity stakes in one another.
Kroger has also had its eyes on toys. This year, the grocer added pop-up toy shops to 600 of its stores during the holidays -- part of the wave of retailers trying to snap up toy inventory after Toys R Us closed up shop.
If the program went beyond the 13 pilot stores, Kroger’s geographic footprint would boom, analysts say. It’s much more difficult, after all, for Kroger to build a 45,000 square-foot grocery store in a new area than it is to add its inventory to a 10,000-square-foot Walgreens. Kroger operates about 2,800 stores compared to the 9,500 Walgreens in all 50 states.
But in the absence of much more information, analysts aren’t convinced that shoppers will think of Walgreens as a place to go for groceries, or that people would think to order their groceries in advance and then pick them up at the drug store.
“I think [Kroger] must think they have a really, really strong brand that will carry over to another venue,” Ransom said. “And that’s where I get to be a little skeptical.”