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Microsoft helps Kroger, Albertsons, & Walmart create the future OS of grocery stores

At first glance, it’s difficult to understand why established behemoths like Amazon (and recently Microsoft) would get into the grocery business. It’s a notoriously low margin industry. In fact, it’s one of the Top Ten Least Profitable Industries, clocking in at an average of 2.2% net profit margin, which for the leading national grocer, Kroger, means they take home a mere $2 Billion in net profit of their $120 Billion gross revenue.

Still, over the last five years, we’ve seen a mad rush to innovate this industry. Why? Well, the simple answer is the massive opportunity.

Today’s omnichannel grocery landscape is valued at more than $1.01 trillion, according to data from Nielsen and Rakuten Intelligence. While e-commerce within the FMCG [Fast-Moving Consumer Goods] landscape represents just 5% of total FMCG sales, it represents 40% of year-over-year dollar growth.

Winsight Grocery Business

Additionally, the winds of consumer behavior are shifting. Suddenly, consumers are okay getting avocados and other produce without feeling them first, as Instacart and other grocery-delivery services have shown. Young professionals want to eat healthy and cook their own meals without shopping, as Blue Apron and other meal kit companies are proving.

Seventy percent of shoppers will be buying some portion of their groceries online within five to seven years, according to Nielsen. That equates to $100 billion in total sales.

Lauren Hirsch, CNBC

Lastly, Amazon’s acquisition of Whole Foods kicked every grocer’s butt into gear. It was the moment of realization for the Krogers and Albertsons of the world that food was not immune to technology. And that technology was, in fact, the only way forward.

Add all of these reasons up and you’ll quickly understand why Microsoft has been making some major moves in this space for the past six months.

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Microsoft, The Grocery Angel.

Since the year has started, Microsoft has locked down two crucial partnerships with not just any grocery chains – but THE grocery chains. Kroger and Albertsons are the two leading grocers in the country (by revenue) if you don’t include Walmart. But, if you include Walmart, then Microsoft has partnered with the three leading grocery chains. Yes, they’re working with Walmart too.

On the Kroger front, Microsoft is helping them test and prove a superior shopping system that’ll guide shoppers through the store. They’re starting with two stores and will branch out from there.

The stores are filled with digital shelf labels and image recognition cameras, and aim to create a retail environment that’s easier for both customers and retail employees to navigate. The two companies also hope to use the digital signage to sell targeted ads based on customer demographics.

Using either an app, or one of Kroger’s existing “Scan, Bag, Go” terminals, customers are directed around a store to find the items on their shopping list. When they reach the correct aisle, digital shelf signs show a personalised symbol to show them the item they need. The app or terminal can then be used to scan the item, before directing them to the next entry on the list.

And Bloomberg notes that there are image recognition cameras implanted in the ceilings of the stores to monitor for when shelf stock is running low. Sensors in the store’s refrigerated cases can also give employees a heads up if the temperature is rising too much to prevent their content from spoiling.

Jon Porter, The Verge

Similarly, on the Albertson’s front, Microsoft is coming in to help eliminate the friction customers experience at the grocery store, such as wait times and finding items, while also helping improve its supply chain and logistics. This deal is hot off the shelf, so there aren’t too many concrete details, aside from a possible robot shopper that fills online orders. Naturally, they’ve expressed an interest in co-creating cashier-less technology.

Last, but not least, in June of 2018, Walmart announced a five-year partnership with Microsoft to advance the technology used in their stores – and have since installed iOT sensors in their freezers in most of their 5,000 stores to prevent spoilage. A few months later, they announced a joint engineering office, where they’d be creating internal technologies to improve the management of their 2.2 million employees – projects will include chatbots designed to help employees navigate benefits and manage supplier interactions.

When Microsoft reorganized its salesforce a year ago and cut multiple thousands of jobs in the process, it also subsequently hired more than 3,000 developers into the salesforce. As a result, [they] can actually code with [their] customers and help them really digitize everything they do within their business.”

Mary Jo Foley, ZDnet

There’s a lot of money to be made in being the entity which helps digitally upgrade the 38,571 supermarkets nationwide. However, there’s something far more lucrative at play here for Microsoft, beyond being the digital transformation experts.

There’s Money in Cloud-computing.

By committing to the digital transformation of huge grocery chains and helping to create next-level, high-tech experiences in them, Microsoft is simultaneously fueling these companies’ dependence on their Azure cloud computing platform. Essentially, they’re creating computing necessity where it never was before.

The worldwide public cloud services market is projected to grow 17.3 percent in 2019 to total $206.2 billion, up from $175.8 billion in 2018.

Gartner

Albertson’s signed a 3-year commitment to use Azure to power their online shopping portal and other high-tech initiatives. Kroger will be using Azure to power the projects outlined above.

To grow and enhance the online experience, the company [Walmart] will migrate a significant portion of walmart.com and samsclub.com to Azure, including its cloud-powered check-out. – Walmart PR

Microsoft is running a two-fold play that is going to pay off hugely. One, they’re creating the tools necessary for retailers to compete with Amazon. Two, they’re providing the back-end support necessary to operate these tools.

Naturally, retailers distrust Amazon’s cloud computing platform, AWS, since it’s the company putting the most strain on their business. Therefore, Azure is going to pick up a lot of clients this way, largely in the retail space.

The Grocery Store Operating System.

Long-term, every grocer wants to determine and deploy the operating system of the grocery store. This is essentially the technology that will reduce employee costs, reduce customer friction, reduce product waste, and prepare grocers for the next 50 years of service. Amazon already has a leg-up on the competition with their Amazon Go stores, which use Just Walk Out technology:

Using the same computer vision, sensor fusion, and deep-learning technology as self-driving cars, Just Walk Out is a smart-store technology that charges your account as you pick an item off the shelf (subtracting it if you put it back, too). The moment you walk into the store, it recognizes your Amazon Go account and begins billing you accordingly.

How Amazon Thrives on our Impatience as Consumers

Making a seamless cashier-less system for a warehouse-sized Walmart Superstores requires an entirely different strategy than the Amazon Go stores, which are comparable to the size of a 7-11. It’s no wonder Amazon is expecting to launch nearly 3,000 Amazon Go stores by 2021.

To convert a Walmart or Kroger, which were built decades ago before the thought of cashier-less systems entered our mind, is going to take different strategies. Fortunately, there’s more than one way to skin a cat.

Amazon Go already has an official rival called Zippin, which has launched a cashier-less store in San Francisco. Additional players in this field include Standard Cognition, Trigo Vision, AiFi, Aipoly, and Imagr. Microsoft is working with Albertsons, Kroger, and Walmart partly under the pretenses that they’ll gather data and have locations to test cashier-less technology.

If Microsoft can pull this off, whether on their own or by acquiring one of the startups that do, they’ll effectively become the Android of grocery operating systems (and Amazon would be the iPhone). For every grocery store that isn’t Whole Foods (which Amazon would be responsible for), Microsoft would be the Grocery Store OS that would run their retail store of the future. And that’s a very lucrative position to be in.

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