Its a strategy shift that founder Barney Kroger never could have imagined: The Kroger Co. wants to make its grocery delivery business profitable by rejecting robots and embracing artificial intelligence.In a series of moves sinc e March 2024, Kroger closed 11 automated warehouses built by the British technology firm, Ocado, while expanding relationships with Instacart, Door Dash and Uber eats.Kroger said the move will save $400 million a year and make delivery times faster, while introducing agentic shopping experiences to Kroger customers. That will happen with Cart Assistant, an AI tool that Instacart will embed on the Kroger iPhone app early next year.It syncs with each customers provided preferences, such as dietary goals and purchase history to make shopping more intuitive - supporting meal planning, budgeting, and nutrition at every step, Instacart said in a Nov. 4 blog post announcing the new tool. In a conference call with Wall Street analysts on Dec. 4, Kroger Chief Financial Officer David Kennerly said Kroger will create new monetization opportunities with advertisers by integrating our customer data and loyalty insights with third-party platforms.And that has some questioning whether Kroger is creating new problems for itself and its customers, in a quest to make its fast-growing e-commerce unit profitable by next year.WATCH: We spoke with experts concerned with Kroger's new shift to AI: Kroger embraces AI for delivery strategy. How will this affect customers?We cant trust AI tools like this to act in our best interest, said Sara Geoghegan, senior counsel with the Electronic Privacy Information Center, a Washington, D.C.-based nonprofit. When an AI chatbot like this recommends a product, we have to ask: Is this being recommended to me because its the best product for me or is it because these companies have a commercial interest in promoting this product?Scott Beck, a former Kroger employee and loyal customer, is concerned about reduced access to Krogers in-house delivery service, which he prefers to Instacart and DoorDash. And he isnt thrilled by the idea that an Instacart chatbot will have access to his Kroger data.If Im ordering something through Kroger, my expectation is that stays within Kroger. I do not want my data being used by somebody else, said Beck, a Xavier University marketing professor who worked for Krogers data-mining unit, 84.51. I think its a fair question that Kroger should answer: What will Instacart be able to do with my data, and are you disclosing that to shoppers? Evaluating the AI threatKroger said Instacart will be its primary delivery fulfillment partner in a Nov. 4 press release. Hoping to learn how that partnership will work, the WCPO 9 I-Team sent a list of 20 questions to both companies.Instacart declined to answer. Kroger provided a statement that includes:"Customers who choose Instacart as their delivery provider through the Kroger app pay the same prices as in-store, ensuring transparency and value. By adding Instacarts Cart Assistant capability to the Kroger iOS app, we aim to provide more choice and convenience, helping customers build baskets that align with their preferences and goals."The I-Team also searched for answers in regulatory filings and public statements made by both companies. And we interviewed experts who follow the grocery industry.What we found might give you pause if youre a Kroger customer, investor or employee.Thats because Kroger is expanding vendor relationships with three companies that have faced thousands of lawsuits and increased regulatory scrutiny over the way they pay employees and treat consumers.In addition, all three companies disclosed artificial intelligence as a risk factor that investors should consider in their most recent annual reports, filed in 2024.Artificial intelligence and machine learning solutions, and our use of such solutions, could result in reputational harm, competitive harm, and legal liability, said Instacarts filing.Uber warned AI use could lead to inappropriate or controversial data practices that subject us to lawsuits, regulatory investigations or other harm.DoorDash said, The use of AI applications may result in data leakage or unauthorized exposure of data.Kroger didnt mention artificial intelligence as a risk factor in its annual report to shareholders, but its privacy policy says it uses AI to analyze data.Wall Street analyst Michael Lasser, from UBS Securities, asked about risk factors in Krogers Dec. 4 earnings call.As you went through your e-commerce review, how did you think about the risk of leaning so heavily on third-party providers to fill a core competency, which is to interact with the customer at the point of delivery, vs having that key function more in-house? Lasser asked.Kroger CEO Ron Sargent didnt address any specific risks in his answer but said all three companies will help Kroger reach younger customers.Were looking at these partners as incremental sales opportunities and customer opportunities, Sargent said. The vast majority of our e-com sales come from the Kroger website, and we feel like they give us operational flexibility as well as strategic flexibility. The Ocado experimentKroger has spent billions of dollars since 2018 to find the best way to deliver groceries to its customers.Thats when it announced a long-term partnership with Ocado to build up to 20 robot-powered warehouses that would efficiently process customer orders, using a hub and spoke system geared toward next-day deliveries.Greater Cincinnati had the first Ocado hub, a $55 million facility in Monroe that feeds smaller distribution centers in Independence, Indianapolis, Louisville and Columbus.Since the Monroe hub opened in November 2018, Kroger has opened seven additional hubs and at least 13 smaller spoke facilities.Those facilities helped Kroger achieve double-digit growth in online orders, reaching $12 billion in annual digital sales in 2023. But they also proved expensive to operate and slower to deliver groceries than the same-day services now offered by Amazon in more than 1,000 U.S. cities.So, Kroger supplemented its delivery options with Instacarts Delivery Now service in 2021, and it began closing Ocado distribution hubs in March 2024.State regulatory filings, known as WARN notices, show Kroger has eliminated more than 2,000 jobs by closing three hubs and eight spokes since 2024.On Dec. 5, Ocado announced that Kroger canceled plans to open a new hub in Charlotte next year. But it is moving forward with a Phoenix facility that will be the companys sixth hub when it opens early next year.The closures have been costly. Kroger took a $2.6 billion accounting charge against earnings in its fiscal third quarter and agreed to pay $350 million to Ocado for not moving forward with a Charlotte facility.Thats enough for Krogers critics to conclude the Ocado experiment was a failure.That was a huge gamble, and obviously, at a minimum, it was a $2.6 billion loser, said John Marshall, a California-based financial analyst for the United Food and Commercial Workers Union. But I think $2.6 billion is just the beginning.Marshall thinks Kroger will eventually take earnings charges of more than $7 billion to close all of its Ocado facilities. And at that point, he thinks it will make Kroger stores less friendly for shoppers.If your stores are really becoming your distribution centers for e-commerce fulfillment, it has a very negative effect on your inventory levels, Marshall said. You have regular consumers walking the aisles, and theyre essentially in somebody elses workspace now.Retail consultant Burt Flickinger sees plenty of upside with Krogers recent moves because Instacart has the size, scale and skill to take Kroger into new markets.It could potentially take Kroger into the food institutional business, Flickinger said. They could start supplying fine restaurants, hospitals, hotels, public schools, commissaries.Kroger hasnt mentioned institutional sales as an advantage of its delivery restructuring, but it did highlight the potential for new advertising revenue in the companys retail media division.Our unique approach to collaboration with Instacart, DoorDash and Uber unlocks new media opportunities across both platforms and were already seeing strong interest from several large CPG brands, CFO David Kennerly told investors on Dec. 4. By integrating our customer data and loyalty insights with third-party platforms, we can bring more targeted, innovative media campaigns, reach new customer segments and create additional monetization opportunities.Evaluating surveillance pricing Kennerly said Kroger was careful to structure deals with Instacart, DoorDash and Uber Eats in a way thats very favorable to our economics. He also said it was important to Kroger that we got to participate in the media opportunities that may originate on their platform rather than our platform.But that doesnt explain how Kroger plans to use customer data with its new delivery partners.As a former employee, Beck has high regard for Krogers privacy standards, which call for the use of aggregated (non-personal) insights to help advertisers reach relevant audiences with promotional offers.But Beck isnt sure how those standards will apply to an Instacart chatbot thats acting as an agent for a Kroger customer on Krogers digital shopping app.Theyre going to have to release certain things so the transactions can be completed, Beck said. Its a question of what happens to the data afterwards. What is Instacart going to see and what are they licensed to do with that data? Are they allowed to keep that information?Those are good questions for Kroger customers to ask before using Cart Assistant, said Geoghegan, the privacy activist whose Washington-based nonprofit accused Kroger in February of engaging in surveillance pricing.That refers to companies that seek the highest price a customer might be willing to pay based on information provided by the customer or inferred from other data sources.I can afford to pay it because of my zip code. Because my purchasing history suggests I have been researching it for a long time. Because they know I have a newborn baby. So many individual characteristics can show why we might be willing to pay more for a product, Geoghegan said. We frankly dont have a glance of whats under the hood here. So, its impossible for us to know just how this data is being used and if its being used in harmful ways.Kroger has denied the use of surveillance pricing in the past. And it isnt clear whether the recent changes will lead to such an approach.But it also doesnt seem likely to lead to lower prices, based on two recent pricing studies.WCPO's Taylor Nimmo ordered the same five products from a single Kroger store in October. She found Instacarts delivery order was 16% more expensive than Krogers, while DoorDash's cost 38% more.And a new Consumer Reports investigation found price differences of up to 23% when different customers ordered the identical product at different stores using the Instacart app. These price disparities happened as Instacart was conducting algorithmic pricing experiments on consumers.Weve seen studies that show that Instacart does lots of experimentation with prices, said the UFCWs Marshall. They are playing psychological tricks on individual consumers, based on their best guess of what will entice that consumer to make that purchase decision. And often, it is dependent on what kind of compensation theyre getting from the consumer product manufacturing, in terms of advertising.If youre concerned about surveillance pricing, the Electronic Privacy Information Center offers these suggestions: Use a privacy protective browser like Brave or Duck, Duck, Go. If using the Chrome browser, install the GPC extension. Toggle privacy settings on, reject cookies, etc. If you're an Apple user, turn on App Tracking Transparency to limit tracking across different apps. On Android devices, manage app authorizations in settings to limit access for individual apps. ...read more read less