Understanding kroger how it achieved 39 consecutive quarters of positive comparable sales

Understanding Kroger: How It Achieved 39 Consecutive Quarters of Positive Comparable Store Sales Growth December 2013

The Kroger Growth Story In September 2013, when The Kroger Co. (a general merchandise and grocery retailer in the US) reported earnings for the second quarter of the current year, 2013, it announced positive comparable store sales growth for the 39th consecutive quarter. This translates into almost 10 years of posting positive comparable store sales growth – a rare feat in retail industry where retailers are struggling to grow their top-line even marginally amid recessionary conditions.

Kroger: Sales (USD Bn) and Sales Growth (%) 90.4

53.8

56.4

60.6

66.1

70.2

76.1

76.7

96.8

For the year ended January 31, 2013 (FY12), Kroger posted sales just shy of USD 97 Bn, becoming the second largest retailer in the US after WalMart.

10%

82.2 8% 6% 4%

However, with revenue of c.USD 469 Bn (year ended January 31, 2013), Wal-Mart is c.4.83 times that of Kroger

2% 0% FY03

FY04

FY05

FY06

FY07

Sales (USD Bn)

FY08

FY09

FY10

FY11

FY12

Y-o-Y Sales Growth (%)

As seen in the exhibit below, Kroger posted positive sales growth even during a global economic turmoil when other retailers posted negative ‘comparable store sales growth’. So, a curious question is: what are the strategies that have worked in favor of Kroger and helped the company outperform and maintain positive comparable store sales growth for 39 consecutive quarters?

Comparable Store Sales Growth (%) 6% 4% 2% 0% -2% -4% FY03

FY04

FY05

FY06 Kroger

FY07 Wal-Mart

FY08

FY09

FY10

FY11

FY12

Target

Let’s discuss some of those winning strategies in following sections:

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Dedicated employee base backed by a strong management team: David Dillon took over as the CEO of the company in 2003, the year when Kroger started on its unparalleled growth path. During his tenure as the CEO, he has almost doubled the revenue and added c.53,000 new jobs. He, along with Rodney McMullen (current COO, who will take the helm from David Dillon as the CEO from January 01, 2014), has built a team of loyal and dedicated employees that have helped achieve the growth.

“More than 13,000 of our more than 343,000 associates have served our customers for more than 30 years. Nearly 2,000 associates have served for more than 40 years. Perhaps even more impressive, there are some families with five generations at work across the company.”

– David Dillon, CEO, Kroger

Kroger has laid out a common framework for recruitment across all divisions that recruit people from the same region to have “local flavor” and consistency. The company also invests in significant resources to train employees so that they have a deeper understanding of work they are performing. Employees also work across functions, which helps them nurture their talent and bring out new ideas that may improve a process.

“One thing that attracted me to Kroger was its sheer size, but it still has a community feel, a local feel, at every level of the organization. Our people have an appreciation for what they do and how it impacts our ability to meet our customers’ needs, whether you’re in a division or at headquarters. There’s really a sense of pride. As big as we are, we make it feel like a family with a true entrepreneurial spirit.”

- Tim Massa, VP - Talent Management, Kroger

Various store formats to cater to maximum customers: Another key strength of the company is its ability to operate a wide variety of store formats to cater to diverse customers (in terms of ethnicity, income levels, household mix, and purchasing patterns). Kroger operates under three major formats – Supermarkets (2424 stores), Convenience Stores (786 stores with an average size of 2,815 sq. feet) and Jewelery stores (328 stores which accounted for just 0.5% of total Kroger sales).

Kroger: Number of Supermarkets and Sales from Supermarkets 75.3 71.1 63.8 57.7 49.7

51.1

FY03

FY04

65.5

2,550 2,520

67.7

2,490

60.1

2,460

53.5

2,430 2,400 FY05

FY06

FY07

FY08

Sales from Supermarkets (USD Bn, LHS)

The Kroger Growth Story

FY09

FY10

FY11

FY12

Number of Supermarkets (RHS)

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Supermarkets are the most important format for Kroger, which accounted for c.78% of its revenue in FY12. Apart from being a complete superstore, most of these stores also house pharmacies, service bakeries, floral shops, pet centers, fresh items (such as seafood and organic produce) and fuel centers. As such, supermarkets offer customers the advantage of ‘one-stop shopping’ in convenient locations and sell products customized to local demographics. As can be seen from the graph, there is also a persistent effort on the part of the management to keep the stores agile and hive off the ones that are unproductive. Let’s consider that aspect in a little more detail now.

Carefully laid expansion (or rather contraction) plan: Opening or closing of a store at Kroger is given a lot of thought. Kroger operated supermarkets in just 31 states (end of FY12) in the US as opposed to other retailers, most of whom operate stores across the entire US. Kroger chooses its markets very carefully and opts out of the markets where it thinks it will not get desired returns.

Kroger: Supermarket Opened / Closed 100 75 50 25

44

0

18 0

-25

-5 -25

-50 -75

-13

-9

-11 -25

-39

-100 FY03

FY04

FY05 Opened

FY06 Acquired

FY07

FY08 Closed

FY09

FY10

FY11

FY12

Net Opened / (Closed)

Rather than focusing on rapid store expansion, the company’s growth strategy is more focused on improving productivity of its existing selling space. Kroger has reduced the supermarket store count by c.108 stores over the last decade. It has been optimizing its operations and closing stores that it considers as “dead-wood” (the ones which would drag its performance) for years together.

Kroger is considering opening stores in new markets; however, the company is taking a cautious approach and would not set up shop there before carefully evaluating these markets. Though the store closure would continue, the current fiscal may see a trend reversal in which Kroger may open more stores than close, such that the net store count may now start swelling.

Merger & Acquisition Kroger has continuously been acquiring companies it deems fit for expansion. These companies are primarily from existing markets, keeping in line with Kroger’s acquisition strategy. According to Kroger’s management, “such ‘in-market’ acquisitions have lower risk and generally produce a higher incremental return because they require little investment in overhead, advertising, and distribution”. After acquisition, interestingly, Kroger may close some of the acquired stores, which The Kroger Growth Story

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is in-line with its store optimization strategy. The acquired stores also get a new banner name under Kroger, keeping the experience harmonious for its customers.

M&A also provides Kroger an opportunity to understand and implement some of the best strategies of the acquired companies. In July 2013, Kroger announced acquisition of Harris Teeter Supermarkets (212 stores) for USD 2.5 Bn to expand its foothold in the fragmented Southeast region of the US. This acquisition also provided Kroger access to high-end customers.

“We do a nice job on the high-end customer but there are some things Harris Teeter does better. We expect we can learn a thing or two from them.”

– David Dillon, CEO, Kroger

Strategic partnerships for Big Data Strategic partnership with Dunnhumby is considered to be the most important factor that has contributed towards Kroger’s growth journey. In his first year as the CEO, David Dillon formed a joint venture with Dunnhumby (UK-based data analysis firm) to create DunnhumbyUSA. The newly-formed company provided Kroger with insights about the shoppers’ shopping habits, which helped Kroger market its offerings on a more personal basis. In other words, Kroger has been into ‘Big-Data’ much before its competitors!

“They saw the opportunity to leverage customer data well before other national/multi-region operators here did, so part of it is the head start they provided themselves. …. Their partnership with Dunnhumby allowed them to get some quick wins; their work with vendor partners helped them gain scale across the whole store.”

– Jim Hertel, Managing Partner, Willard Bishop

Personalized marketing based on customers’ insights has helped the company increase customer loyalty. Kroger sends ‘personalized coupons’ to its customers on the basis of recommendation it receives from DunnhumbyUSA. These coupons have a redemption rate of more than 70% within two weeks of mailing, which helps in generating additional sales at Kroger.

“Close to 90% of the transactions in our stores involve one of our loyalty cards. Almost half of the households in the United States carry one of our shopper cards. And in the markets where we operate, our penetration is even higher — approximately 85% of the households in those markets carry one of our loyalty cards.”

– Mike Schlotman, CFO, Kroger

Investment in technology for improving C-Sat Technology has always been an important part of Kroger’s strategy. Way back in 1972, Kroger was the first grocery retailer in the US to test an electronic scanner. In more recent times, the company has installed new POS system from QueVision, which focuses on faster checkout. The new system has reduced the average waiting time during checkouts from four minutes in 2010 to less than thirty seconds in 2013. As a result of this new POS technology, Kroger has registered c.42% improvement in customer satisfaction related to checkouts.

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“I’m committed to getting my customers through the lines quicker. At Kroger you get shorter lines and faster checkouts. Who likes standing in line? We promise you will spend less time in line.”

– Kroger Cashier (in a commercial on YouTube)

Private Label and Own Logistics – a move towards being vertically-integrated To keep bringing customers back to its stores, Kroger has been continuously expanding its private label items. Of the c.50,000 items available at a typical Kroger store, almost 12,000 are private labels, of which c.40% are manufactured in-house. These 12,000 items contribute c.24% of the Kroger sales. Further, Kroger plans to add approximately 650 new private label items in current fiscal (FY13).

Apart from manufacturing almost 40% of the private label items in-house, Kroger also owns truck fleets that cover more than 100 million miles a year – travelling between stores, manufacturing facilities, distribution centers and warehouses – keeping the supply chain under control.

Being an almost vertically-integrated company, Kroger has had better control over its operations, which provides it with strategic advantage vis-à-vis its competitors who procure from other manufacturers or use logistics of third-party service providers.

Passing cost-savings to the customers for a win-win Kroger understands that in this age of economic turbulence, customers are looking at value of a product more than ever before. Lower prices have become important. This has led Kroger to aggressively pursue cost control measures across various functions over the last decade. Further, the company has been passing the cost-saving benefit on to its customers in the form of reduced prices to win their loyalty, creating a win-win for both, Kroger and its customers.

“We have just completed what is nearly 10 years of positive identical-sales growth. We have invested in price for each of those 10 years when compared to the year before. At the same time, we have focused on lowering our costs. We have actually lowered our costs now for over eight consecutive years.”

– David Dillon, CEO, Kroger

Conclusion Overall, in conclusion, one notes that Kroger works with the motto of ‘Customer 1st’. All of its strategies revolve around increasing the number of loyal customers who keep coming back to its stores. With such deep focus on customers, the growth registered by Kroger is hardly a surprise!

“As we have shown quarter after quarter, our consistent execution of the ‘Customer 1st’ strategy deepens customer loyalty, increases sales and creates sustainable shareholder value.”

– David Dillon, CEO, Kroger

Source: Company Website; Company Reports; Secondary Research; Sutherland Analysis

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