Is Kroger in denial about the magnitude of its challenges?

Discussion
Photo: Kroger
Oct 13, 2017
George Anderson

Kroger is in denial about the competitive challenges it faces. That’s the central thesis of a Bloomberg opinion column by Sarah Halzack, who criticized the grocer for announcing strategic moves such as product assortments personalized by store and improvements to customer service as little more than anteing up table stakes in the current retailing era.

Ms. Halzack characterized executives at Kroger as describing the “current rough patch” it is going through as adapting to shifts that take place in the industry “every 12 to 15 years.” Kroger, which confidently maintains it is in the process of responding to the market’s challenges, doesn’t understand that the e-commerce transition taking place now is “a dramatically different business model, with a new set of competitors, logistical hurdles and profitability impediments,” writes Ms. Halzack.

Kroger unveiled its new strategic plan at its annual Analyst Day meeting this week. The plan, known as Restock Kroger, includes reducing capital investments in new stores while using technology to optimize product assortments and improve customer service in existing locations.

Kroger’s plan includes: 

  • Utilizing customer data from its 84.51 division to offer more personalized recommendations to customers throughout the year. Kroger maintains that it currently “delivers more than three billion personalized recommendations” annually. 
  • Building on digital investments such as its ClickList click and collect program. Last year, Kroger announced it planned to offer the service at roughly 45 percent of its stores. The company has also has been testing home delivery using Uber. 
  • Keeping customers happy through smart pricing. Kroger maintains it has invested more than $4 billion in pricing going back to 2001. 
  • Developing its private label portfolio. The company has seen annual sales of its own brands grow 37 percent from $15 billion to $20.5 billion between 2011 and 2017. 
  • Investing in its store-level associates. Kroger plans to spend $500 million over the next three years in improve training, “rebalance pay and benefits,” offer performance incentives and define career opportunities.

The one area of Kroger’s plan that has gotten the most attention from investors was its announcement that it was exploring strategic alternatives for its convenience stores including a possible sale of the 784 stores under the KwikShop, Loaf ‘N Jug, QuickStop, Tom Thumb and Turkey Hill Minit Markets banners.

DISCUSSION QUESTIONS: Do you think Kroger management is failing to fully grasp that its current challenges are unlike others that it has encountered in the past? Does Restock Kroger hit or miss the strategic mark, in your opinion?

Braintrust
"As usual, the predictions of the end of the world are premature."
"Have any of you ever worked with traditional grocers? For the most part, you’re dealing with procurement specialists."
"I think they have as good a chance at making it through this era as any other pure play grocer, but as always only time will tell."

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17 Comments on "Is Kroger in denial about the magnitude of its challenges?"


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Phil Masiello
BrainTrust

There doesn’t seem to be anything new in Restock Kroger. It is a lot of the same old same old. I think the Kroger management is employing the Ostrich Principle to management. Hide your head in the sand.

Ben Ball
BrainTrust

“It’s really, really different this time. No, really it is!” (And the end of the world is just days away … )

Kroger has been doing this right for a long time. Just like Walmart, they have a solid core strategy and a management team that knows how to adapt it to current trends (notice I said trends — not fads). Some of the changes Kroger is testing will have a big impact on their e-commerce/delivery business in the future.

As usual, the predictions of the end of the world are premature.

Dr. Stephen Needel
BrainTrust

I agree with Ben; most of the money in grocery is still in physical stores — improve those.

Art Suriano
BrainTrust
I think Kroger is learning a hard lesson that when you become too big, especially after buying many competitors, you don’t just have the problems you once had, you also now have those of the businesses you acquired. Today the grocery industry is changing rapidly. With so many stores and so many different types of customer demands today, it’s hard to find one size that fits all. Here again, we see a retailer who thinks they will solve all their problems with technology. I don’t agree. Kroger needs to take a step back and figure out who they are, why they are different than their competitors and why customers should shop them. Then, yes, they can use technology to reach out to customers but only after they have a reason for customers to respond. And I don’t just mean price. Where is the customer shopping when they’re not shopping at Kroger? Kroger needs to find out not only where but most importantly, why? In time Kroger could consider converting some of their other banners to… Read more »
Richard Layman
Guest
3 months 5 days ago
Interesting points. Kroger more than other companies has been good at not ruining companies it acquires, unlike Safeway under Steve Burd. (We’ll see with Albertsons. I’ve never been into a United Supermarkets banner, which they acquired, and there have been some bad changes at Safeway in the DC area, although after a year of falling way behind on price, they seem to be refocused.) The “marketplace” format is a way to box out Walmart/Target and could probably be deployed more widely. The Royal Ahold bfresh experiment is one they could probably learn from too. However, unlike H-E-B (Central Market) and Giant-Eagle (Market District), they don’t seem to have an upscale concept going head to head with Whole Foods and Wegmans. In fact with the entry of Publix and Wegmans to Hampton Roads/Richmond, they’ve cut back on store expansion. Still, they bought Mariano’s and they’ve done their Main & Vine experiment. They are experimenting with hard discounting, but focused on lower-income demographics, not higher-income demographics. But they are adding meal kits, investing in price so that… Read more »
Ian Percy
BrainTrust
We can be problem solvers, in which case we are doomed to focus on the past. Or we can be possibility thinkers in which case we are focused on the future. It’s not quite a binary choice, but most “leaders” seem unable to get away from the past and problem solving. The thing is … solve every problem you have and all you are is caught up. There are three levels of possibilities. There are adjacent possibilities, the incremental changes (aka best practices) everyone makes in the “me too” retail world. Free shipping. Digital marketing. Local sourcing. Low prices. There are non-adjacent possibilities which are the innovations and ideas that make everyone nervous because it usually means leading the pack which, contrary to a common myth, very few leaders actually want to do. Then there are transformational possibilities … those possibilities few others will ever see. Transformational possibilities are those that totally redefine a specific world. Think Amazon, Apple, Facebook, the first heart transplant. This requires inspired leadership who have tapped into the secrets of… Read more »
Lee Peterson
BrainTrust

Have any of you ever worked with traditional grocers? For the most part, you’re dealing with procurement specialists. Definitely NOT customer-oriented thinkers. Take a hairball the size of Kroger, put it on top of said non-customer thinking and you’ve got a recipe for disaster in today’s age. Table stakes: I totally agree with Sarah’s comments.

Add to this the fact that competitors who ARE customer-centric are entering the marketplace daily (some big ones too!) and you just doubled the size of the urgency tent. But what do we hear? Increased table stakes. That, to me, is definitely the sign of a company that just doesn’t get it.

To Ben’s point, will they go away tomorrow? No. Will J.C. Penney go away tomorrow? No. Will Kmart? On and on. The point is relevance. And to me, Kroger is irrelevant and continues to prove that on a consistent basis.

Mohamed Amer
BrainTrust

While we can’t really hear the discussion of the Kroger board of directors, I suspect the conversation may go facing another typical rough patch. However, history also credits Kroger as a top notch operator in the supermarket space for the past couple of decades with sound business decisions and a focus on efficiencies and robust operational processes.

I have no doubt that focusing on the core elements of the business will reap rewards for Kroger. But will these benefits be sufficient to maintain leadership in the new grocery battleground? It’s good to heed some advice from Intel’s legendary CEO Andy Grove, “only the paranoid survive.”

There’s a fundamental shift taking place in retail and while grocery was once thought to be immune from dramatic business changes, non-traditional competitors will make sure those changes are applied. Blocking and tackling are an absolute must, but you’ve got to run and connect on some deep routes.

Gib Bassett
BrainTrust

I think she’s a bit correct. You expect leaders to have a vision that is bigger than current trends. Retailers are at different stages of maturity and execution for sure and that matters a lot. But I see her point.

This quote from her article is what spurred my thoughts here: “When executives proudly discussed achievements like knowing their shoppers’ hobbies or whether they use an iPhone or an Android device, all I could think was: Isn’t this simply the standard now that we’re many years into the era of Big Data? What retailer isn’t doing something like this, or at least trying to?”

Sterling Hawkins
BrainTrust

There’s definitely a bit of balance that needs to take place. Yes, improving product assortments personalized by store and improvements to customer service are table stakes; they are necessary to continue to compete in the marketplace today. And the vision is missing. Understanding what new retail experience Kroger can create sets the stage to thrive in the future.

Ken Lonyai
BrainTrust

I disagree with all the bashing from a different perspective: Two or three times a month we buy (mostly) grocery items from Vitacost — a Kroger brand. They almost always execute very well and with discounts are markedly less expensive than Amazon — a place we rarely buy grocery from. We don’t expect two-day delivery yet sometimes it happens. And incidentally, we’ve unintentionally showroomed Whole Foods for many of the packaged-goods staples that now come from Vitacost, due to the substantial price difference and doorstep convenience.

So in short, Kroger has the possibility to remain competitive if they take lessons from Vitacost (among other sources) and stay focused on their game and the needs/desires of their customers.

David Livingston
Guest
3 months 5 days ago

Kroger is not in denial and they don’t really have any real strategic plan. Its all just jargon for the press release in order to increase stock price. At the end the day, Kroger is simply one of the better run plain vanilla sterile supermarket chains. Every grocer can say they are doing what Kroger is doing.

Michael Blackburn
Guest
3 months 5 days ago

So a year ago Kroger was a Wall Street darling and now they are in denial?

Do they have an organic growth problem? Yes, that has been clear for the last decade, ergo their decision to become more acquisitive. And they continue to generate profits and cash flow. They are growing online business, albeit mostly click and collect. Delivery, which is a small fraction of online grocery, is mostly through third parties but they are testing their own. No one has figured out grocery delivery, including Amazon.

Ask any landlord if they have any qualms renting space to Kroger. My only concern would be if Kroger management actually takes this type of criticism seriously.

Camille P. Schuster, PhD.
BrainTrust

Kroger has had a consumer centric strategy for years and appears to be continuing that strategy with the new announcement. Kroger is committed to providing the consumer service their consumers want. Doing that sounds more productive than following every new technology or industry approach being tried. Focusing on doing what their consumers want really well is definitely consistent with the strategy they have been pursuing.

Craig Sundstrom
Guest

Probably no need to go into the specifics of Ms. Halzack’s claim. Actually one can’t go into specifics since there don’t really seem to be any other than breathlessly mentioning Amazon and Whole Foods. (Does she even have any idea of how WF functions?) But ultimately it’s pretty simple: it’s between people who think grocery will remain primarily store-based, and any transition to online — if occurs at all — will be gradual and handled by existing players vs. those who think it will rapidly — if not, in fact, instantly — becoming an online delivery model because, you know … “Amazon”. I’m in the former camp.

As for the ideas Kroger outlined: they don’t strike me as revolutionary, but rather fine tuning what successful businesses are always engaging in. Are there other things they might do? Perhaps, but management is far better to know than I whether or not they should.

Kai Clarke
BrainTrust

Kroger still needs to understand not just the new online marketplace, but also its new level of competition including Lidl, Aldi and others who are creating a new shopping experience, pushing even lower prices at store level (think eggs for $.38 a dozen, milk for $1.57/gallon). They are then combining this with an online presence in-store, as well as follow-up communications, coupons and alerts. Lower prices, online strength, new customer experience, great service and a simple, fast shopping experience. These are the standards for today’s retail mark that Kroger needs to focus on.

Paul Donovan
BrainTrust

Kroger as a grocery company did quite well during the great recession, growing from a base of about $60B in revenues to about $90B when the recession ended. This showed they have resilience as an operator. They also showed imagination by acquiring their IP assets with the 84.51 investment (ex DunnHumby). In addition, if you search their patent applications, they also demonstrate knowhow not traditionally associated with grocers. Given their ability to acquire both online properties and meal kit startups etc. as Walmart is also doing in digital I think they have as good a chance at making it through this era as any other pure play grocer, but as always only time will tell.

wpDiscuz
Braintrust
"As usual, the predictions of the end of the world are premature."
"Have any of you ever worked with traditional grocers? For the most part, you’re dealing with procurement specialists."
"I think they have as good a chance at making it through this era as any other pure play grocer, but as always only time will tell."

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