Kroger 2.0 Appears to Be a Success

Discussion
Jun 21, 2006
Rick Moss

By Rick Moss


With its financial report yesterday, Kroger capped off eleven consecutive up quarters of same-store sales growth with news of its most impressive quarterly sales growth in over
five years. Sales at stores open at least a year jumped 7.2 percent in Kroger’s first fiscal quarter, or 5.6 percent excluding fuel. Total sales were up by 8.2 percent to $19.4
billion.


In a company statement, Kroger chairman and ceo David B. Dillon proudly announced a quarterly cash dividend to shareholders “for the first time in 18 years” which he attributed
directly to “our associates’ commitment to our Customer 1st strategy.”


Kroger has battled unprecedented competition from supercenters in its numerous markets and is often thanked for its determined efforts with lackluster reviews from many industry-watchers
who regard its conservative approach as “plain vanilla” and representative of an earlier era. But latest indications are that the company is doing a lot of things right. Referring
to yesterday’s report, Mr. Dillon said, “This compares favorably with our traditional supermarket competitors, and indeed with any food retailer.” (One can safely assume that
latter refers to Wal-Mart and trendsetting Whole Foods Markets.)


Details in Kroger’s financials offer clues to their winning strategy. Management was able to pull operating, general and administrative costs as a percentage of sales down 19
basis points during the period to 18.17 percent. At the same time, capital investment is robust, totaling nearly $450 million vs. $400 million in the year ago period.


According to the Financial Times, since 2001, Kroger has managed to keep prices competitive on core SKUs by accepting a reduction in profit margins. But the chain also
credits its work with UK firm Dunnhumby in methodically editing its product mix based on local “store characteristics.”


“Increasingly the differences [between our stores] will be driven by the differences in our customers, rather than just the differences in geographies,” said Mr. Dillon.


Moderator’s Comment: Has Kroger’s perseverance paid off in a winning, “next generation” big chain supermarket formula? How will the resurgence of Kroger
and Safeway shape the supermarket landscape in coming years?


A number of aphorisms come to mind regarding Kroger’s success, including “slow and steady wins the race” and “stick to the fundamentals.” The Kroger management
team should be congratulated for “keeping their eye on the ball.”

Rick Moss – Moderator

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15 Comments on "Kroger 2.0 Appears to Be a Success"


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Ryan Mathews
Guest
14 years 8 months ago

Congratulations are in order, but so is a caveat. Since a fair portion of the performance results can be traced back to actions which can’t be repeated (i.e., you can’t cut the same cost twice) the new problem is how to sustain momentum when the majority of opportunities involve either increasing merchandising effectiveness and/or settling for decreasing margins over time.

Mark Lilien
Guest
14 years 8 months ago

It’s not the battle of the big versus the small. It’s the achievement of the better-managed versus the mediocre. Kroger credits the dunnhumby relationship, for example. Kroger is enlightened enough to hire “outsiders” and has the self-awareness to credit them appropriately. Better-managed retailers are reasonably self-critical and get appropriate help wherever it’s found.

David Livingston
Guest
14 years 8 months ago
Kroger’s perseverance has paid off. Who says there is a resurgence of Safeway, besides Safeway? Kroger will be the big winner. In fact, they have already won, leaving Safeway far behind in many markets in Texas, Colorado, New Mexico, Arizona and others. Safeway is getting a lot of press with their Lifestyles stores while Kroger is quietly one-upping them. Kroger has managed to weather the storm while chains like Winn-Dixie, A&P, Safeway, Marsh, Big Bear, Minyards, Bi-Lo, Super Kmart and Albertsons have been brought to their knees and forced to close stores or sell off their assets to investment groups. Kroger has used Wal-Mart as muscle to help them accomplish their goals. Despite the onslaught of Wal-Mart, Kroger has still managed to stay on top in large markets such as Louisville, Nashville, Atlanta, Denver, Cincinnati, Detroit, Columbus, Houston, Phoenix and Indianapolis. The landscape will continue to change. Kroger will be upgrading stores and perhaps make some strategic acquisitions in Wisconsin and Minnesota. Other chains will continue to show the painful face of failure. Kroger has… Read more »
Barry Wise
Guest
Barry Wise
14 years 8 months ago

Kroger like, many other supermarket operators, has faced many challenges over the past 10 years. However Kroger, unlike many of their competitors, has continued to develop, implement and adjust its strategies along the way without caving in to the latest trends. Kroger now operates under more banners than any of their competitors, yet maintains consistency in its regional chains, including a local and regional feel while operating within Kroger’s business model. Maybe some of the other national supermarket operators need to take a closer look at Kroger’s success.

Bernie Slome
Guest
Bernie Slome
14 years 8 months ago

Kudos to the Kroger management team. They found a winning formula and stuck to it. Despite Wall Street pressures, despite the “lackluster” reviews of industry watchers and despite the obvious pull to “Keep Up With the Joneses” Kroger developed a strategy and has been riding it to success.

Business, while always difficult, is really pretty simple. Find out what your customer wants, what price they are willing to pay and what service level they need. Deliver the product at the right price and with the necessary customer service and you will ALWAYS be a successful business.

It is obvious that Kroger has done all of the above and that they are constantly measuring how they are doing. Our company works with many supermarket and retailer chains and have found that those who measure both customer feedback with an IVR type of mechanism and then measure the non-negotiables with a secret shopper/mystery shop mechanism are the most successful.

Again to the Kroger management, congrats and keep up the good work!

Stephan Kouzomis
Guest
Stephan Kouzomis
14 years 8 months ago

You have to remember, Kroger is in some Winn-Dixie markets, and that helps.

But, to take nothing away from Kroger, their acquisitions of Fred Meyer and QFC plus Dillon brought in some fresh thinking, and generational understanding. Pay off time. Hmmmmmmmm

Race Cowgill
Guest
Race Cowgill
14 years 8 months ago

Good job, Kroger. But I think there is more going on here. Note that our recent data shows that Kroger customer service, product selection, store layout, out-of-stock incidents, cleanliness, and product quality are all low in absolute numbers (and about in the middle relative to the industry as a whole). How do we account for Kroger’s success when their actual numbers in the core processes (except supply chain) are so low?

Mark Burr
Guest
14 years 8 months ago
Okay, now that Webster’s helped me out with ‘aphorisms,’ I think I can agree with Rick’s comments completely. In addition, I would note what Mr. Dillon’s comments “Increasingly the differences [between our stores] will be driven by the differences in our customers, rather than just the differences in geographies.” I think this is one area where Kroger really gets little credit. I also think they get very little credit all in all. In regards to differentiation by store and market, HEB is usually what comes to mind. In my old hometown, there are now 4 Kroger stores, all of which are relatively close, yet all are located in a different demographic, all are relatively newer or updated stores, and all are completely different. They definitely own the market in that area and it’s no wonder why. Another area not often mentioned about Kroger is their rapid and continuous expansion in their fuel offering with their stores. I would like to see the breakdown of the impact on that this has had on their same store… Read more »
Camille P. Schuster, PhD.
Guest
14 years 8 months ago

It’s not “slow and steady” nor is it “stick to the fundamentals” that creates Kroger’s winning strategy. Most of what they have been doing is behind the scenes, adopting new business processes centered on consumers. This is an approach that is easy to mouth but extremely difficult to implement. They have progressively and systematically worked to implement the change in businesses processes (e.g., adopting activity based costing, implementing category management, using scanner data to learn about consumers at local stores, creating a paperless business process). These are not activities that are easily visible to outsiders. The process of testing new approaches and implementing them across thousands of stores takes time. However, each step lowers costs and creates loyalty with consumers. No one step by itself is the hallmark of success and this change did not happen overnight. With a goal in mind, aggressive business decisions, and commitment over time, Kroger continues its journey. They aren’t finished yet.

Barbara Conklin
Guest
Barbara Conklin
14 years 8 months ago

Kroger is very wise to keep focus on the assortment that fits the community it serves. There is a core assortment and then there is the assortment that is tailored to the customers that shop at a given location. They may adjust 5 – 10% of their mix but will solidify customer loyalty. I hope they stay focused on cutting costs and continue to believe in their direction.

Michael Tesler
Guest
Michael Tesler
14 years 8 months ago

Many industry-watchers regard its conservative approach as “plain vanilla” and representative of an earlier era because that is 100% true. Kroger will have to evolve but, because it exists in a space where things happen last (and sometimes never), they are getting away with a format that is reactive rather than proactive and more 1950 than 2006. But like all the department stores, hardware stores and drug stores who resisted real innovation, their days of real same store increases are numbered.

Dennis Serbu
Guest
Dennis Serbu
14 years 8 months ago

Keeping it simple, Mr. Dillon is one of a few select Industry Executives that has actually been in a Grocery Store. While the statement was intended to be facetious, there is a lot to be said for being raised in the industry and actually having encountered (GASP!) “CUSTOMERS”. We call this trait “Can Stacking” and “Having Purple Fingers,” for those of you than can remember that far back.

It is mostly basics: Blocking and Tackling; taking a Macro Operation Micro to the point where you recognize regional customer needs and respond accordingly. Most of us are not smart enough to manage an organization that large without creating a cookie cutter centralized approach. It is the sameness that provides the slippery slope to Heck.

Ed Dennis
Guest
Ed Dennis
14 years 8 months ago

Competition is fierce in the grocery industry. Kroger has managed to weather the storm while chains like Winn-Dixie, A&P, Safeway, Marsh, Big Bear, Minyards, Bi-Lo, Super Kmart and Albertsons have stumbled. Has their success been because of the weakness of these other players or have they really made progress? I would like to see statistics on OOS, on employee retention, on sales growth by store. Profit can be misleading, but the fact that they have sustained over eleven quarters is a massive statement and also a curse: “What you gonna do for me tomorrow?” Good luck Kroger!

Art Turock
Guest
Art Turock
14 years 8 months ago
As a sales growth strategist, my first inclination in company’s reports of success is to examine the basis for sustainable success. I ask my winning clients to address this pair of questions: “What marketplace conditions need to stay in place for your success to continue?” “What’s the likelihood of those conditions staying intact?” In Kroger’s case, their current winning has depended on cutting back margins, which can’t continue for very long. Another factor in Kroger’s ability to withstand Wal-Mart’s onslaught is dominating markets populated by weaker rivals. Kroger is #1 or #2 in market share in 43 of 52 major markets, and its weaker rivals tend to absorb the loss of share and get put out of business when Wal-Mart comes to town. Kroger estimate that, on average, 50% of the business in their 48 major markets is held by operators who do not have Kroger’s advantages in economies of scale from areas such as purchasing, logistics and technology. Former Kroger Chairman Joseph Pichler’s was fond of saying, “If you’re being chased through the woods… Read more »
Daryle Hier
Guest
Daryle Hier
14 years 8 months ago

Kroger’s success is, just as was noted here, conservative and plain vanilla and that’s fine, but something is gnawing at me. Their sustainability obviously makes this a real and honest success … for the financial statement. I see some Kmart in this (with their early years of rebounding before the big fall). And yes, how DO they keep this pace up when they’ve already made significant cuts? What about certain stores not mentioned, like Ralph’s, which hasn’t shown much differentiation (except for a few Fresh Fare stores)? I have more questions about Kroger’s marketing department. There are more questions and I have more doubts.

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