How Kroger Beat the Supply Chain Crisis

The Kroger Co. translated labor challenges and supply chain disruptions into impressive sales growth in the third quarter, prompting the company to raise its guidance for fiscal 2021.

In an earnings call with analysts, CEO Rodney McMullen said the grocery chain hired 64,000 new associates during the third quarter ended Nov. 6. He also said that despite the current supply chain crisis, the company's in-stocks are better today than during the same period last year due to the fact that senior leadership started planning for the crisis in early 2021.

"Because of our team's agility, we are better in stock today than we were a year ago and we were able to serve customer through the Thanksgiving holiday with items they needed for their celebrations. In fact, we increased our year-over-year pickup fill rate by over 130 basis points during the week of Thanksgiving," McMullen said.

McMullen said the grocer feels "great" about its ability to serve customer needs through the holidays and beyond.

"A great example of leveraging learnings from operating during the pandemic: We kept the additional warehouses originally brought on to support business through COVID to ensure we were able to provide for customers throughout the holiday season as well," he said.

On Nov. 29, McMullen participated in a supply chain roundtable with President Biden. After the meeting, McMullen issued a statement: "We thank the Biden administration for their efforts to alleviate current supply chain concerns."

The following day, the federal government launched an unprecedented investigation into the operations of food retailers and suppliers amid the supply chain crisis. The Federal Trade Commission ordered nine large retailers, wholesalers and consumer good suppliers, including Kroger, to provide "detailed information to help the FTC shed light on the causes behind ongoing supply chain disruptions and how these disruptions are causing serious and ongoing hardships for consumers and harming competition in the U.S. economy." 

But supply chain disruptions have not been a big barrier for Kroger when it comes to sales growth. For fiscal 2021, Kroger raised its adjusted earnings for the year to around $3.40 to $3.50 a share from $3.25 to $3.35 a share as it earlier projected.

Kroger's omnichannel offering resonated with shoppers during the third quarter as consumers continued to eat at home, a trend that McMullen said is "structural."

"We believe the food at home change is structural and not temporary," he said. "With most people consuming meals at home and grocery stores continuing to capture the majority share of stomach, it is more important than ever that we provide customers with flexibility on how they choose to shop with us. Leading into Thanksgiving, 70% of consumers said that they would be doing more of their holiday shopping in the store this year. At the same time, 84% of consumers said that they will continue to shop online the same amount or more in the future. These seemingly contradictory behaviors are exactly what Kroger's seamless ecosystem was designed to accommodate."

McMullen said inflation is having an impact on Kroger customers, with 82% of consumers saying they are feeling the impact of inflation and one in four consumers saying they are not confident in their finances right now.

"We are leveraging our data and personalization to enable our customers to stretch their food dollars," he said. "We are delivering value with personalized promotions, big packs and dynamic holiday offerings. Our brands also offer our customers flexibility within their spending without compromising thanks to the wide variety of incredibly high quality and innovative products at various price points."

McMullen said national brand SKUs at Kroger have continued to decrease as the pandemic and supply chain disruptions have dragged on. Meanwhile, the company's own brands have continued to grow SKUs and sales. Home Chef is now a $1 billion brand; McMullen said cost savings and premiumization are driving consumers to buy private brands at Kroger.

"Some of the national players have not reintroduced as much variety as they offered before COVID, so we have introduced some of that variety in our owned brands," McMullen said.

He said the company has specifically grown its private brand SKUs in plant-based, natural and organic as the post-pandemic consumer prioritizes health and wellness.

"While price continues to be top of mind, customers continue to desire the freshest food options. We grew sales in natural and organics as customers continued to gravitate toward better for you options. Our fresh departments outpaced total company identical sales without fuel during the quarter as well."

Kroger's Our Brands launched 216 new items during the quarter with plans to launch several innovative and unique products focused on helping customers enjoy the holiday season. This week the company announced plans with Dutch company Kipster Farms to bring the world's first carbon-neutral, cage-free eggs to retail shelves under Kroger's Simple Truth brand.

Net sales at Kroger were $31.86 billion for the third quarter, a 7.2% increase from the year-earlier period. Earnings were 64 cents on a per-share basis, compared with 80 cents in the prior year. Net profit at Kroger was $483 million, however — down 23% from $631 million in the comparable period a year earlier as the company passed on some inflationary costs to shoppers. This decrease primarily related to higher supply chain costs and continued price investments partially offset by sourcing benefits, the company said.  

However, CFO Gary Millerchip said the company's cost savings initiatives remain on track to record $1 billion in cost savings in fiscal 2021, Kroger's 4th consecutive year of such savings. 

The company said it incurred a charge of $93 million during the quarter, an increase of more than 300% over last year due to "higher inflation across several categories, including grocery and meat."

In the third quarter, Kroger launched Kroger Delivery Now nationwide with Instacart to provide 30-minute delivery, enabled by a first-of-its-kind virtual convenience store shopping experience. It also introduced Boost by Kroger Plus, an annual membership program that provides customers free delivery and additional fuel points on purchases in four divisions. 

The company plans to open five new customer fulfillment centers powered by the Ocado Group including expansions in California and Florida and entrance for the first time into the Northeast region. As for Florida, McMullen characterized the growth opportunity for grocery retailers in Florida as "mind-boggling."

"We continue to be pleased with the rollout of our customer fulfillment centers in Groveland, Florida, and Monroe, Ohio, which are exceeding internal expectations. And we are especially proud of our net promoter scores driven by our teams, delivering a world-class experience for our customers," he said.

Last month, Kroger announced a collaboration with Bed Bath & Beyond and buybuy Baby on a national e-commerce experience via Kroger.com and a small-scale physical store pilot to expand home and baby product offerings. 

The retailer said the average hourly wage of its employees will be greater than $16 by the end of 2021. McMullen said 405,000 associates have completed diversity and inclusion training and the company achieved $4.1 billion in diverse supplier spend in 2020, a 21% increase versus prior year.

Serving 60 million households annually nationwide through a digital shopping experience, and almost 2,800 retail food stores under a variety of banner names, Cincinnati-based Kroger is No. 3 on The PG 100, Progressive Grocer’s 2021 list of the top food and consumables retailers in North America.