In It to Win It

Amid an increasingly fragmented and competitive environment, Kroger continues to grow and thrive, led by great people focused on a superior customer experience, both inside and outside its stores.

2013 is a year of milestones for The Kroger Co.

• One hundred thirty years ago, Barney Kroger opened his first grocery store in Cincinnati, still the headquarters city of what has since grown to be the nation’s largest traditional grocer, with more than 2,400 stores under multiple banners across the country.
• The company is closing in on 10 years of consecutive quarterly same-store sales growth (the 39th quarter of growth was announced shortly before press time) — an unprecedented achievement in the cutthroat retail food business. The widely admired national retailer also polished off a stellar 2012 fiscal year with $80.8 billion in sales, putting it in second place behind Bentonville, Ark.-based Wal-Mart Stores Inc. among the top U.S. grocery retailers. Kroger also continues to boost its market share amid an increasingly competitive and fragmented retail environment.
• This past summer, Kroger announced plans to merge with Matthews, N.C.-based Harris Teeter, the well-respected 212-store southeastern regional chain, in a $2.5 billion deal that will extend Kroger’s reach even further and leverage the best qualities of both top-notch operations.

As part of its sweeping policy of “community engagement,” Kroger this year is celebrating the fifth anniversary of its Perishable Donations Partnership, having donated the equivalent of 175 million meals to needy families through the program it launched as a component of its long alliance with Chicago-based Feeding America.

Yet for all of the positive press the company has rightly received for its spate of accomplishments in recent years, the praise showered on David B. Dillon in response to the news of his pending departure as CEO is both bittersweet and clearly well deserved.

Indeed, after helming the company for a decade as chairman and chief executive, Dillon, 62, will relinquish the reins at the end of the year but will stay on as chairman through the end of 2014.

Kroger’s leadership torch will be passed to Dillon’s loyal lieutenant and fellow company veteran W. Rodney McMullen, 53, current president and COO, who will assume the top spot in January.

Perhaps it’s Dillon’s confidence in the crack team that he and McMullen have assembled to make Kroger a grocery-selling dynamo. Or maybe it’s a desire, despite that confidence, to go out while at the top of his game.

In any case, it became even more fitting that Progressive Grocer, for the second time in five years, has chosen to honor Kroger as its 2013 Retailer of the Year — an honor rightly deserved for the aforementioned achievements, as well as for the company’s continued strides in shopper experience, sustainability and talent development.

What sets Kroger apart from its competitors in its ability to successfully serve a vast and diverse shopper base? According to Jim Hertel, managing partner of Barrington, I11.-based Willard Bishop, “Value for customers, operational discipline, and a clear perspective on their chief competitor — Walmart — and what they need to do to win.”

A ‘Virtuous Circle’

“As we have shown quarter after quarter, our consistent execution of the ‘Customer 1^st’ strategy deepens customer loyalty, increases sales and creates sustainable shareholder value,” Dillon said during the company’s second-quarter investor conference call last month. “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.”

McMullen says growing Kroger’s business and profitability “will help us create more jobs and career opportunities, and enhance job security, for our associates.” As he noted at the company’s first-quarter conference call in June, “over the last five years, we’ve added 33,000 jobs.”

Kroger continues to pursue an aggressive, targeted expansion strategy to increase square footage and store penetration in existing and new markets to drive sales and further refine its market-specific store formats.

“The industry has certainly become even more competitive in the past decade,” notes Neil Stern, senior partner with Chicago-based retail strategy firm McMillanDoolittle. “In order to gain share, as Kroger has done, you need to take share from someone else. Some of that is coming from traditional conventional grocers, but some also is coming from the alternative channels, such as Walmart Supercenters, that comprise the outside threat.”

Kroger is engaged in what Stern calls a “virtuous circle” that has lasted for a decade. “They have lowered prices and gained more sales, and have continued to make these investments to continue to drive ongoing same-store sales increases,” he says. “This leads to more productivity and the ability to then offer lower prices. Additionally, they have made significant investments in a best-in-class loyalty program, strong private label, and reinvested in their stores and technology. In other words, they are leveraging their size and capabilities in multiple areas.”

Kroger cites Nielsen Homescan Data showing that its overall market share rose some 20 basis points during fiscal 2012. This data also indicates that its share increased in 10 of the 19 marketing areas outlined by the Nielsen report, while declining slightly in nine (Walmart is a primary competitor in 17 of the 19 marketing areas). According to Kroger’s own internal tracking of competitive store openings, its divisions compete with more than 1,200 Walmart Supercenters.

“The progress we have achieved these past 10 years sets a wonderful foundation on which to build for an even brighter future,” Dillon said during the second-quarter investor conference call. “And the most important part of all is that the team at Kroger is large, broad-based, with dedicated associates — Team Kroger — who have collectively come together to achieve these results, and it is that combination that I think is unmatched in the industry today. The results achieved by our team make me most proud.”

‘The Ultimate Winning Team’

Dillon is quick to shower praise on the collective team that has built Kroger into a nationwide grocery retailing powerhouse able to increase sales and market share amid incursions by Walmart, supercenters, club stores and other formats that have further fragmented the consumer’s grocery-buying dollar. In all, it takes some 343,000 associates across the breadth of the company to achieve such consistently stellar results.

Together, Dillon and McMullen have not only assembled a stellar management team, they have also invested significant resources in developing and nurturing talent throughout the company to ensure that Kroger will continue to prosper in more than capable hands for many years to come.

The fact that so many top managers have remained loyal to Kroger is further testament to the company’s senior leadership, according to Burt Flickinger, managing partner of New York-based Strategic Resource Group, who says that Dillon’s team members “would be prime targets for anyone looking to upgrade their leadership.” Flickinger adds that Kroger is “a winning team, and everyone wants to work with a winner. Kroger is the ultimate winning team.”

Noting the company’s ability “to recruit and retain the best and brightest in the industry,” Flickinger says, “Everyone, from finance to all key corporate staff posts, has a broader depth of knowledge than any other retailer.”

But what makes a potential associate Kroger material?

“We look for associates who embody a passion for people and great business results,” says Tim Massa, Kroger’s VP of talent management, explaining Kroger’s leadership model. “Within the model, there’s a set of behaviors we look for, regardless of what role you’re in,” attributes that management believes will best support Customer 1^st, inspire innovation, encourage coaching and developing others, promote teamwork, and effectively communicate — “behaviors that bring the best out of people.”

Every Kroger associate maintains a profile on the company’s KnowMe talent management system, which Massa describes as “a Facebook page for associates,” including such details as their skills, interests and work histories. Massa calls the system “a two-way street” in that associates and their managers are each able to learn more about one other.

“As you have career discussions with your manager, that profile is an entry point into what you want to do,” Massa explains. “It lets us know our people better and lets our people know what it takes to get to the next level… to stretch, grow and seek out new opportunities.”

There’s a common framework across all divisions for recruiting new associates, which Massa says allows each regional banner to develop teams with “local flavor on a foundation of consistency.”

Talent development at Kroger encompasses four pillars, Massa notes: supply (of people) and demand (of business), assessing and selecting the right people, onboarding and developing recruits, and connecting with and engaging talented associates.

“Integrating talent development into the overall business plan is key,” says Massa, adding that Kroger’s talent development “starts with recruiting… as an intern, ideally,” after which managers set about “developing a program that best meets [associates’] needs in role-based curriculum development.”

Kroger routinely teams up associates in varied functions to work on strategic projects within divisions “to get the best thinking,” Massa says. “That cross-functional thinking helps our associates grow their depth of knowledge and experience.… We do that with folks we think have high potential, to give us a broad view of our company and our people.”

Further, Kroger relies on its senior leaders “to share their stories of how they developed, to help pull our talent forward.”

As a point of pride, Dillon points to the longevity of so many of Kroger’s associates. “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,” he notes. Perhaps even more impressive, there are some families with five generations at work across the company.

In particular, the past decade under Dillon’s reign has instilled a deep sense of loyalty, asserts Flickinger. “They don’t have deflections of key people like they had in the ’80s and ’90s,” he says. “It’s one terriffic team that stays together.”

Still, adds Massa, “47 percent is generation Y or younger — we have an influx of new faces, but we value the tenure and experience that allows for mentoring and coaching.… You really do get a thinking approach to solving needs for our customers.”

Flickinger further applauds Kroger’s ability to negotiate amicably with trade unions. “With the cooperation of the UFCW (United Food and Commercial Workers), Kroger has been able to reach agreements with organized labor very cooperatively and constructively,” he says, “and in return, Kroger continues to invest in those regions to create more jobs — wins for Kroger as an employer and unions in worker membership.”

So what makes Kroger a great place to work?

“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,” says Massa, who came to Kroger three years ago after 22 years with the grocer’s crosstown neighbor, Procter & Gamble. “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.”

For Massa, the best part of his job at Kroger is “the ability to be able to impact the entire company, to work with counterparts across the company, to build upon the contributions of all the talented men and women across the company, and to help enable and make connections with great leaders. We have so many who want to give back, and that’s something I get great joy out of.”

Kroger has been reaching out to women, people of various ethnicities, veterans and other minorities within the company, explains Massa. “We’re trying to connect with various groups across our company, to offer support and collaborate on how to drive our business.”

Massa describes an “inspiring” company event last April, when Kroger brought together 5,000 store leaders from across the country for a leadership summit in Louisville, Ky. Gathered together under one roof, everyone on the first day of the summit each shouted out their individual banner names, Massa recalls, but “by day three, they were all yelling, ‘We are Kroger!’

“The momentum coming out of that has really been a catalyst,” he says. “It was quite an event for our leadership to see how we do operate as one.”

‘Relentless at Executing with Excellence’ Kroger continues to prove itself a master of the customer experience, powered largely by its leveraged alliance with Cincinnati-based DunnhumbyUSA in gathering data to fuel its mighty Customer 1^st service engine, built around the four key areas of people, products, customer experience and pricing.

The strategy is a proven winner — Kroger is the No. 1 or No. 2 player in 38 of its 41 major markets (where it operates nine or more stores); it faces Walmart in all but seven of those markets.

“It all starts with caring about the customer and about what they want from a food retailer,” Willard Bishop’s Hertel says. “Then you have to do the hard work of creating the ability to deliver what shoppers want. Finally, you have to be able to deliver it at scale.”

In Kroger’s case, according to Hertel, shoppers want value: good merchandise at a good price. “Kroger took a hard look at their cost of doing business, took a significant chunk out and passed savings on to their customers,” he says. “They’ve always had a strong and sophisticated own-brand program, but they’ve raised their game on both the value and premium ends in the last few years. They are operationally extremely disciplined, so once they identify successful directions, they are relentless at executing with excellence.”

Kroger regularly seeks customer feedback on how well it’s executing each of the four key areas of its Customer 1^st strategy.

“We continue to improve our performance in each area, and our efforts are being noticed,” McMullen said during the September earnings call. “Customers are telling us that our associates continue to connect with them by showing that our people are great, our product selection and quality is improving, we are making the shopping experience faster and easier, and we continue to give our customers better value for their money. Doing the Four Keys together is what separates us from our competitors — competitors of both the past and the future — because the hard part is doing all four, and doing them reliably.”

Mike Donnelly, SVP of merchandising, credits DunnhumbyUSA as “one of the bigger factors that has contributed to the success of Kroger.” When the alliance began a decade ago, Donnelly says, “we made a commitment back then to actually put the customer first. It’s been beneficial for the CPG companies to help them drive their business, to use the information right, on how they can build their brands.”

DunnhumbyUSA presents Kroger with a unique competitive advantage by allowing it to segment its customer base and design customized offerings for the individual needs of each. It also gives the grocer the tools to target promotional dollars and pricing investments toward its most profitable customers.

“They saw the opportunity to leverage customer data well before other national/multiregion operators here did, so part of it is the head start they provided themselves,” Hertel says. “But they had to invest in the data, systems and people to make it work before they or their trading partners knew how big it would become. Their partnership with Dunnhumby allowed them to get some quick wins; their work with vendor partners helped them gain scale across the whole store.”

Proprietary customer insights have allowed Kroger to personalize its digital offers to consumers, which to date have amounted to about 2.5 million downloads of some 700 million coupons, notes Donnelly, a 34-year Kroger veteran. “Personalization will separate us, whether through the mail or digital,” he says. “The whole multicultural merchandising we see over the next 15 to 20 years will change how we go to market.”

‘Superior Shopper Experience’

Referencing the Dunnhumby alliance, Flickinger says one of Kroger’s unique areas of vision “is seeing where the shopper’s going,” noting that the grocer “is continually increasing in staffing, knowledge and building the team for superior shopper experience.”

Flickinger describes visiting a superstore retailer in various markets around the country and finding significant out-of-stocks, long checkout lines and skeleton crews. Meanwhile, at nearby Kroger-owned stores in those same markets, shelves were fully stocked and multiple checklanes were open, with no more than two shoppers waiting in each line.

“We see the same thing in every western state, the south, the Rocky Mountain region,” Flickinger says. “Shopper satisfaction is unparalleled.”

This, in turn, makes Kroger attractive to CPG companies, Flickinger believes: “We’re seeing suppliers investing more merchandising money and research. Everyone wants to be on the Kroger team because they’re learning so much from Kroger, not only for one’s company, but one’s career.”

Taking a broader view, McMullen says one of the most important measures of Kroger’s business is loyal household growth. “It lets us know how well we are connecting with our best customers. And our loyal customers on average spend about half of every dollar with Kroger, which means we have a tremendous opportunity to increase their spending across our family of stores,” he says.

In its most recent quarterly report, Kroger grew its number of loyal households. “Our loyal-household count grew at a much faster rate than total household growth, which was also up for the quarter,” McMullen notes. “Overall, customers continue to visit our stores more frequently, purchase fewer items per trip and buy more on a monthly basis.”

Flickinger calls Kroger “the best in the business in multiformat operations” — food-and-drug combo stores, general merchandise, convenience and fuel stores, and jewelry stores. “Kroger is consistently more successful in the toughest markets in America.”

‘Stability and Reliability’

Kroger continues to use technology to its strategic advantage. “The strong infrastructure investments made in recent years have provided excellent stability and reliability This foundation has allowed Kroger to centralize processing and reduce costs,” the company reports.

Kroger has also been able to use technology to improve the customer experience by reducing wait times at the checkout and improving coupon processing. The grocer expects to continue to use technology to promote the Customer 1^st strategy in the coming years.

For example, Kroger’s R&D team has implemented such innovative business solutions as Advantage Checkout, a system that fully automates item scanning at checkout; Scan, Bag, Go, for which shoppers carry a hand-held scanner and scan their items while they shop; and QueVision, which enables customer service associates to move shoppers through the checkout process with minimal wait times.

Meanwhile, Kroger has invested in digital media to better engage directly with customers as they plan and shop. Recently updated websites for each banner allow shoppers to view weekly ads and online promotions, load and manage digital ads, create shopping lists, refill prescriptions, and set up online accounts to view points and rewards balances. Smartphone applications that Kroger has created for each of its banners have been downloaded more than 2 million times, providing instant access to many of the features available on the banner sites.

Facebook and Twitter accounts for each banner offer more ways for shoppers to stay in touch with their local stores regarding news, events and promotions. Kroger uses digital media channels to deliver ads and messages in support of weekly promotions, and to increase consumer awareness and engagement with the grocer, in addition to e-mail subscriptions for weekly specials, coupons and other promotions.

Further, Kroger invests significant resources to ensure that its information systems and logistics network are operating as efficiently and cost-effectively as possible. Investments during the past few years have included the following:

• Hydrogen fuel cell-powered material-handling equipment
• Photovoltaic solar panels on stores and a distribution center
• Backup and peak-power need electrical generators
• Enterprise Pharmacy Retail Network programs
• Collaborative category optimization
• Expanded onboard computers in the transportation feet
• Fuel-efficient tractor trailer designs
• Green technology initiatives focused on equipment reductions and data center improvements to reduce power consumption and environmental impacts
• Electronic shelf labels
• Operational improvements to boost store efficiencies
• Improvements to the store front end customer experience

Making ‘A Huge Difference’

Some of Kroger’s technology advancements dovetail with its herculean sustainability initiatives.

“As an industry, we’re doing a great job focusing on high-value sustainability,” says Lynn Marmer, Kroger’s group VP of corporate affairs. “We’re working on a goal of zero waste.”

That means sending no waste to landfills, an achievement realized by 21 of Kroger’s 37 manufacturing plants, Marmer adds, noting that Kroger stores are near 60 percent zero waste and rising. Kroger is a member, along with the National Restaurant Association, of the Washington, D.C.-based Food Waste Reduction Alliance.

“We have reduced total store energy usage by 32.7 percent since the year 2000 and reduced our carbon footprint,” McMullen said during the June earnings call — well on the way to meeting Kroger’s goal of 35 percent by 2015.

Kroger has recycled 32 million pounds of plastic through its national in-store “Bag2Bag” recycling program. It’s progressing toward sustainable seafood goals in partnership with the Washington-based World Wildlife Fund.

And, in another marriage of technology and sustainability, Kroger’s Ralphs/Food 4 Less division operates a one-of-a-kind anaerobic digester, which converts unsold organics into renewable energy — basically creating energy from food. This system is expected to offset some 91 million pounds of food waste a year and generate enough renewable energy for about 20 percent of the division’s Compton, Calif., distribution center’s electricity needs.

In turn, Kroger’s sustainability efforts have quite literally helped feed its community involvement activities through its groundbreaking Perishable Donations Partnership with Feeding America, which since 2008 has allowed the grocer to donate 175 million meals of fresh meat, produce, dairy and bakery items to hungry families.

The program has also enabled Kroger to divert more than 100,000 tons of food waste away from landfills and incinerators. A founding partner of Feeding America, the nation’s largest domestic hunger agency, Kroger has been engaged in the hunger relief effort for more than 30 years and has longstanding relationships with more than 80 local food banks.

“This has made a huge difference,” Marmer says of the perishables program, which allows the needy to benefit from otherwise edible food that’s cosmetically unsellable. She says pickups of donated perishables “have even surpassed dry grocery donations” historically made by grocers throughout the food retailing industry “That’s exciting from a sustainability aspect.”

‘More Than Selling Groceries’

Kroger has a long history of being engaged in the communities where its people live and work, Marmer notes. “We’re doing more than selling groceries. We’re selling groceries that make people’s lives better. What we’re doing in the communities is part of that overall theme.”

Among Kroger’s other key outreach efforts:

• Bringing Hope to the Table: This cause marketing campaign has generated $3 million in cash this year to combat hunger. “Our business is feeding people,” Marmer declares. The relationship we have with Feeding America and local food banks is phenomenal. As an industry, we collaborate on how to get more food to food banks.”
• Honoring our Heroes: Since 2010, Kroger has raised more than $7 million to help fund USO programs that serve members of the military, wounded warriors and their loved ones. Its Honoring Our Heroes website allows customers and associates to share personal stories, words of encouragement, and support for those who serve. The site recognizes some of the more than 350 Kroger associates currently serving in the U.S. military on active duty and as reservists.
• Sharing Courage: To date, Kroger has contributed more than $21 million to support local breast cancer treatment, research and education. Another $3 million is expected this year, with the help of key vendor partners. Kroger associates have shared their own stories of survival on specially marked packages of Kroger-exclusive products and online at www.sharingcourage.com.
• Kroger Foundation: This entity awards millions of dollars in grants annually to local organizations that have been recommended by the company’s retail operating divisions, including scholarships, domestic violence relief, meals for the homebound, and coastal cleanup efforts.

Further, Kroger associates donate thousands of hours of volunteer service; managers serve on the boards of local food banks, providing guidance on food safety, logistics, facility operations and fundraising.

“Great companies are companies that people are inspired and proud to work for,” Marmer says. “We try very conscientiously to do things that inspire that pride, whether that’s a cancer walk or supporting the military. Those things that are really most important to our associates and customers help to make Kroger a place that people are proud to shop and work at.”

In addition, Marmer is “really proud of what our company does in purchasing from women-and minority-owned businesses,” noting that Kroger has steered in excess of $1 billion in business toward such vendors.

For her part at Kroger, Marmer — who was honored last year as the first-ever recipient of the distinguished Trailblazer Award from Progressive Grocer and the Network of Executive Women (NEW) at the gala for PG’s Top Women in Grocery awards — relishes “the variety of what I do,” which encompasses community engagement, sustainability, media relations and external communication. “I get to touch in a positive way millions of people’s everyday lives. It’s very humbling,” she says. “I’m honored to be part of an industry that does that.”

Combining Strengths

As Kroger looks back on considerably more than a century of progress, the culmination of its latest venture — the merger with Harris Teeter — looms large.

McMillanDoolittle’s Stern calls the deal “a terrific acquisition for Kroger on a number of fronts. Geographically, it fills in coverage to the north from their [divisional] base in Atlanta. Qualitywise, Harris Teeter runs excellent stores, and Kroger can probably learn from Harris Teeter on upscale offers. Conversely, Kroger’s strengths in private brand, loyalty marketing and pricing leverage should be a benefit to HT.”

The union of the 212-store Harris Teeter chain with Kroger’s 2,400-plus family of stores will further allow HT — which will keep its name and its Mathews, N.C., headquarters as a subsidiary operation — to benefit from its new parent’s superior purchasing power, information systems and world-class customer insights. Meanwhile, Kroger will gain access to HT’s expertise in operating urban stores and gain insights behind its strong customer ratings on people, products and shopping experience.

The merger is consistent with the Kroger growth strategy, Mike Schlotman, Kroger’s SVP and CFO, said at the July merger announcement. “We expect the addition of Harris Teeter will accelerate our growth into attractive new markets and enhance both our top and bottom lines.

“Learning from each other and combining each company’s strengths has been the cornerstone of success in the mergers we have done over the years,” he said, citing mergers with Dillons in 1983 and Fred Meyer in 1999.

‘I, You, We Make a Difference’

The folks at Kroger resist attempts to praise any one executive for the company’s success, consistently sharing accolades with its nationwide team of talented leaders in a conscious decision to live by the theme of the company’s leadership summit earlier this year: “I, You, We Make a Difference.”

Still, this hasn’t kept industry observers from heaping kudos upon Dillon for his exceptional skill at steering the ship.

“He’s humble, he’s unassuming, he’ll deflect the credit,” Flickinger says of Kroger’s chief executive. “He’s a great leader, a great teacher, a great innovator, a great student of the industry, of the consumer, the competition, the economy.”

Flickinger concludes, “Kroger — by doing everything right in every key area — will continue to win for the foreseeable future.”

“Our consistent execution of the ‘Customer 1^st’ strategy deepens customer loyalty, increases sales and creates sustainable shareholder value.”
—David Dillon, Kroger chairman and CEO

The ability to be able to impact the entire company, to work with counterparts across the company, to build upon the contributions of all the talented men and women across the company… We have so many who want to give back and that’s something I get great joy out of.”
—Tim Massa, Kroger VP of talent management

“Kroger is a winning team, and everyone wants to work with a winner. Kroger is the ultimate winning team.”
-Burt Flickinger, Strategic Resource Group

“We made a commitment back then to actually put the customer first…. It’s been beneficial for the CPG companies to help them drive their business, to use the information right, on how they can build their brands.”
—Mike Donnelly, Kroger SVP of merchandising, on DunnhumbyUSA’s shopper data research

“They’ve always had a strong and sophisticated own-brand program, but they’ve raised their game on both the value and premium ends in the last few years. They are operationally extremely disciplined, so once they identify successful directions, they are relentless at executing with excellence.”
-Jim Hertel, Willard Bishop

“They have made significant investments in a best-in-class loyalty program, strong private label, and reinvested in their stores and technology. In other words, they are leveraging their size and capabilities in multiple areas.”
—Neil Stern, McMillanDoolittle

“We’re doing more than selling groceries. We’re selling groceries that make people’s lives better. What we’re doing in the communities is part of that overall theme.”
—Lynn Marmer, Kroger group VP of corporate affairs