Kroger Drives Growth by Uplifting Colorado Community
The word “resiliency” is something that The Kroger Co. CEO Rodney McMullen likes to mention frequently when he talks about his company, whether on earnings calls, at industry conferences or on cable news shows. More often than not, he talks about resiliency as it relates to the company’s business model.
“We are delivering a fresh, affordable and seamless shopping experience for our customers, with zero compromise on value, quality, selection or convenience,” McMullen said during the Cincinnati-based company’s fourth-quarter earnings call this past March. “We are advancing our purpose to feed the human spirit by significantly increasing associate wages and uplifting our communities. And we are delivering on our financial commitments through our strong, resilient value creation model.”
Recently, however, I had the opportunity to see another side to Kroger’s resilience — specifically, how the retailer put resiliency into action at one of its stores: Table Mesa King Soopers, in Boulder, Colo., where 10 people lost their lives in March 2021 in a mass shooting. After that horrible tragedy, which resulted in the death of an off-duty police officer, Kroger closed the store for 11 months; the location reopened in 2022 after a full remodel and celebrations honoring the victims.
On a sunny and warm spring day in April of this year, I entered the store, which had a “Boulder Strong” sign on the front door. Young families pushed shopping carts near the plentiful grab-and-go sections of the perimeter; at least two dads picked up containers of freshly pulled rotisserie chicken breast.
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In the floral department, high school students had stopped by on their way to the prom. They needed floral arrangements for their dates, and their community King Soopers had dozens and dozens of gorgeous bouquets on display.
In the international foods aisle, college students who likely attend the nearby University of Colorado searched for a specific kind of salsa. “It has to be hot,” one woman told her shopping companion. The woman grabbed a jar of Kroger’s Private Selection Restaurant Style salsa and headed over to the tortilla chip aisle.
Walking every aisle of that store gave me goosebumps, not because of the horrific events that had unfolded there two years ago, but because of how much pride, how much strength, how much empathy could be felt from every associate working in this store on the day I visited. Even in a store rocked to its core by an unimaginable tragedy, Kroger continues to deliver a superior customer experience. Never has the company’s purpose of feeding the human spirit and uplifting communities been more alive than at that King Soopers in Boulder.
This is the stuff that great companies are made of, and it’s one of four key reasons that Kroger is poised to sustain its momentum as America’s top grocer, driving profitable sales growth and providing a seamless shopping experience.
‘Food-First Business’ Evolution
Kroger’s current business model is founded on four pillars: fresh, private brands, personalization and seamless (omnichannel). By delivering on these four pillars, the company continues to churn out profitable sales growth at a time when the grocery market is oversaturated, hypercompetitive and an exceedingly expensive industry in which to operate.
In fiscal 2022, Kroger, which operates nearly 2,800 stores, built on record fiscal years in 2020 and 2021 with even more impressive earnings. Kroger saw a year-over-year total company sales increase of 5.2%, excluding fuel, to $148.3 billion, compared with $137.9 billion in 2021. Gross margin was 21.4% of sales for 2022, and the company’s net total debt to adjusted EBITDA ratio was down to 1.57, compared with 1.63 one year ago. The grocer expects to bring that momentum into 2023 and deliver revenue and EPS growth on top of these record results.
“Kroger’s 2022 results demonstrate the strength of our value creation model,” said CFO Gary Millerchip during the March earnings call. “In 2023, we expect to grow revenue by continuing to invest in our customers through competitive pricing and personalization, fresh products and a better shopping experience.”
Since introducing this value creation model in 2019, Kroger has achieved not just consistent sales growth, but also consistent returns for shareholders that have significantly exceeded the retailer’s total shareholder return commitment of 8%-11%. Specifically, over the past three years, Kroger has achieved more than 19% compounded annual growth rate in adjusted FIFO net operating profit and approximately 25% compounded annual growth rate in adjusted EPS. Over the same time period, Kroger generated adjusted free cash flow of approximately $9.7 billion and has returned a total of nearly $5.8 billion to investors via dividends and buybacks.
Fiscal 2023 at Kroger is expected to bring comps without fuel of 1%-2%, and adjusted net earnings per diluted share of $4.45-$4.60, including an estimated benefit from the 53rd week of approximately 15 cents. Anticipated adjusted FIFO operating profit is $5 billion-$5.2 billion, with capital expenditures totaling $3.4 billion-$3.6 billion.
Meanwhile, the Federal Trade Commission continues to review the proposed merger between Kroger and Boise, Idaho-based Albertsons Cos., and the companies are planning to sell hundreds of stores in a move to dispel antitrust concerns. The value of the stores could exceed $1 billion.
“We are evolving from a traditional food retailer into a more diverse food-first business that we believe can deliver sustainable future growth and succeed in a variety of operating environments,” Millerchip added. “Upon closing our merger with Albertsons, which is anticipated to be in early 2024, we believe the merger will significantly accelerate our go-to-market strategy and deliver total shareholder return well above our stand-alone model during the first four years post-close.”
Still Leading With Fresh
Kroger has built its reputation in grocery by aiming to provide customers a “full, fresh and friendly” experience. The retailer demonstrated operational excellence in all three metrics in 2022. Kroger is still in the throes of implementing its End-to-End fresh initiative, which is designed to deliver fresher food to shoppers and keep perishables on the shelf longer.
“As an important influence on where customers shop, we are constantly improving how we bring even fresher food to our stores and e-commerce experience,” McMullen said. “Our End-to-End fresh initiative is changing the way our teams deliver on our commitment to freshness, and we are incredibly pleased with the success. In 2022, more than 1,400 stores implemented the End-to-End produce solution, driving measurable increases in both fresh and total store sales.”
In 2023, Kroger plans to keep innovating the fresh experience to drive customer satisfaction and improve the product mix.
“We continue to improve inventory management tools, strengthen our supply chain to deliver additional days of freshness and enhance our offerings to meet customer demand,” McMullen said. “Our merger with Home Chef brought significant capabilities in in-store and restaurant-quality meal solutions. We will be expanding our Home Chef production facilities to meet this growing customer need.”
At the Boulder King Soopers, shoppers seemed to gravitate toward several refrigerated cases with Home Chef-branded products, including one showcasing value-added fresh meats.
As for the health of the Kroger consumer, McMullen said that the retailer’s value prop appeals to more higher-income shoppers.
“Inflation has started to stabilize,” he observed. “The higher-income customer is really resonating with our value proposition, and we’re having meaningful increases there in terms of that customer. And the profitability of that customer is higher as well because they shop the full mix of our stores and they would be buying more produce in fresh departments and deli/bakery, which is driving some of that profitability. So we feel really good on how we’re connecting with our customers during this time.”
But, he noted, the retailer is always on the lookout to do better.
“Customers that are most loyal to us will still spend 30% to 50% of their spending somewhere other than Kroger, and that’s an opportunity for us to improve our position,” McMullen said. “When you look at fresh, we start off with a higher share of fresh than we do in other parts, but it’s an area where we’re meaningfully better than our competitors. So our ability and focus on growing our business is to do ‘full, fresh and friendly’ in a way that it resonates with all customer types, and do it in a way where there’s zero compromise. Fresh is incredibly important, and friendly is incredibly important. That’s our sweet spot where we connect the best, and that is a growing area across the U.S. And we operate in many markets that are growing as well.”
Private-Brand Powerhouse
The second pillar of Kroger’s strategy, private brands, was a major reason that the retailer posted another strong quarter and fiscal 2022, with same-store sales up 10.1% in Our Brands, reflecting the growing importance to inflation-embattled customers of these exclusive-to-Kroger products.
“A customer on a budget can get great value with Our Brands,” McMullen affirmed. “They can save 7% to 10% by buying Our Brands versus national brand. If you look at our Home Chef and products related to that, a customer can get a meal for … one-third to one-fourth of what it costs to go out.”
Over the past 10 years, Kroger’s private-brand portfolio has picked up share during almost every year. The only exception to that was a little bit of time during the pandemic, when consumers had more money in their pockets, McMullen noted.
During its fourth quarter, Kroger celebrated the 10th anniversary of Simple Truth, a more than $3 billion brand providing customers with 1,500-plus unique natural and organic products. The milestone came after the retailer launched Smart Way, a new opening-price-point brand, as part of Kroger’s Our Brands portfolio. This line merges 16 legacy brands into a single, easy-to-find identity. Smart Way joins Kroger brand, Private Selection, Home Chef, Heritage Farm and Simple Truth in the grocer’s private-brand lineup.
“By consolidating and simplifying several brands into one, we are making it easier for customers while creating a point of differentiation across the full portfolio,” McMullen explained. “We will continue expanding Our Brands to more categories with innovative product offerings. Our goal is to help every customer find high-quality, affordable products they love, from pantry staples to fresh food to ready-to-eat restaurant-quality meals.”
During Q4, the company also opened its 1,000th Murray’s Cheese shop within Kroger stores, offering customers a highly curated cheese selection in more than 30 states across the country.
Personalization With Scale
Kroger’s third pillar, its personalization business, has also been on fire as of late.
Kroger Precision Marketing (KPM), the grocer’s retail media arm, is one of its fastest-growing alternative-profit businesses and well positioned to win within the U.S. retail media landscape, which is projected to be a $55 billion industry by 2024. Last year, Kroger’s alternative-profit businesses achieved $1.2 billion in operating profit in 2022.
In April, KPM revealed a partnership with Disney Advertising to share first-party shopper data for targeting streaming audiences — at first on Hulu, which streams shows such as “Great Expectations,” “The Bear” and “Fleishman Is in Trouble” — and measuring the results, including sales and conversions by household.
This solution is launching at a time when marketers are demanding more proof of performance through advanced targeting and measurement, and more accountability from their media investments. The connection of Disney’s premium inventory to KPM’s data science capabilities enables advertisers to reach audiences through the most impactful streaming content and ultimately measure the sales impact on the back end across Kroger stores. PepsiCo was the first advertiser to work with KPM and Disney during alpha testing.
“The collaboration with Kroger Precision Marketing and Disney provides an exciting opportunity for brands to meet consumers where they are by leveraging KPM’s first-party consumer data to reach the right shopper at the right time,” said Carol Simpson, senior director of shopper marketing at Purchase, N.Y.-based PepsiCo, when the partnership was made public. “As consumers spend more time with streaming TV, it is increasingly important for industry providers and advertisers to work together to bring innovative solutions like this to the marketplace.”
A select group of consumer packaged goods brands will participate in an exclusive beta program, and it’s slated to be available to the general market in the second half of 2023.
“Because we know our customers so well, we are able to provide recommendations to start their baskets and deliver personalized offers on the products most important to them, saving them time and money and making their lives easier,” McMullen said. “In return, our customers reward us with their trust and loyalty, consistently ranking us among the best at being able to offer personalized savings and solutions that meet their needs. In 2022, we grew loyalty as our customers more deeply engaged with personalized coupons and fuel rewards.”
As customers looked for more ways to save, digital coupon engagement at Kroger hit an all-time high during the past year. The retailer’s combined paper and digital coupons helped save customers more than $1.4 billion on products. Additionally, to provide even more value, the grocery chain launched its Boost membership program nationwide in July.
“Early results are exceeding our expectations with incremental engagement and overall household spend,” McMullen said. “We are evolving Boost with new benefits to further broaden its appeal and create additional customer value. In 2023, we will make significant investments to build out our personalization capabilities, including increasing the use of real-time data to predict customer needs, which will support sales growth during the next three years.”
Seamless Innovation
At a time when grocery e-commerce sales are decelerating somewhat, Kroger’s digital sales are accelerating — up 12% in the fourth quarter, led by 22% growth in delivery solutions. The company also saw an increase in digitally engaged households by approximately 900,000, compared with the same period last year. According to McMullen, seamless — meeting the shopper whenever, wherever and however they want to shop — will be a growth driver in the years ahead.
“Seamless is growing in importance among our customers, and we expect it will be a significant growth driver over the next several years,” McMullen asserted. “We have built a digital platform that offers a seamless shopping experience, allowing customers to shift effortlessly between store, pickup and delivery solutions. Our combination of stores and dedicated fulfillment centers positions Kroger to serve all customer trips, from in-stock shopping to rapid delivery on needed-now items to large stock-up orders. Despite the easing of pandemic-related shopping behaviors that led to a significant increase in online shopping, more and more customers are incorporating e-commerce into their daily permanent routines, recognizing the value and convenience online shopping offers.”
McMullen said that he expects digital sales to continue to grow at a faster pace than overall food-at-home sales and that he believes Kroger is well positioned to deliver double-digit growth over the next three years.
“As we work to become the most trusted online grocery destination, we are focused on four key areas that will position us to deliver that growth,” he noted. “We start by providing a compelling Kroger-owned digital destination, where we offer customers exceptional value, personalization and freshness in a single easy-to-use online experience. Second, we are focused on delivering best-in-class fulfillment, driving trust and loyalty by exceeding expectations for quality and freshness. Next, we are focused on reaching new customers and adding more shopping occasions. Finally, we are driving our profit flywheel and improving margins by reducing our digital cost to serve and growing our alternative-profit streams. To accomplish this goal, we are lowering fulfillment costs, building the density of demand and last-mile routing, engaging directly with our third-party vendors, and growing digital retail media.”
As for Kroger’s customer fulfillment centers (CFCs), the retailer opened a new one last quarter in the fast-growing Denver market but is still evaluating the model.
“We’re very much in the middle of that journey right now, sort of 18 months or so into those first two facilities, really kind of fully understanding the scale of demand and how the customers behave and how you optimize that model,” Millerchip admitted. “But from a customer demand, customer experience standpoint, we’re seeing all the sort of things we’d have hoped to have seen around customer engagement.”
McMullen added that the company is still actively looking for sites for some pre-announced CFC locations, but that “finding the sites ended up being a little bit more difficult than what we expected.”
Purpose and People
Back in Boulder, Kroger’s investments in the associate experience were on full display at King Soopers. An older woman who needed help taking her groceries out to her car had no trouble finding an associate to help her do that. Another customer, who needed to have someone at the guest services desk watch her bags of groceries while she fetched her car, had no trouble getting that kind of customer service, either. Another associate watched over the self-checkout area, cheerfully greeting each shopper who stepped up to start scanning their items.
In March, Kroger said that it will make a more than $770 million incremental investment in its associates during 2023. The investment will be used to raise average hourly rates, improve health care options, build new training and development opportunities, and more.
“Our average hourly rate is now more than $18, and more than $23 when you include comprehensive benefits,” McMullen said. “We value and respect our associates, and investing in their success is just one way we demonstrate that. We take seriously our role in helping to create healthier and thriving neighborhoods across the country.”
This latest investment builds on the $1.9 billion incremental investments in wages and comprehensive benefits that Kroger has made since 2018.
“Investing in our associates’ holistic well-being is an essential part of what makes Kroger an employer of choice, and ultimately becomes an investment in our customers and communities,” said Tim Massa, Kroger’s SVP and chief people officer. “When we think about how we build our benefits, we want to enable every associate to thrive financially and emotionally, both in their careers and at home. We look forward to continuing to celebrate our associates and the many ways they show up for our customers and each other every day.”
