Kroger: The king of

G
ood prices on superior products and
services. That’s Kroger’s concise
summation of a strategy that last year
enabled the company to gain share in 13 of
its 19 marketing areas and more recently
extend to 34 the number of quarters in
which it achieved identical stores sales
growth.
It is a remarkable streak of consistency
given the turmoil the U.S. economy experienced during the past eight years, and the
run isn’t over. The company has forecast a
full-year identical-store sales increase
of 3% to 3.5% at locations in operation for five full quarters without
expansion or relocation.
The year is off to a good start.
First-quarter identical-store sales
increased 4.2%, and the top-line
strength translated to profits as earnings
per share grew 11.4% to 78 cents, six cents
better than analysts expected. The solid
performance gave the company conviction it
has the right strategies in place to deliver an
even strong financial performance this year
than originally thought, and the full-year
profit forecast was increased to a range of
$2.33 to $2.40 per diluted share compared
with earlier guidance of $2.28 to $2.38 per
diluted share.
1
As Kroger chairman and CEO Dave Dillon
noted earlier this year, the company’s focus on
people, prices, products and shopping experience is why Kroger is winning.
“Our associates’ work to please and delight
our shoppers inspires customer loyalty, which
grows our business and generates shareholder
returns. Simply put, when we put our customers first, shareholders win,” Dillon said.
Dillon is a veteran of the grocery industry
and a longtime leader at Kroger who literally grew up in the food business working
at the Kansas-based retailer founded by his
great-grandfather. Following an acquisition
of Dillons Stores by Kroger in 1983, Dave Dillon became president of Dillons in 1986, and
by 1990 he was named an executive VP of
Kroger. In 1995, he was named president and
by
consistency
d
re
Kroger: The king of
so
on
Sp
Insights
COO of Kroger and became CEO in 2003.
Coincidentally, that’s roughly when Kroger
began its string of quarterly identical-store
sales increases. Dillon set the company on
a growth strategy focused on improving the
productivity of existing selling space and
leveraging shopper insights stemming from
a relationship with dunnhumby, a global
leader in data management, analytics and
insights-led planning. The unique partnership
with dunnhumby is regarded as a key competitive advantage for Kroger because it enables
the company to segment its shopper base and
design customized offerings that engender
loyalty because promotional funds can be
targeted toward the most profitable customers.
According to Kroger CFO Mike Schlotman, the company has built and operates the
industry’s leading loyalty program as a result
of the insights provided by the partnership with
dunnhumby.
“Close to 90% of the transactions in our
stores involve one of our loyalty cards,”
Schlotman told attendees at the BMO
Capital Markets Farm to Market investor
conference in New York earlier this year.
“Almost half of the households in the United
States carry one of our shopper cards. And in
the markets where we operate, our penetration is even higher — approximately 85% of
the households in those markets carry one of
our loyalty cards.”
The result is one of the largest retail customer databases in the nation and a treasure
trove of data, which Schlotman said, “provides
us with valuable insight into our customers’
shopping behaviors that no other U.S. grocery
retailer possesses.”
Those insights and targeted marketing efforts
that results from them have allowed Kroger to achieve
a No. 1 or 2 markets share in 38 of its 42 major
markets, including those markets in which it faces
Walmart’s supercenters as its largest competitor.
Kroger said its share of market grew to 21.1% in
2011 from 19.1% in 2007, based on Nielsen Homescan data.
The company has managed to achieve sales
growth and share gains despite a lack of square footage expansion as it ended 2011 with 2,435 stores, 25
fewer units than 2010. In addition to the company’s
base of 2,435 supermarkets and multi-department
stores, 1,090 of which contained a gas station, there
were an additional 791 convenience stores and 348
jewelry stores.
Rapid store expansion is not in the cards at Kroger,
where the strategy is all about share gains, expense
leveraging, and selling more stuff to loyal customers
in a modestly inflationary environment and improving
economy.
“As we look toward 2012, we expect the external
environment to be a little better than 2011,” CEO
Dillon said recently. “All of the data we are seeing
suggest the overall economy and customer sentiment
are improving. Both give us reason to be optimistic
about the year ahead.” n
Kroger employs a network of 2,435 supermarkets and multi-department stores
operating under numerous banners on its nationwide market-share quest.
Kroger at a glance
Headquarters: Cincinnati
Chairman and CEO:
Dave Dillon
Annual sales:
$90.4 billion
Net income:
$1.1 billion
Operating margin 1.4%
Number of stores: 2,435*
Average store size:
61,000 sq. ft.
* Supermarkets only
Source: Company Reports
2
Ralphs
gets real
with SoCal
prices
K
roger’s Ralphs division launched a major pricing
offensive earlier this year in Southern California,
where it introduced a new campaign that encouraged
shoppers to “get real”low prices.
The campaign was a major undertaking that
had residents of Ralphs’ Southern California trading area wondering what was going on with the
company, thanks to teaser spots on the radio and
strategically located billboards that indicated March
28 was launch date for the “get real” campaign.
When the date arrived, shoppers at Ralphs’ 257
stores were met with a barrage of signing and promotional materials reminding them that Ralphs is the
destination to “get real” low prices.
Shoppers arriving at stores were met with signs
outside store entrances and inside the entry vestibule,
signs prominently located on large endcap displays
in multiple locations, signs attached to the shelf edge
and signs on freezer doors.
Everywhere shoppers turned their gaze fell upon a
red and yellow “get real” sign.
It may not have been the cleverest campaign ever —
efforts touting low prices seldom are — but Ralphs
deserves credit for a campaign that was innovative in
its buzz-building approach, as well as bold with regard
to the claim made and then supported with compelling
in-store prices. Grocers are under constant pressure
to assert their value proposition, and this is especially
true in Southern California where Ralphs competes with
Safeway’s Vons division, other conventional regional
operators and a range of ethnic formats that appeal to
the region’s diverse population. n
3
Kroger by
the numbers
T
o say that watching Kroger generate shareholder returns
is as exciting as watching paint dry would be an insult to
paint. Kroger operates in a slow growth industry characterized by intense competition, extensive regulation, a challenging labor situation, price-sensitive shoppers and the lowest
margins in the retail industry.
All of the above explains the modest growth expectations
shared with investors. According to guidance provided by the
company, its business model is structured to produce annual
earnings per share growth in the range of 6% to 8% with a dividend yield of 1.5% to 2% for a total annual shareholder return in
the range of 8% to 10%.
Those are appealing returns, but the company goes about
producing them in an old-school way that contrasts sharply
with so-called new economy high fliers such as Apple, Google
and Amazon.
Kroger’s growth comes from gaining market share and selling more stuff to existing shoppers. It is intent on leveraging
its installed base of stores and food manufacturing capacity to
improve the productivity of its existing selling space and expand gross margins. The company doesn’t open hundreds of
new stores annually, but maintains what it has, and it doesn’t
have an international division looking to do deals globally.
Last year, sales increased 10.2% to $90.4 billion from $82
billion. Profits, excluding a pension-related charge, increased
9% to $1.1 billion, and earnings per share increased nearly
15% to $2.
Kroger’s targeted rate of return and strategy to deliver
results may not be as flashy as some others, but that just goes
to show the arrogance of most investors to think they can
do better than an 8% to 10% targeted annual rate of return.
According to Kroger, its revenues the past five years grew at
an annul rate of 5.4%, and earnings per share grew at 6.4%
during the same time frame. The compound annual earnings
per share rate for the S&P 500 index over the same time was
a little less than 2%, according to the company.
With square-footage growth in the low single digits, the
company’s growth strategy is almost entirely dependent on
4
gaining share and leveraging shopper insights to more effectively serve customers. That the company has been able
to deliver on this strategy is impressive considering its share
of the market has been under relentless pressure for the past
two decades. First, the company had to survive the onslaught
of Walmart’s push into grocery retailing with the rollout of
supercenters that now exceed 3,000 units. The other major
headwind was the emergence of alternative channels and new
entrants in the food retail universe. Dollar stores, drug stores
and Target have all dramatically expanded food offering in the
past decade with the goal of driving increase traffic to their
stores. They have been successful in that regard, but more
to the detriment of other traditional grocers than Kroger. The
company has also had to withstand the rise of no-frills, limited
assortment, extreme value competitors such as Aldi on the
low end, while the like of Whole Foods, and more recently, the
Fresh Market, appealed to upper-income shoppers.
All of the data we are
seeing suggest
the overall economy
and customer sentiment
are improving.
chairman and CEO Dave Dillon
Despite the challenge, Kroger likes what it sees in the coming year with an environment that is likely to be more favorable than 2012.
“All of the data we are seeing suggests the overall economy
and customer sentiment are improving,” chairman and CEO
Dave Dillon said after fourth-quarter results were released.
“Both give us reason to be optimistic about the year ahead.
We are also mindful that consumer sentiment is fragile and as
we’ve seen over the last few years, it can be affected by external factors such as rising gas prices and geopolitical issues.
So we will continue to carefully monitor the pace of economic
recovery, higher gas prices and the slowing of the rate of
inflation. While these factors will influence all retailers, our
success will come from making tactical adjustments as needed
throughout the year, just as we did throughout 2011.” n