Kroger in test mode

by Monica Watrous
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Kroger is experimenting with different formats to maintain robust momentum.

NEW YORK — If it’s a way to sell groceries, chances are, the Kroger Co. is testing it. The Cincinnati-based supermarket chain is experimenting with several retail formats to maintain its robust momentum. The company has posted 45 consecutive quarters of same-store sales growth and achieved $108.5 billion in sales in fiscal 2014.

“We’re not afraid to test, we’re not afraid to stop tests, we’re not afraid to expand tests,” said Mike Schlotman, senior vice-president and chief financial officer of Kroger, during a May 12 presentation at the Goldman Sachs Global Staples Forum in New York. “One of the things I’ve always said is, if there’s an iteration of retailing out there, you should assume that somewhere we’re testing it somehow.

“I really can’t think of, in our space for what we do, that we haven’t tested an iteration of different offerings that are out there, from hard discount to in the ‘80s we had membership warehouse clubs. We had Price Savers back in the mid-‘80s that we got out of. Maybe we were a little earlier for it, and we should have stuck with it a little longer, in hindsight, given where Costco is today.

“But we’re not afraid to test; we’re not afraid to change, and I think that’s our strongest suit.”

Kroger currently is testing a hard-discount store format, similar to Save-a-Lot and ALDI. The company acquired Ruler Foods as part of its merger with Jay C Foods Stores in 1999 and has expanded it to better understand how the model works.

Mike Schlotman, senior vice-president and chief financial officer of Kroger

“The jury is still out a little bit on if this is something we’re going to roll out,” Mr. Schlotman said. “We do have in the mid-30s of them now. We continue to push into some new geographies with it. The learnings are interesting. Whether it becomes a roll-out or we just understand the model better, it’s going to make us a better retailer ultimately, whichever way it winds up going.”

On-line grocery shopping is another area of focus for Kroger, which last July acquired Vitacost.com, Inc. for approximately $280 million to expand its digital footprint.

“There are things going on with Vitacost right now that is in some geographies, in some ZIP Codes, that it wouldn’t look like it’s Vitacost that you can order product from on-line,” Mr. Schlotman said. “So there are always tests going on when we enter into a transaction like that. We didn’t merge with Vitacost just to sell what they sell on-line. We liked their infrastructure, we liked their fulfillment centers, we liked the time of delivery.”

A bonus of Kroger’s $2.5 billion acquisition of Harris Teeter Supermarkets, Inc. in 2013 was a click-and-collect e-commerce model, which Mr. Schlotman said has been a profitable venture.

“Really, what we’re trying to do is on any given shopping trip, if a customer wants to interact with you in brick and mortar, if they want to order on-line and swing by the store and pick it up, or if they want some products delivered to their home, how can we offer that opportunity for them at a price that makes sense, and continue to increase our loyalty with that particular customer, which remains very, very important?” he said. “Harris Teeter wasn’t the first, and it won’t be the last merger we ever do. Vitacost.com wasn’t the first dot-com business we looked at; it was the first dot-com business we looked at that had a representative sample of what we have in our stores. They sell a lot of things on that web site other than vitamins and supplements…

“They have a lot of food products on that site as well, typically, around healthy eating and healthy living as well. All these were done with a purpose.”

Kroger also is testing a fuel rewards program in Wichita, Kas., where the company operates Kwik Shop, Dillons and Baker’s stores.

Kroger is testing a fuel rewards program in Wichita, Kas., where the company operates Kwik Shop, Dillons and Baker’s stores.

“We aligned our c-store business and our grocery business, trying to bridge the business between those two,” Mr. Schlotman said. “Regardless of the outlet you shopped in, you would get fuel rewards to redeem at either location. We’ve been trying to replicate that in other markets. The model wasn’t right originally. We kind of paused. We’re tweaking that model. I’ll be more interested in what that model yields when we have the number of convenience stores in that particular market that we think we need to have a viable test….

“It’s not something that is fatal to our outlook. We’re not putting the company at risk for it. But if it is successful, it could be a huge tailwind for the company. There are all kinds of tests like that going on in the company; that one’s just been a bit more public.”
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