CINCINNATI — When executives with Kroger Co. spoke about competition 10 years ago, they were focused on one competitor, said Rodney McMullen, chairman and chief executive officer. Today, the situation is much different.
|Rodney McMullen, chairman and c.e.o. of Kroger|
“Today, we would bucket competitors,” he said Nov. 2 during the retailer’s annual investor day conference. “So, restaurants would be a group; digital would be a group; hard discounters would be a group; discounters would be a group; (and) ‘traditionals’ would be a group.”
While such competition creates challenges for the retailer, Mr. McMullen added that it creates opportunity, too.
“ … The customer is open for change, and what we are really striving to do is to be able to solve the customer’s needs on their terms the way they want it, seamlessly across all these pieces,” he said.
Key to Kroger’s success has been the company’s ability to improve its connection with its customers, increase the number of shoppers loyal to the company’s banners and increase its share of the consumer’s retail purchase. The connections come from a variety of initiatives, including ClickList, Kroger’s on-line store pick-up model and capital expenditures on improving distribution efficiencies to ensure the products consumers want are on the shelf and price management.
Mr. McMullen called the current investment in ClickList a headwind, noting that the model’s profitability is lower than more developed in-store efforts. But he added that such future investments are required for the company to keep pace with changes in the marketplace.
Mike Donnelly, executive vice-president of merchandising, said past investments have turned into tremendous successes for Kroger.
“ … If you think back 2 or 3 years ago and this whole idea around this brand called Simple Truth, the insights actually told us that’s where the customer was going,” he said. “And then we started to think about this brand differently, and we started to grow the brand, and obviously, you’ve seen what it has done.”
Underscoring those changes in the marketplace, Mike Schlotman, chief financial officer, pointed to how gross margin profitability has shifted in stores.
“If you go back to 2005, our grocery category, which is essentially the lowest selling gross profit margin department in the store, was just under 46% of sales,” he said. “If you go to 2009, it grew to just under 49% of sales. If you go to 2016, instead of 49%, our grocery category today is only 44% of sales.
“So, we’ve had almost a 500 basis point decrease in the lowest gross profit margin department in the store, which means we’ve had a 500 basis point increase in all the other departments’ share of total sales over the last several years.”
One of the categories where the shift has taken place is for natural and organic products and such brands as Simple Truth. Mr. Schlotman said total sales for the products have “almost quadrupled” and that the department has a very high gross margin.
Yet he added that he sees such trends not continuing as competition for such products increases and price becomes an issue. To adjust, the retailer is reconsidering how it prices such products.
“ … We don’t do anything incrementally to an organic banana versus a traditional banana,” he said. “And the only difference we think that should be charged to the customer is if there’s a difference in the cost of that product. We don’t think just because it says organic it should necessarily get a higher gross profit margin.”
To offset the changes, Kroger is investing in logistics in an effort to reduce costs, improve efficiencies and improve product quality. One such initiative involves the building of a new facility to serve the retailer’s Atlanta division.
“They had a cobbled together four- or five-building campus where there was a lot of shuttle expenses between those,” Mr. Schlotman said. “We have gone to Southeastern Atlanta, built a green-field project, (a) brand-new warehouse that … is servicing the Atlanta division, today, out of one building.”
He said Kroger has additional logistics investments on the drawing board.
“ … We do have a lot of logistics projects in the pipeline to have our product move more efficiently and effectively and closer to the customer, and have the right product in the right warehouses at the right time.”