By Brian Higdon, The Mars Agency
CEO Rodney McMullen provided a wide-ranging update on Kroger last week at the annual Bank of America Consumer & Retail Conference. The company’s long-time leader touched on a variety of topics, including the current state of the retailer’s customers, its outlook on inflation, and the cost savings plans for 2023.
While nothing in the conversation came across as new to an avid Kroger watcher like me, the discussion did serve as a nice reiteration of Kroger’s steady, evolving strategy and a reminder of some mistaken assumptions about the supermarket leader we all might make sometimes. Here are a few key takeaways:
Kroger wins during inflation.
Kroger is expecting inflation to worsen before getting better in 2023, but the retailer intends to continue winning because of the big bets it has placed on fresh food and “Our Brands.”
Kroger’s customers are feeling the strain of inflation and have changed their buying habits to stay on a budget; the retailer is even experiencing growth among customers with higher-than-average household income. Shoppers are switching from national brands to own brand products, downloading and using coupons more, and eating at home instead of dining out. In response, Kroger is personalizing its offerings and using data to improve pricing (being more aggressive in certain categories such as meat).
Own brands deliver a higher margin for Kroger and significant savings of 8-10% for shoppers who switch from national brands, said McMullen, who corrected one questioner who referred to the products as “private label.” “We refer to them as ‘Our Brands’ because that is what they are,” he explained.
Own brands have grown market share for most of the last 20 years because customers initially attracted by their affordability stay with them because of their high quality, McMullen said. Sales are currently increasing by double digits.
Retail media is still evolving.
Not quite six years old, the company’s retail media business (Kroger Precision Marketing) will be a large contributor to the profit model going forward.
The marketplace presents a “massive opportunity” for Kroger, which right now is gaining only a fraction of the $100-120 billion being spent on retail media, according to McMullen. Kroger’s strategy is to be transparent with CPG partners about whether or not their objectives can be achieved rather than simply trying to sell advertising.
Ocado isn’t Kroger’s only path to “seamless.”
Although a very important piece, Kroger’s partnership with supply chain technology provider Ocado is just one aspect of a broader strategy to create a multi-layered but seamless shopper journey. The broader strategy combines in-store, pick-up and delivery options that can ultimately deliver scalability and profitability, including the long-term profitability of the Ocado investment.
Kroger is leveraging Ocado to expand its presence into new markets like Florida in a less capital-intensive way: The volume managed by one Ocado “shed” (warehouse) is equivalent to about 10 to 12 stores. Ocado also supports efforts to provide same-day delivery as a critical component of Kroger’s overall customer service ecosystem.
Delivery profitability is a work in progress, but the company is taking a 10-year view and expects online margins to become as good as in-store within that time frame. The ecommerce-focused Boost loyalty program isn’t profitable yet but covers its costs by increasing ecommerce order volume.
Engaging with customers in multiple ways benefits Kroger exponentially because it earns the retailer a higher percentage of the shopper’s total spend. A year after they become digital shoppers, customers visit physical stores more often than before but have higher satisfaction levels because the trips are now driven more by desire than need.
Elsewhere, Kroger is capitalizing on the growing trend in cooking at home by inspiring shoppers to try something new. Its ongoing expansion of the Home Chef meal kit delivery business in 2018 illustrates their strategy to win “What’s for dinner tonight?” in whatever way is necessary.
The retailer is also fully aware that digital engagement goes beyond actual shopping to include such other related activity as discount hunts and recipe searches.
There is a lot going on under the surface.
Kroger is conducting 1,600 to 1,800 projects and tests aimed at improving the business.
The primary goal is to make process changes using technology and data that will save the company time and money, which ultimately will do the same for shoppers.
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About the Author
As SVP-Customer Development, Brian Higdon leads all of The Mars Agency’s grocery channel activity and serves as GM of the Cincinnati office, guiding a team of shopper marketing experts driving growth, ROI and strategic engagement with retailers for our key clients. Prior to joining Mars in 2018, Brian led an independent cross-functional team of consultants and analysts dedicated to the creation of new retail formats and market-winning strategies.
