Kroger’s Private Recipe

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\"RRThe Kroger Co. Has Been on Quite a Tear

For a while now, Kroger has posted what is doubtless the best financial record of any conventional supermarket company. Check out these metrics: For 49 quarters in a row, it has registered increases in identical-store sales, excluding fuel. For the same period, it posted an unbroken chain of market-share increases—and for a full decade, has delivered double-digit compound increases in shareholder dividends. With 431,000 employees, Kroger is the third-largest employer in the nation, after Walmart and UPS. It is a force to be reckoned with.

Kroger is the most profitable and largest supermarket operator in the nation with annual sales of nearly $115 billion. In the hierarchy of things, that makes Kroger about twice the size of its nearest supermarket rival, Albertsons, as measured by food and consumables sales. It should be noted, though, that mass-merchandiser Walmart’s stores in the U.S. alone yield nearly twice the sales levels of Kroger’s food and consumables sales.

Great Positioning

All things considered, Kroger is in a very enviable position. Let’s take a quick look at its business then assess how it’s doing and what it might all mean in terms of takeaways for other forms of retailing.

Kroger is the operator of some 2,800 supermarkets, most under the Kroger banner, but also under a variety of other names such as Ralphs, Fred Meyer, Dillons, Harris-Teeter and Roundy’s. Kroger has hard-discount banners too: Food 4 Less, Ruler Foods, and Foods Co. Kroger also owns 700 convenience stores and a sizable chain of jewelry stores. All the non-Kroger banners are the spoils of acquisitions. Kroger, founded in 1883, has a long history of buying and selling stores, but the modern era of chain acquisition started in 1983 with the purchase of Dillons. Most recently, Kroger acquired an interest in Lucky’s Market, a specialty food retailer.

Kroger’s stores are widespread. It has a presence in 35 states, although it has no supermarkets in the Northeast or Florida. This brings us to the first important factor in Kroger’s success: its size and proximity to a large proportion of the nation’s population. It’s easy for a lot of people to shop at Kroger. Its diversity of banners helps too, giving it a presence in virtually all forms of food retailing, which, if nothing else, has become a sort of learning lab available to tap into as consumer demands change. Store density also gives Kroger the advantage of being able to acquire product and get it to the stores by means of its own distribution network.

Efficient Advantage

Kroger’s second advantage is its efficiencies, combined with a heavy emphasis on consumer-data analysis. As a result, Kroger has been able to come close enough to Walmart’s pricing structure to remain competitive, outperforming any of its industry peers. Recently, Kroger made substantial price reductions on 1,000 products in the 120 stores that comprise its Mid-Atlantic region, which runs as far west as Ohio.

It’s interesting that Kroger has been able to accomplish these efficiencies with what could be considered a huge unwieldy workforce—represented by labor unions. To be expected, the union-management relationship isn’t always a smooth. The unions can play hardball, as evidenced by a recent 10-day strike at a Denver distribution center.

Kroger’s labor force is growing as Kroger is now in the midst of adding 14,000 store-based employees nationwide, counting both part- and full-time jobs to improve store-level service.

Merchandising Power

Kroger’s third strong suit is merchandising. It has built up a robust private label program that allows it to enhance its low-price image as well as enter the specialty and organic-product markets, offering products at price points much lower than most specialty stores can match.

Kroger’s private label program is quite dense. Its opening price-point labels are P$$T and Heritage Farms. Mid-tier labels are branded as Big K, Kroger, Wholesome Home, Comforts for Baby, and Private Selection. Kroger’s newest and biggest success has been with its Simple Truth, Simple Truth Organics, and HemisFares. The Simple Truth brands now account for $1.5 billion in sales after their introduction just two years ago. The newly introduced HemisFares label is an upmarket vehicle for imported product. It has been creatively merchandised with “taste of” events featuring Spain, Italy, Mexico, and other countries.

Private Brand Sales

By comparison, most supermarket chains in the U.S. produce 22 percent or less of sales from private bands. It’s likely that the absence of manufacturer allowances associated with private brands keeps that number on the low side. Many supermarket chains in Europe have more than half their sales in private brands.

Kroger’s multi-tier brands are positioned against hard discounters, such as Aldi and dollar stores, while the specialty, organic, and upmarket brands are positioned against high-priced specialty retailers such as Whole Foods, The Fresh Market, and Sprouts, all of which are experiencing varying degrees of difficulty at the moment. To a great degree, those difficulties owe to Kroger’s low-priced specialty brands. Moreover, Kroger’s depth of store banners gives it the nimble ability to roll out private brands as needed.

Lessons Learned

What does Kroger’s success mean for other retailers? Strangely enough, the biggest challenge Kroger faces may be success itself. As countless large-scale companies have discovered, past performance is no guarantee of future success. Some of the biggest names in retailing such as Walmart, Target, Macy’s, Sears, Nordstrom, and others too numerous to cite, have experienced headwinds, or worse. It’s more than a historical curiosity to note that A&P, founded in 1859, was liquidated in recent months. At one time, A&P was a nationwide retailer that had higher sales than those of General Motors, and that was when GM was the biggest industrial company on earth.

Kroger management recognizes the hazard: “We don’t take Kroger’s success for granted—not for a second,” Rodney McMullen, chairman and CEO, told shareholders in a recent letter. He said Kroger’s goals are continued cost removal with proceeds going into lower price points, better customer service, fresher perishables, and corporate expansion.

Apart from avoiding the hazards of success, other retailers can take some lessons from what Kroger has accomplished.

To Recap:

  • Kroger has grown by a slow and steady program of acquisitions, generally of chains that were successful in their own right and would fit well into Kroger’s structure.
  • Kroger has sought efficiencies of operations, particularly when it comes to buying and distributing product.
  • Kroger has used the proceeds of efficiencies to lower price points and build a strong multi-tier private band program. That program is key to Kroger’s competitive abilities. It also has increased in-store service. Kroger intends to further pursue these two strategies.
  • Perhaps most instructive of all is that despite the fact that Kroger is a very old company, it has used constant improvement to remain a vibrant force in the marketplace.

Kroger is no A&P.



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