Kroger officials know their business, but describing it is another thing.
“The grocery industry as we all grew up in: It doesn’t really exist anymore,” David Dillon, Kroger’s chief executive officer, said earlier this month during a conference call with financial analysts. “We’ll occasionally use the term ‘grocery’ because it helps us relate to the things you describe. … But we don’t think of that as our industry. We don’t have a good name for it other than ‘food,’ but it’s a broader industry than the traditional food industry.”
Dillon’s remarks came during a lengthy response to a question posed by a financial analyst: How, Dillon was asked, was Kroger managing to navigate challenges to the supermarket channel better than its peers? Dillon replied by saying Kroger’s focus was not on what was good for the supermarket industry necessarily, but on what was good for Kroger’s customers. And that, he said, is what’s good for Kroger.
“Instead of looking at traditional supermarkets, we look at the pie being a lot bigger than that,” Dillon explained. “We are looking … at where our customers spend their money. And because we look at it that way, our battle has been for market share of that bigger pie. And that attitude, that viewpoint, caused us to address it differently than other supermarket operators.”
This focus on the customer — within the wide field of dynamic retail channels — is key to understanding Kroger’s point of view and its moves toward store format evolution, investments in technologies, product selections and pricing strategies. Kroger is not insulated from challenges unique to the supermarket industry, but the company firmly believes its perspective places it in a channel unto itself.
“People look at Kroger incorrectly probably, because they try to put people into channels,” added Mike Schlotman, Kroger’s chief financial officer, in the same exchange. “If you look at what a traditional supermarket would be, and you go into our stores today, it’s nothing like it used to be. And there really is a new category that we’re in. … What we’re trying to create with our customers is a channel that’s completely different than anything that’s out there. And I think our customers are showing us … that’s really happening.”
If Kroger is to be confined to the grocery channel, understand that it’s performed like no one else in it. Its fourth-quarter financial results posted this month marked the 33rd consecutive quarter of increased non-fuel identical sales. And while its earnings results aren’t going to blow away Wall Street at least while Whole Foods is around, Kroger officials insist that its “Customer First” strategy will reward shareholders as a result of its impressive gains in sales and share.
“I wouldn’t say that Kroger is its own channel, but they’ve certainly set themselves apart from the rest of the channel,” Mike Paglia, senior analyst for Kantar Retail, Cambridge, Mass., told SN. “We project them accounting for 25% of the growth in the channel over the next five years. They’re a leader by a wide margin.”
Kroger didn’t always have a name for its strategy either. Although the company has been funding price and service investments through cost reductions and relying on analysis from shopper card data and other consumer research for more than a decade, officials didn’t use the term “Customer first” widely until 2008, when it laid out the strategy behind what it called four key elements: Price, Products, People and Shopping Experience. A combination of these elements make Kroger’s strategy a difficult for competitors to replicate and can produce results within a variety of economic conditions.
“It’s not any one of them,” Dillon said. “It’s the four of them.”
Dillon insists this point of view will also lead to better earnings growth over the long run, saying Kroger’s performance before undertaking this strategy in 2001 provides the best example.
“If you look at ourselves in the 1990s, even though we had good earnings growth during that time, our sales were not strong, we were losing relevancy with customers, and we were really focused on just producing earnings,” he said. “When we moved to a point of view that said, we’ve got to solve issues for customers, put customers first, that, in effect, gave us a stronger result for our shareholders.”
Kroger officials weren’t available for comment for this article, but public remarks as well as observations from industry analysts suggest an almost religious devotion to its strategy and an admiration for sticking to it even when alternatives could be argued.
“The great thing you can say about them is they have been steadfastly consistent,” Neil Stern, senior partner of McMillan Doolittle, Chicago, told SN. “They said, ‘Here’s our strategy, here’s what we are trying to do,’ and they have stuck to it. In good economic times, in bad economic times, they have stuck with it. They don’t seem to pay too much attention to the analysts on a quarterly basis [but] you see that consistency in results coming through.”
Although financial analysts have generally agreed that Kroger over the last decade has been the strongest performer among traditional food retailers, they are often cautious in their praise, citing Kroger’s propensity to sacrifice profits in price investments and concern for the ability to hold up sales in tough economic times.
Gary Giblen, an industry analyst, has long likened Kroger’s balance of sales and earnings growth to a tightrope walk. Ajay Jain, an analyst for Cantor Fitzgerald, in a recent investment thesis noted earnings and sales trends had deteriorated since 2009 and that Kroger’s strategy produced choppy results.
“While it’s long been viewed as the best-positioned conventional retail operator overall (a view we strongly agree with), we also believe that Kroger’s financial performance has also been somewhat inconsistent since [fiscal 2009],” Jain said. “Management’s single-minded focus on customer loyalty has at times come at the expense of earnings growth (many times, in an unpredictable manner).”
Kroger officials say their business model is structured so as to produce annual earnings per share growth in the 6% to 8% range, plus a dividend of 1.5% to 2% annually for a total return of 8% to 10%. This, Schlotman said, compares favorably to the S&P 500 over a rolling three-to-five-year period, and is generally less volatile than most S&P 500 stocks. Earnings growth is sparked by identical-sales gains plus small improvements in margin.