Kroger accelerated strategic game plan in 2022, executives say

In reporting fiscal 2022 results, executives at The Kroger Co. said the supermarket giant is making steady progress with its “Leading with Fresh, Accelerating with Digital” strategy and gave an update on the pending $24.6 billion merger deal with Albertsons Cos.

Net sales for the fourth quarter rose 5.4% to $34.82 billion and were up 5.9% excluding fuel, Cincinnati-based Kroger reported. Q4 identical sales without fuel grew 6.2% year over year. For the 2022 fiscal year, net sales totaled $148.26 billion, up 7.5% from a year ago and marking a 5.2% gain excluding fuel. Full-year ID sales climbed 5.6% without fuel.

On the earnings side, Kroger turned in adjusted earnings per share (diluted) of 99 cents for the fourth quarter and $4.23 for the full year. The EPS figures bested Wall Street’s top-end forecast of 95 cents for the quarter and $4.21 for the year, according to Refinitiv.

Kroger ‘working cooperatively’ with regulators on Albertsons merger

Kroger Chairman and CEO Rodney McMullen told analysts Thursday in a conference call on its fourth-quarter and full-year performance that the company is well under way with negotiations to gain regulatory clearance for the acquisition of Albertsons.

The transaction, announced in mid-October, would combine the nation’s two largest supermarket retailers and form a company employing 710,000 workers and operating 4,996 stores, 3,972 pharmacies, 2,015 fuel centers, 66 distribution centers and 52 manufacturing plants in 48 states and the District of Columbia. In early December, Kroger reported that it received a second request for information from the FTC on the proposed merger.

Kroger and Albertsons expect to finalize their merger transaction in early 2024. / Photos: Shutterstock

“We are working cooperatively with regulators, responding to the Federal Trade Commission’s second request, and in discussions about the transaction, while also working to identify potential buyers for the stores we expect to divest to obtain clearance for the transaction,” McMullen said in the call. (Call transcript provided by AlphaSense.)

Kroger and Albertsons have estimated 100 to 375 store divestitures via direct sales to buyers or spinoffs into a new Albertsons subsidiary dubbed SpinCo, which would be formed immediately before the transaction’s closing and operate as a stand-alone public company. The merger deal sets a store divestiture ceiling of 650, at which point the companies could re-evaluate the transaction.

“We are pleased with the level of interest received thus far,” McMullen said, “and will work towards finding a solution that benefits all stakeholders. We remain on track to close the transaction in early 2024.”

McMullen also noted that Kroger and Albertsons have begun laying the integration groundwork for the merger.

“During the quarter, we launched our integration planning efforts, with the goal of preparing for a seamless cultural and operational integration. We expect to create customer benefits beginning day one of close,” he explained during the call. “The integration team is developing work streams with clear objectives and milestones to deliver value for our customers, associates, communities and shareholders. We are pleased with the progress we’ve made to date, and we will continue to provide updates as we have them.”

The preparatory work also has included more interaction with Albertsons’ management team, including CEO Vivek Sankaran.

“During the past few months, we have spent time getting to know Vivek and the Albertsons leadership team. We are incredibly impressed with their talent, culture and commitment to their customers and communities,” said McMullen. “We look forward to bringing together our two highly complementary organizations to provide customers with lower prices and more choices while realizing the long-term value we expect this merger will deliver.”

“Fresh, Digital” strategy advances

Meanwhile, Kroger is making strides in all four “pillars” of its “Leading with Fresh, Accelerating with Digital” growth plan, including fresh foods, own brands, personalization and a seamless omnichannel experience, according to McMullen and Chief Financial Officer Gary Millerchip.

On the fresh front, the End-to-End Fresh Produce initiative has rolled out to more than 1,400 stores as of the close of fiscal 2022, up from 355 stores certified at the end of Q1, 864 in Q2 and 1,252 in Q3. Through the program, Kroger leverages data, science and partner collaboration to sharpen produce distribution, reduce the time from farm to table and ensure supply-chain stakeholders are working together to lower the age of product, minimize dwell time in the distribution network and maintain the cold chain. In stores, the retailer is boosting vendor accountability by updating technology that provides real-time data to suppliers to deliver more days of freshness.

Kroger's Rodney McMullen said the retailer sees "innovating the fresh experience" as a pillar of its growth plan. / Photo courtesy of Kroger

“In 2023, we will continue innovating the fresh experience to drive customer satisfaction and improve our product mix,” McMullen told analysts. “We continue to improve inventory management tools, strengthen our supply chains and deliver additional days of freshness and enhance our offerings to meet customer demand.”

Our Brands, Kroger’s private-label portfolio, ended fiscal 2022 on a high note with a 10.1% jump in identical sales, the Cincinnati-based retailer said. Highlights included the Smart Way value and Home Chef meal solutions brands, as Kroger introduced 1,344 new Our Brands items in 2022.

“We will be expanding our Home Chef production facilities to meet this growing customer need,” McMullen said. “The Our Brands portfolio allows us to offer exciting products at great value while driving incremental sales and improving margins. Our Brands quality and value proposition is especially important when inflation is affecting so many of our customers' lives.

“We will continue expanding Our Brands to more categories with innovative product offerings. Our goal is to help every customer find high-quality, affordable products they love, from pantry staples to fresh food to ready-to-heat, restaurant-quality meals,” he added.

Getting closer to customers

Food-at-home demand remains strong, including among higher-income customers, a segment that Kroger grew by 1.1 million households in fiscal 2022. The company is continuing to use personalization to drive more shopper engagement, with its data science teams employing predictive science to give customers “the right products at the right time and at the best value,” according to McMullen.

The End-to-End Fresh Produce initiative reached over 1,400 stores by the end of fiscal 2022. / Photo: Shutterstock

“In 2022, we grew loyalty as our customers more deeply engaged with personalized coupons and fuel rewards. As customers looked for more ways to save, digital coupon engagement hit an all-time high during the year. Our combined paper and digital coupons helped save our customers more than $1.4 billion on products they need and want. That’s on top of our everyday promotions and all the other value we offer,” he said. “In 2023, we will make significant investments to build out our personalization capabilities, including increasing the use of real-time data to predict customer needs which will support sales growth during the next three years.”

Sixty million households now participate in the Kroger Plus program, and the retailer’s fuel rewards program saw redemptions rise 14% in 2022.

Millerchip noted that fuel is a linchpin of the value equation for consumers. “Fuel remains an important part of our overall value proposition,” he said in the call. “Our loyalty program, which can save customers up to $1.25 per gallon, has been one of the many ways we have helped customers stretch their dollars over the past year and contributed to our gallon sales outpacing the industry during the quarter.”

E-commerce, alternative businesses on upswing

Digital sales surged by 12% year over year in the fourth quarter, and enabling customers to shift seamlessly between stores, pickup, delivery channels will be key to building on that momentum, executives said.

“Our combination of stores and dedicated fulfillment centers positions Kroger to serve all customer trips, from in-store shopping to rapid delivery on need-it-now items to large stockup orders,” explained McMullen. “Despite the easing of pandemic-related shopping behaviors that led to a significant increase in online shopping, more and more customers are incorporating e-commerce into their daily permanent routines, recognizing the value and convenience online shopping offers. We expect digital sales will continue to grow at a faster pace than overall food-at-home sales and believe Kroger is well-positioned to deliver double-digit growth over the next three years.”

Kroger's "seamless" shopping experience centers on enabling customers to easily shift between stores, pickup and delivery. / Photo: Shutterstock

Kroger, too, is bolstering its top and bottom lines by continuing to build up its alternative profit businesses. The company said its Kroger Precision Marketing (retail media), 84.51° (retail data science and analytics) and Kroger Personal Finance (financial services) units generated $1.2 billion in operating profit for 2022.

“Kroger Precision Marketing is one of our fastest-growing businesses, which is well-positioned to win within the U.S. retail media landscape, projected to be a $55 billion industry by 2024,” McMullen said in the call. “What makes our retail media business special is our ability to help brands achieve a greater return on their media investment.”

The value generated by the alternative profit businesses allows Kroger to reinvest back into its core grocery business to drive further store and digital traffic, “creating a flywheel effect,” according to Millerchip.

“We are evolving from a traditional food retailer into a more diverse food-first business that we believe can deliver sustainable future growth and succeed in a variety of operating environments,” he said.

Cost savings aid workforce investment

Millerchip also pointed out to analysts that Kroger is continuing to take cost out of its business operations. “We remain focused on eliminating waste in areas that do not affect the customer experience, and we are making investments in technology to improve store productivity, lower digital fulfillment cost, and reduce waste and shrink,” he said. “These improvements will drive an incremental $1 billion of cost savings in 2023, which will mark our sixth year in a row of delivering $1 billion of savings.”

In a separate announcement on Thursday, Kroger said it plans a more than $770 million incremental investment in its associates for 2023. Those funds are earmarked for raising average hourly wages, improved health care options, new training and development opportunities, among other areas.

“We continue to support our associates through investments in wages and comprehensive benefits,” McMullen said in the analyst call. “In 2022, we raised our average hourly rates by more than 6% and have now invested an incremental $1.9 billion in associate wages since 2018. Our average hourly rate is now more than $18 and more than $23 when you include comprehensive benefits.”

Millerchip later added, “We will continue to invest significantly in associate wages, and this will be funded by our planned cost-savings initiatives.”