Customer 1st Strategy Drives Success: Dillon

SHELLY REESE

CINCINNATI — Kroger Co.'s annual shareholder meeting here last week sounded more like a consumer focus group than an investor enclave.

The people who took the microphone to ply Chairman and Chief Executive Officer David Dillon with questions about the company's performance weren't inquiring about earnings growth or same-store sales. Rather, they wanted to know if Kroger would be renovating stores near their homes, adding gas pumps or enhancing its rewards program so points earned at Kroger stores outside the Greater Cincinnati market could be used for gas discounts locally.

Had Dillon not been speaking, he would probably have been scribbling notes as consumer feedback is a hallmark of Kroger's “Customer 1st” strategy, which emphasizes faster checkouts, cleaner stores, more convenience and better value. “We are challenging ourselves every day to be the best at listening to our customers and responding to what they tell us is important to them,” Dillon told the audience. Dillon credits the strategy with helping the company increase its major market share by 100 basis points over the past two years.

But shareholder and consumer concerns merged when a shareholder inquired about recent takeover rumors. In April, Dillon responded to a Wall Street Journal report speculating that it was the target of a private equity buyout by issuing a statement assuring employees that “neither management nor our board of directors has any interest in pursuing a leveraged buyout transaction.”

Dillon again quashed the rumor from the podium. “We are not interested, frankly, because we are confident that our Customer 1st strategy is paying good dividends.” The response drew audience applause.

Looking beyond 2007, Kroger expects its Customer 1st strategy to help it increase same-store supermarket sales in the 3%-5% range. Dillon outlined a number of competitive advantages he likewise expects to contribute to Kroger's success.

“One of our company's key strengths is our wide variety of store formats,” he said. “We are able to tailor our stores to fit our customer's needs in specific markets.” Kroger plans to open its large-format Marketplace stores in six additional markets. The company currently operates 31 Marketplace stores. Dillon noted the upscale Fresh Fare stores have likewise been popular, but declined to outline any expansion plans.

Organics and natural foods represent one of the company's fastest-growing categories, and Kroger intends to add new health-and-wellness-oriented products to its successful private-label program. It used Thursday's meeting as a venue to announce a cholesterol-reducing, fat-free milk that will be available in stores this week. The milk, which will be sold under Kroger's Active Lifestyle brand and priced on par with the company's other milk products, blocks cholesterol absorption and can help reduce cholesterol by as much as 15%, Dillon said.

Dillon also touted Kroger Personal Finance, which offers a 1-2-3 Rewards MasterCard, pet insurance, mortgages, home equity lines and identity-theft insurance, and has plans to introduce more products by year's end. “We consider these services an extension of our overall Customer 1st strategy,” he said.

Dillon noted the company has made strides in improving its environmental stewardship, reducing its energy consumption by 1.3 billion kilowatt hours or more than 20 percent since 2000. That savings represents enough energy to light, heat and cool every house in Nashville, Tenn., for one year, Dillon said.

Dillon also mentioned that President Bush this week announced his intention to appoint Rich Manka, Kroger's vice president and pension benefit officer, to the Pension Benefit Guaranty Corporation Advisory Committee.