How the Pandemic Accelerated Kroger's Transformation

While reviewing a remarkable period of sharp increases in sales and profits, and experience having navigated operational challenges as an essential business during the coronavirus pandemic, officials of The Kroger Co. were quick to point to investments they said helped it to absorb the surging volume, and said the future—although murky on specifics—looked better having been through it.

“We would expect 2021 to be better than what the trend would have been for '21 before COVID,” Rodney McMullen, CEO of the Cincinnati-based grocer, told an analyst during a conference call discussing the company’s first-quarter financial results. “[From] everything that we can see, we believe there are certainly meaningful shifts in the way people eat. I won’t say [they are] permanent, but certainly multiyear. And that we would expect '21 to be better than what '21 would have been before COVID.”

Heavy investment in expanding digital shopping capabilities over the two years coming into the crisis—a period of at-times difficult transformation under the Restock Kroger initiative—helped the company. It saw digital sales climb by 92% in the three-month fiscal quarter that ended May 23, McMullen added. That program—which also included investments around fresh food, private brands and personalization—had begun delivering sales momentum to the grocer in the months just prior to onset of the pandemic in the U.S., which was signaled by consumer stock-up behavior in Kroger stores in late February before a national emergency declaration in early March shut down Kroger’s rivals in the foodservice, entertainment and restaurant fields and forced consumers to consume meals in their homes for virtually the entire quarter.

With safety and social distancing a concern, online sales growth at Kroger registered in the triple digits during April and May. Digital sales accounted for about 6.5% to 7% of Kroger’s total sales for the period, McMullen added, indicating shoppers spent close to $3 billion on online shopping at Kroger in the quarter.

“As many of you know, we outlined our Restock Kroger transformation plan in 2017 and as part of that plan, we made the strategic decision to invest in digital. These investments allowed us to quickly add much-needed capacity to serve our customers by scaling the foundational capabilities we have built and continue to develop,” McMullen said. “The outcome of these efforts has been a meaningful uplift in sales across all digital modalities, Kroger Pickup, Delivery and Ship.

“We firmly believe that our ongoing investments will help Kroger emerge stronger, and it’s clear from our recent customer data insights that our competitive moats—Fresh, Our Brands, Personalization and Seamless Ecosystem—are even more important as a new normal begins to emerge in food retail.”

Sales Tapering, Patterns Changing

Kroger’s quarterly comp of 19% already showed a retreat from figures shared in a business update in early April, when stock-up buying triggered a 30% March comp increase. Comps in the now-underway second quarter are in the mid-teens, but “we do expect sales to continue to taper as the quarter progresses,” CFO Gary Millerchip said.

Sales are also becoming more balanced in stores as state restrictions ease, with signals of more impulse and splurge buying, and returns of departments like floral, deli and specialty cheeses.

Deli trends in recent weeks “have been significantly improved from where it was in the height of the lockdowns,” a phenomenon McMullen said could be triggered by shoppers packing lunches to take to work with them as concerns about shopping in multiple locations and restaurants are continuing even as workplaces reopen.

Customer interactions similarly indicate shoppers still have intentions to eat meals at home with their families. “When talking to customers about when their children return to schools, we still have a significantly higher percentage of families telling us they plan to make breakfast for the kids to take the school and lunch for the kids to take the school,” McMullen said. “All of those things in terms of what customers are telling us, we would expect there'll be more meals eaten at home or prepared at home that obviously will help support growth as well.”