Kroger CEO Sees Opportunity in the Chaos

Between serving more customers virtually, making adjustments to keep up with battered supply chains and maintaining efforts to stay in touch with both new and existing shoppers, The Kroger Co. is determined to come out of the coronavirus crisis “in better shape than we went in,” CEO Rodney McMullen said in an interview this week.

Speaking in a webcast conference with Evercore ISI, McMullen said the chain is looking at its swelling volumes due to the national shutdown as an opportunity to win loyalty when the crisis subsides. “We’re working hard to try and make sure people fall in love with eating as a family again,” he said.

To this end, McMullen said Kroger was staying “disciplined” on promotions and on its personalized offers to shoppers, adjusting only to de-emphasize stocking up while making efforts to include new shoppers in those mailings sooner than it typically would have before the crisis, acknowledging those sales could be fleeting.

“We’re still doing mailings directly to customers on a monthly basis based on their shopping behavior. … Several of our competitors have stopped doing that,” McMullen noted. “In the past, we would’ve been aggressive users of '10 for $10' or 'buy five, save five,' those types of things. We have modified those offers, but we continue to communicate to customers individually based on their household behaviors.”

For new shoppers—many of whom have turned to Kroger as alternative venues such as restaurants are largely out of the game and/or face more severe supply and operations challenges—“we’re putting them into the mix quicker than we historically have done,” McMullen said. “We think this is incredibly important.”

Kroger was hardly spared from the stock-up behavior of panicked shoppers in the opening weeks of the crisis—it revealed that same-store sales in March were up by 30%—but said its own manufacturing facilities and supply chain infrastructure have been advantages in bouncing back. Its plants are running 24 hours day—“the only time they’re shut down is for cleaning,” McMullen said—and moves to reduce the variety of items coming from them has helped to increase available supplies by slowing plant downtime.

“Whenever I get a chance to be in front of a national audience, I always remind people there’s plenty of food in the supply chain if you just buy what you need,” said McMullen. “The U.S. supply chain just isn’t designed to where people that traditionally might have a week’s worth of stuff at home all of a sudden felt like they needed four weeks of stuff at home.”

Kroger is also working with supplier partners on reducing lines in categories and said the parties were slowly getting better visibility into demand. “There are some suppliers that are stepping up in a big way, and it’s been very inspirational and [we’ve had] very great communication. It’s daily communications, and in some cases, more than one a day. And the biggest change over the last week or so is that those conversations used to be, ‘What can you get me tomorrow?’ Over the past week or so, it’s been, ‘What’s going to get delivered over the next week?’ And a few suppliers were actually starting to talk about what our demands look like for the next two or three weeks.”

One area of the supply chain the crisis has exposed U.S. weaknesses is in the ability to get safety equipment for its associates sourced from China, McMullen said. “I personally got involved in getting them and ... that wouldn’t be the case on a typical basis. Somebody is going to figure out a way to make them in the U.S. and make them at a price that makes sense,” he said. 

Digital Trends Bode Well

McMullen said he’s been in touch with U.S. leaders—he was named to a committee by President Donald Trump earlier this week to advise on a plan to reopen the country—as well as counterparts in China, Hong Kong, Singapore and Italy, investigating what a “new normal” would look like. Digital shopping will be a much bigger part of it.

“Internally, we’re putting a tremendous amount of energy behind it,” he said. “I mean, there is no doubt that people are engaging in digital channels much more aggressively than before.”

Kroger’s approach to digital shopping—which from the start was designed to “scale up” to meet a greater demand at a lower cost to serve—is positioning the company well, McMullen said, even if the automated centers to ultimately serve that purpose are still under construction. He maintained the company’s first robotic fulfillment center with Ocado was still on track to open early next year. Its Home Chef meal kit division in the meantime is at capacity every day. “I think there are a lot of customers that will decide they like it and they’ll continue to do it,” he said.

“If you look at the innovation in terms of all the work that we’ve been doing over the last few years on seamless, that is paying off huge for us right now,” McMullen said, referring to Kroger’s term for shoppers who engage with the brand in-stores and online.

McMullen acknowledged the potential for a U.S. recession but said based on historical trends that Kroger could benefit at least for a time as consumers trade down over the first six or 12 months. “If the recession lasts long enough, it will catch up with you,” he added.

His interactions with federal officials indicate the “the government is approaching this like a war and they’re putting all their resources against it. And I do think that will help the country recover quicker,” he said.