2012 Hall of Fame: David Dillon

It’s been a decade of radical change — most of it for the better — since David Dillon took the reins of Kroger Co. in 2003. His tenure as chief executive officer has seen the largest U.S. supermarket chain drive a widening gap between itself and its nearest competitors while turning in consistent sales growth that is the envy of the industry.

Those who know Kroger say these changes reflect not Dillon’s desire to be an agent of change necessarily, but rather his willingness and ability to lead change when that is what Kroger customers require. His role of steering Kroger’s “Customer 1st” strategy, helping Kroger to establish a blueprint for a successful 21st century food retailer, has earned him recognition in SN’s Hall of Fame.

David Dillon

“‘Transformation’ is such an overused word in the context of business strategy but Kroger really has transformed,” Andrew Wolf, an analyst covering Kroger for BB&T Capital Markets, Richmond, Va., told SN. “They’ve gone from the mediocre middle, knowing that if they didn’t do what they did, they’d wind up on the losing side. And now they are on the winning side. What Kroger did was transformative enough to become a market-share winner, instead of just a profit maximizer.”

A Larger Arena

So complete has Kroger’s transformation been that Dillon recently has begun to hesitate to refer to Kroger as a supermarket company, seemingly concerned that the term at once fails to accurately capture the breadth of its modern focus, while also associating it with an industry that investors have looked away from in recent years.

Now operating multiple store formats in multiple geographies, and differentiating itself from food retailers via technology, pricing and services, Kroger sees itself operating in a larger arena than just supermarkets, Dillon said in an investor conference earlier this year.

Read more: The SN Hall of Fame, Class of 2012

“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.”

“It’s a different company today than what it was when [Dillon] took over,” Neil Stern, senior partner at McMillanDoolittle, Chicago, told SN in a recent interview. “Then, it was a traditional food and drug chain. Now you look at it, you have many more pieces of the business. You have a supermarket business, and a nonfoods business. They have a much larger focus on services and formats.

“I suppose Kroger is still a supermarket,” Stern concluded, “but it pushes the boundaries of what a supermarket is supposed to be.”

Fourth-Generation Operator

David B. Dillon is a fourth-generation supermarket operator. His great-grandfather, Jonathan S. Dillon, founded the first Dillon Food store in Hutchinson, Kan., in 1913, and his grandfather and father helped to build that company into a publicly traded chain. By the time David Dillon joined the company in the 1970s, Dillon was large, diverse and well regarded for its people. When Kroger acquired Dillon Cos. in 1983, Kroger also acquired its next two CEOs: Joe Pichler, who served from 1990 to 2003, and Dillon, who succeeded Pichler in 2003 and was named chairman a year later (see related story).

“It’s unusual that Kroger acquired his business. Usually in those cases, the acquirer really starts to take over,” Stern said. “But in the case of Dillon and David, not only did they acquire a company but they really acquired a leader. That’s incredibly rare. I can’t think of another instance where that happened.”

Dillon was a former Eagle Scout and a former student body president at the University of Kansas, where he earned a business degree, according to various reports. In 1976, he received a law degree from Southern Methodist University.

During his career, he served in various leadership positions with Dillon’s Fry’s Food, King Soopers and Dillon divisions before being named president of Dillon Cos. in 1986. He was appointed executive vice president of Kroger in 1990, and he was elected president and chief operating officer of the company in 1995.

Willingness to Change

Although Dillon never practiced law, in an interview published several years ago in SMU’s Law School journal, Dillon spoke about how studying legal cases from many angles helped him to develop an open-mindedness and nimbleness he said is considered rare among leaders in the business world.

“Good leaders, it is said, establish a direction and stay with it and never waiver. Kind of like politicians when they like to say they don’t flip-flop,” he was quoted as saying. “My belief is that, and I’ve said this pretty openly in the organization, I’m willing to change my decision on any matter anytime in the face of new information, and that I’m willing to flip-flop if the facts have changed from what we originally thought.”

That willingness to change course is key to a business whose strategy is based largely on the fickle whims of shoppers. And Dillon has demonstrated he will act decisively when customers speak. The approach has won Kroger some mixed reviews on Wall Street, observers say, noting those occasions when Kroger invested more in price than anticipated to keep sales momentum during a particular quarter.

Read more: 2012 Hall of Fame: Sol Price

But industry watchers also credit Kroger as the first traditional supermarket operator to understand how price had become a paramount concern in the wake of Wal-Mart Stores’ impact on the grocery business, and one that called for a new way of defining success. Under Dillon’s leadership Kroger transformed from a company managing gross margins to one concerned chiefly with growing market share.

“The hallmark of the strategy has been to establish price competitiveness against Wal-Mart. They were one of the first companies to draw a line in the sand and say, ‘We need to do this, and we’re going to this.’ They got on it earlier than anyone else. At a time where people were throwing up their hands and saying, ‘What will we do?’ Kroger went out and solved that problem, to a degree,” Stern said. “They’ve also invested in upgrading their stores, and in the expansion of formats. It’s not just about prices and a loyalty program. It’s about competing on as many facets of the business as you can.”

Next Phase of Growth

While price investments can be expected to continue at Kroger as needed, Dillon recently acknowledged that the work over the previous decade had improved customer perceptions of price to a point where it is less of a liability today. That has helped to launch what he called “the next phase of Kroger’s growth,” as described in the company’s Analyst Day conference in October. This plan counts on continued success of the Customer 1st initiatives including service and price investments and format evolution, with greater capital spending and an eye on organic growth in new and existing markets.

Kroger is often cited as a potential buyer of some Supervalu assets, particularly the Jewel-Osco banner in the Chicago market, and also the Acme banner in the Philadelphia region.

Speaking at the SN Analysts Roundtable earlier this year, several participants cited Kroger as a potential consolidator, but they also noted that that they expect it to remain relatively cautious.

“I think Kroger would be the natural acquirer [for some Supervalu assets],” said Wolf of BB&T. “As much as Jewel and Acme have been under-invested in, they are still putting up some decent sales per square foot.”

Neil Currie, an analyst with UBS, New York, added that buying Jewel — the No. 1 banner in Chicago — could pose challenges, however.

“The problem with Jewel now is, it’s got great market-share reach, but Aldi also has a significant amount of stores in the Chicago market and Wal-Mart just announced plans to open dozens of stores there.”

Kroger expects to continue a partnership with loyalty marketing firm DunnhumbyUSA — now part owned by Kroger — providing the company with insights allowing it to promote more efficiently and segment its customers.

“Anyone can invest some in price and get more traffic into their store. Others are trying to do that,” Wolf said. “What’s so transformative about Kroger is that they are gaining market share productively.

“[Dillon] took most of the heat and the ridicule when they decided to do this. He continues to take heat for years of not letting up. Now they have a juggernaut,” Wolf added. “The business is really strong. Fifteen years ago plus, Kroger was nothing like it is now. It was big and kind of able to push its weight around, but it wasn’t taking market share. It wasn’t running a very sophisticated segmentation strategy. Today it truly is a strong business in an industry that isn’t doing well.”

Read more: 2012 Hall of Fame: Clarence Birdseye

Dillon through the years has endeavored to keep a low profile, rarely granting interviews (company officials did not respond to a request for this article). In written remarks published in SN in 2010, Dillon credited his success to the support of family and his colleagues, combined with his experience in the grocery industry.

“I believe there is value in every job and learning the value of a hard day’s work is a lesson that has stayed with me throughout my career in the grocery business,” he said. “Along the way, I have been fortunate to be surrounded by supportive family, friends and colleagues who I count on for advice and honest feedback about what I can do to better serve our customers, associates and shareholders. At Kroger, we encourage leaders to create an environment where feedback is welcome and where everyone’s input is valued.”

Sidebar: Kroger CEOs, Past and Present

CINCINNATI — David Dillon, who has been chief executive officer of the Kroger Co. since 2003, is the 10th chief executive officer of Kroger in its 130-year history and the second Kroger CEO to be named to SN’s Hall of Fame.

Joseph B. Hall, who manned the top spot at Kroger from 1946 until 1964, was inducted to the SN Hall of Fame in 2010.

Hall joined Kroger as a real estate manager in 1931 and later moved on to merchandising. Among his accomplishments as CEO was stitching a far-flung collection of thousands of mom-and-pop stores into a unified chain, and introducing advances in private label, product manufacturing and the company’s distinctive blue-and-white logo.

Like Dillon, Hall was also especially concerned with developing a close relationship with Kroger’s shoppers. Unable then to rely on data from loyalty cards, Hall and his fellow executives would visit shoppers in their homes to discuss their needs and concerns as part of a program known as “Kroger Calls.”

Kroger’s first top executive was its founder, Bernard H. “Barney” Kroger, who headed the company from its inception in 1883 until his retirement in 1928.

The top-level executives who followed him:

• William H. Albers, 1928-1930, who worked with Barney Kroger and succeeded him. Albers left Kroger after only two years to start his own chain of stores.

• Albert H. Morrill, 1930-1942, who joined the company as general counsel. During his term as CEO, he decentralized the company by creating 23 divisions and gave division managers greater autonomy in operations, purchasing and merchandising. He also established in-house facilities to monitor product quality.

• Charles M. Robertson, 1942-1946, who initially served as vice president and treasurer. He put the chain’s expansion plans on hold during World War II and channeled some of the company’s food production toward the military by creating high-quality rations for troops.

• Hall, 1946-1964. He shortened the company’s name — The Kroger Grocery & Baking Co. — to The Kroger Co. and led the company to its first $1 billion sales year in 1952. He merged 45 private labels into a single Kroger brand with a distinctive blue-and-white logo and oversaw expansion into Texas, Minnesota and California. Sales quadrupled to nearly $2.3 billion during his tenure.

• Jacob E. Davis, 1964-1970, a former congressman and judge who joined Kroger as vice president in 1944. During his years as CEO, he focused on revitalizing and modernizing Kroger’s manufacturing plants, replacing older facilities with new ones and consolidating smaller plants into larger regional operations.

Read more: The SN Hall of Fame, Class of 2012

• James P. Herring, 1970-1978, who joined the company in 1960 after selling his East Coast drug stores to Kroger as the basis for Kroger’s new drug store division. Given his nonfood background, Herring was instrumental in moving Kroger into the food-and-drug combo-store format.

• Lyle Everingham, 1978-1990, who joined Kroger as a clerk in 1946. During his years as CEO, he led the company in reorganizing its 24 division offices into 13 marketing areas for closer contact with the main office and was at the helm for the 1983 acquisition of Dillon Cos. He also led Kroger to utilize extensive consumer research to focus on meeting customer needs first, rather than on what suited Kroger best.

• Joseph A. Pichler, 1990-2003, who became a Kroger executive through the 1983 merger with Dillon. Under his leadership, Kroger bought Fred Meyer Inc. in 1999, which included Ralphs in Southern California, QFC in Washington and Smith’s Food & Drug in the Southwest. He also steered Kroger away from a hostile takeover in 1988.

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