Kroger banks on burgeoning sources of revenue

The Kroger Co. is looking to alternative profit streams to help reach its goal of $400 million in operating profit by 2020 under the Restock Kroger initiative, executives said at the company’s annual investor conference.

To that end, Kroger aims to monetize the huge, rich stores of data amassed from its position as the nation’s largest supermarket company, with 2,800 stores, vast digital properties, millions of daily transactions and broad technology and analytics capabilities.

Executives noted that although Kroger’s core grocery business will generate the lion’s share of profits, it’s expected to see little growth in the coming years. Meanwhile, business through partnerships, media, consumer packaged goods (CPG) insights and Kroger Personal Finance is already expanding at a 16% compound annual growth rate in EBIT (earnings before interest and taxes) and is projected at 28% through 2020 and 34% to 2022.

“Building Kroger's financial model through traditional supermarket and grocery retail blends is tantamount to looking in the rearview mirror,” Chairman and CEO Rodney McMullen, left, told investors yesterday at the conference in Cincinnati.

“When you look at the retail environment, it's like driving on the Autobahn. It's incredibly exciting. But there's a lot going on, and it's going on fast,” he explained. “Kroger is transforming our growth model. We will grow market share through both strengthening our seamless [omnichannel] ecosystem and through growing complementary businesses and partnerships that generate alternative profit streams.”

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Chief Financial Officer Mike Schlotman outlined the Restock Kroger strategy’s path to $400 million in operating profit. The company estimates $4.45 billion in incremental operating margin growth and $4.05 billion in incremental operating margin investment. That includes redefining the grocery customer experience via enhanced digital offerings, store optimization, smart pricing and expanded private label, along with infrastructure and technology upgrades and investment in alternative profit sources.

“This is how we plan to do it. It's redefining the customer experience, where we're investing $800 million,” Schlotman said. “Feeding off that growing data, the growing traffic, the higher customer count that comes in, we then monetize both that data and that traffic into multiple alternative profit streams. Some of that falls to the bottom line to go to our shareholders, some of it goes back into redefining the customer experience. And this winds up becoming the virtuous circle of how we plan to generate the $400 million.”

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By the end of 2018, Kroger expects to cover 92% of households in its market areas through its stores, Ship online grocery delivery service, Pickup click-and-collect service and third-party delivery providers. In 2019, the company expects to be able to reach 100% of households across the country.

“We have incredible assets, including a large audience, 9.5 million customers shopping us every day. And if you include our pharmacies and our fuel stations, we're at 11 million transactions a day. Think about that. Let's pretend you have a TV show and every night you get 11 million people watching your TV show, you think you could sell some advertising? So do we,” said Stuart Aitken, group vice president at Kroger and CEO of the company’s 84.51° data and analytics unit.

Kroger has behavioral data on 60 million households, and 96% of all transactions are tied to the retailer’s Plus Card, which Aitken called “the most robust data set in the industry.”

“We are increasing the modalities that customers can interact with us,” he said. “More interactions allow us to leverage this and create a stronger customer experience that ultimately allows us to better deliver on the alternative profit streams. This is an attractive area for investment for us. It is asset-light and margin-rich.”

Kroger Personal Finance saw year-over-year growth of 13% in 2017 and is expected to realize 20% growth this year, according to Aitken. Kroger’s advertising/media business had 10% growth last year and is projected to near 30% for 2018.

“We've been very deliberate in our media growth. Our media is differentiated. The data we have allows us to be more targeted and provide a greater ROI for our clients,” Aitken said. “We will be the most transparent media company in the industry, showing our clients the value of targeting all of the pieces they are investing with us across the portfolio.”

Looking ahead, Kroger reconfirmed its GAAP net earnings guidance of $3.88 to $4.03 per diluted share for 2018, with adjusted earnings per diluted share of $2.00 to $2.15. Analysts, on average, forecast adjusted EPS of $2.12, with estimates ranging from a low of $2.03 to a high of $2.17, according to Thomson Reuters.

Kroger projects an annual digital sales run rate of just over $5 billion for 2018, climbing to $9 billion by the end of 2019.

“Seeking to leverage its scale and significant insights on customers, the company is seeking to transform its business model with alternative revenue, where it plans to monetize its rich data and make the argument that it can provide CPG [companies] with a superior ROI on ad/marketing dollars (in addition to trade spend) versus traditional channels,” Jefferies analyst Christopher Mandeville wrote in a research note on the Kroger investor conference.

“By having both a physical footprint — now incorporating digital media on shelves via EDGE tech — and a growing online presence,” Mandeville said, “we believe Kroger is well-positioned to accelerate growth in this area, given its unique ability to offer a more thorough analysis on how ad spend translates into transactions.”