Digital bounces back as Kroger builds out a seamless customer experience

Back in the summer, US retail giant Kroger, a champion of online grocery shopping, saw a dip in digital sales as consumer returned to browse the aisles. That six percent digital drop has been reversed as key planks of the firm’s overall omni-channel strategy firm up in the Vaccine Economy.

For its most recent quarter, Kroger’s digital sales grew eight percent, while delivery solutions were up 34%. CEO Rodney McMullen said:

Early in the second quarter, we introduced our Boost membership nationwide, and it's already showing promising results including an increase in overall household spend among members. We remain focused on adding new members and are encouraged that enrolment is in line with our internal expectations and projections.

During the quarter, we opened a new Customer Fulfillment Center (CFC), powered by Ocado's automated smart platform, in Romulus, Michigan. Additionally, we are excited to expand the Kroger Delivery network to more customers in four new geographies during the quarter through spoke facilities in Austin, Birmingham, Oklahoma City and San Antonio. This brings our total CFC and spoke count to 18.

We also continue to invest in our pick-up business, where demand remains strong. During the quarter, we increased capacity and shortened wait times to improve our customer experience. We also invested in technology and implemented process efficiencies, which helped lower our cost to serve.

Outside Ocado

The firm’s partnership with Ocado continues to evolve, but is still in its early stages, noted CFO Gary Millerchip:

One of the key things for us with the big facilities is it is a 4-to-5 year journey as you're building to maturity and building to scale. And so there are some elements of that, that until you kind of understand what the customer density looks like at scale, we're still figuring out some of that operational efficiency in the model…in the first two facilities, we're only 18 months really in that journey of a 4-year journey overall to get to capacity. 

And there is more to digital life than the Ocado tie-up, added McMullen:

The thing that I think is always important is Ocado is one part of our overall digital strategy. The thing that we're wanting to make sure that we have is a seamless ecosystem where customers can easily go between delivery, pick-up and shopping in stores. What we find is, by far, the majority of customers that stop engaging with us on pick-up, come back into store and we capture that in-store versus delivery. So when you look at the overall seamless system, we're really focused on how do we have that total loyalty across all the engagements with the customer.

The thing that I'm super proud of our teams on the sheds that as we open them in the spoke is our Net Promoter Score from those continue to be world-class and incredibly strong and the customer continues to engage more frequently with us there.

Of course, in the inflationary environment of 2022, shoppers are looking for bargains and good deals, with Kroger seeing a record 750 million digital coupons redeemed over the summer months, representing nearly $1 billion in savings.  McMullen observed:

I think it's always important to remember a customer that shops at Kroger, there's personalized rewards that are individualized for each household that the market would never see. And that's something that's incredibly valuable for our customers in addition to our fuel rewards and other pieces. So I think you really have to look at the total value proposition.

The firm’s Boost loyalty program is a crucial component of overall strategy, added Millerchip, as is the firm’s delivery capabilities:

We see about 25% of customers that sign up for Boost are completely new to digital. So that's a really good driver of the digital business as well. And then we're still in the early infancy stages of some of those convenience trip missions, whether it's Kroger Delivery now with our partnership with Instacart, where products can be delivered, smaller baskets, within 30 minutes, and also the meal solutions, things like sushi and floral.

While the firm expects momentum to continue in the back half of the year, Millerchip said that there’s a need to look closely at what the prospects for continued digital growth:

We are taking a step back certainly to figure out what is the overall market digital growth is likely to look like this year because…we’re building a seamless ecosystem for the customer and what we're seeing in customers are moving between the channels and making the decisions of where they shop. Ultimately, we want to make sure the customer will go to Kroger and they're choosing to shop through the store or pick-up or delivery, whatever works for them.

We certainly have certain assumptions around how we thought the digital market will grow this year, and we've sort of taken a step back as we look at the back half of the year and really sort of assess how we think the market overall is growing. But our focus is really on making sure that seamless ecosystem is winning the customers' loyalty overall, whichever channel they choose to shop through.

My take

Overall, after a digital blip last quarter. Kroger is back on track as an omni-channel bellwether. As McMullen argued:

Our customers are telling us they love our seamless experience. We continue to see customers effortlessly shift between store, pickup and delivery, which is building loyalty. We continue to improve the experience. And we'll always encourage our customers to shop with us how they want to and with zero compromises.