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Shopping for online profitability - Kroger CEO Rodney McMullen plays a pragmatic omni-channel long game

Stuart Lauchlan Profile picture for user slauchlan March 20, 2023
Summary:
Digital is a priority for Kroger, both in terms of convenience for customers and profit (eventually) for the retailer.

Rodney McMullen
Rodney McMullen

We are not doing it for a hobby!

A telling comment from Rodney McMullen, CEO of grocery giant Kroger at last week’s Bank of America 2023 Consumer & Retail Conference, where he talked about the company’s online ambitions. Like all food retailers, Kroger had a COVID digital uptick as most of us tried to order our supplies online, but that’s finding a new omni-channel level in the Vaccine Economy. 

It’s also been the case that while major grocery retailers have reported growth online, turning a profit here has been more elusive - see Walmart, as a case in point. For his part, McMullen told the conference:

If you look at our online business, the [in-store] business incrementally now is profitable. Barely. And if you look at the delivery, you know, that still has a lot of work to do. But I feel very confident that we’ll get there and we’ll figure it out.

Right direction

On the face of it, things aren’t going too badly in that direction. Kroger’s latest quarterly numbers saw digital revenues up 12% year-on-year and up 22% for the full year, while the number of digitally-engaged households was up 900,000 on the previous 12 months. That’s just the start, suggested McMullen on the post-earnings release analyst call: 

Seamless is growing in importance among our customers, and we expect it will be a significant growth driver over the next several years. We have built a digital platform that offers a seamless shopping experience with zero compromise, allowing customers to shift effortlessly between store, pick-up and delivery solutions.

Despite the easing of pandemic-related shopping behaviors that led to a significant increase in online shopping, more and more customers are incorporating e-commerce into their daily permanent routines, recognizing the value and convenience online shopping offers. We expect digital sales will continue to grow at a faster pace than overall food at home sales and believe Kroger is well positioned to deliver double-digit growth in over the next 3 years.

There are a number of key areas of focus strategically to deliver on that ambition, he explained :

We start by providing a compelling Kroger-owned digital destination, where we offer customers exceptional value, personalization and freshness in a single, easy-to-use online experience. Second, we are focused on delivering best-in-class fulfillment, driving trust and loyalty by exceeding expectations for quality and freshness. 

Our delivery approach is unique in the fact that we have a large store network conveniently located close to our customers and large dedicated fulfillment centers designed efficiently to pick large orders. Our dedicated fulfillment centers provide the most reliable experience, the highest in-stock levels, best on-time delivery and one-of-a-kind white glove experience with industry-leading Net Promoter Scores. Kroger delivery customers are more engaged across our entire ecosystem, spending more and shopping with us more often. 

Getting personal 

Personalization of offerings is also a top priority, McMullen added: 

Our data science teams are using predictive science to serve customers the right products at the right time and at the best value. Because we know our customers so well, we are able to provide recommendations to start their baskets, and deliver personalized offers on the products most important to them, saving them time and money and making their lives easier. In return, our customers reward us with their trust and loyalty, consistently ranking us among the best at being able to offer personalized savings and solutions that meet their needs.

In 2022, we grew loyalty as our customers more deeply engaged with personalized coupons and fuel rewards. As customers look for more ways to save, digital coupon engagement hit an all-time high during the year. Our combined paper and digital coupons helped save our customers more than $1.4 billion on products they need and want. That's on top of our everyday promotions and all the other value we offer.

The latest development here was Boost, pitched as “the industry's most affordable membership nationwide”. McMullen said:

Early results are exceeding our expectations with incremental engagement and overall household spend. We are evolving Boost with new benefits to further broaden its appeal and create additional customer value. In 2023, we will make significant investments to build out our personalization capabilities, including increasing the use of real-time data to predict customer needs, which will support sales growth during the next three years.

All that said, there has been a slowdown in the roll out of Ocado automated sheds, a key tranche of Kroger’s omni-channel ambitions through its partnership with the online grocery platform specialist. This is temporary, Mullen stated: 

We are actively looking for sites for some pre-announced locations too on those and finding the sites ended up being a little bit more difficult than what we would have expected.

Profit?

So, back to the question of how to turn a profit in online grocery? McMullen concluded: 

When you look at our digital business long term, we wouldn't see the profitability to be any different in this supermarket when you look at it over a longer period of time. And if you look, what we find is [that] a customer, when they move online, they actually, after a year, engage with us more in store than before. So what we're really focused on is having an ecosystem where the customer thinks food, they think Kroger. And what we're finding is the customer routinely moves back and forth between the different channels.

If you look at each piece of it, every single day, you're working to figure out ways to improve processes and take costs out. And then on top of it, obviously, retail media is an important part of the driver. 

So when you look at it long term, we really see no change in the opportunity and potential. We're incredibly excited and everything that we see, we think it will be more important in three years, five years, ten years to [be] where the customer engages with us through multiple ways - and the digital channel is a critical part of that. We find the customer engages with us digitally, even when they don't shop digitally. So for us, we see it as exciting as we did before. We don't see the long-term profitability being different. And we're working continually in terms of both internally and with our partners on how to improve processes.

My take

Long-term, we still believe the margins on our online business will be the same or better than historical supermarket. And I always [say],  job one is to make sure you don’t lose that customer. Job two is to figure out how to get a good ROI.

Kroger is pragmatically playing a long game here and that’s all to the good. Assuming the forthcoming merger with Albertsons passes muster, there may be some course alignment to be done, but to date, it’s still looking like a decent omni-channel playbook. 

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