Kroger, aided by a database that’s the envy of the industry, the leading chain’s forward-thinking on everything from e-commerce to private brands has helped position it for pandemic success.
Just a few short months ago, small specialty retailers that cater to niche markets – natural and organic, extreme value, gourmet – were siphoning off customers left and right from mainstream retailers in the undifferentiated middle. But when the coronavirus hit, everything changed. Consumers headed to big stores with broad assortments and full shelves where they could buy everything they might need for an extended quarantine. With 2,757 supermarkets across 35 states and the District of Columbia, Kroger was that store for millions of Americans, making it one of the pandemic’s biggest “winners.”
COMPS UP 30% IN MARCH
Revenue surged 30% in March, and at press time, the Cincinnati-based company’s stock was up double digits in a down market. “Kroger has performed admirably during the crisis,” confirms Neil Saunders, managing director of retail at New York-based GlobalData. Yes, it suffered out of stocks like every other retailer, “But the general view is that Kroger managed better than most – probably because of its strong supply chain.”
Indeed, says George Denman, vp of sales at Cincinnati- based Graeter’s, a longtime hometown partner, Kroger moved quickly to break up the logjam of trucks coming in and out of warehouses by opening up receiving hours and relaxing restrictions for DSD vendors. As a result, “It recuperated much faster than local competitors, some of which actually stopped shipping many smaller brands to focus on the big guys.”
Another supplier adds, “Surprisingly, Kroger did not allow the massive increase in demand derail its reset in our category, which is proceeding on schedule this month. That says a lot.”
Beyond its ability to react quickly to the crisis, the chain’s steady investment in e-commerce (by 2019, 95% of Kroger households had access to some form of online shopping) meant it was better positioned than most to accommodate surging demand for click and collect and grocery delivery, says Don Stuart, managing director at Wilton, Conn.-based Cadent Consulting Group. But in an effort to reduce risk to employees and customers and help prevent hoarding, the company transformed one of its Cincinnati stores to pickup only for online orders. “That shows that despite its size, Kroger can be forward-looking, innovative and able to adapt quickly,” he remarks.
While the retailer’s online sales have grown 50% a year since 2016, which is surely helping it retain a certain percentage of its customers, that growth is putting more pressure on margins, says Stuart. “In many cases, the more Kroger sells, the less it makes due to the cost to serve with the current [store pick] online model.”
As a solution, the chain has talked about both central fulfillment and micro-fulfillment from stores, but its partnership with U.K.-based e-grocer Ocado seems to point toward the former. In fact, the two recently announced the location of a sixth Ocado-powered automated warehouse in Wisconsin that could fill online orders for Kroger customers in Wisconsin, northern Illinois and northwest Indiana. Twenty such warehouses are planned, with the first expected to come online sometime next year. But at more than $50 million a pop to build, they represent a huge financial risk, according to analysts who aren’t sure the Ocado model will translate from the U.K. to the U.S. marketplace.
Moreover, says Saunders, at least some of that money might be better spent on improvements to brick-and-mortar stores, some of which “are in desperate need of investment.” He notes, “The experience in Kroger stores is very mixed. Some locations are modern and look great… however, others feel very old and dingy.”
DATA ASSETS SECOND TO NONE
While some of its physical assets could use a little work, Kroger’s data assets and its ability to utilize those insights to drive decision-making are second to none, says Tory Gundelach, senior vp, retail insights, for London-based Kantar Consulting. While the company uses data to determine everything from assortments and layouts to pricing and promotions, the ability to personalize offers and communications will be one of the most valuable moving forward, especially as more sales shift to digital. From basket-building to pricing, “There’s lots of runway for personalization in that space, and I think it will be a big advantage for Kroger,” she says.
For a price, manufacturers can utilize the data, managed through the chain’s data intelligence subsidiary 84.51°, for that same purpose. For example, says Stuart, one frozen protein company he knows used Kroger’s database to create a target demographic for its product, select shoppers to receive free samples and recipe ideas and then monitor those shoppers afterward to measure the effectiveness of the campaign. “So Kroger makes money coming and going,” he says. “It sells the data and insights, but when Kroger helps its partners build their businesses, it’s helping itself at the same time. So it’s a win-win for the retailer.”
It’s an even bigger win when the product is part of Kroger’s private label program, which Stuart calls “exceptional.” With shares in excess of 28% – significantly higher than most of its competitors – Kroger generated $23 billion in store brand sales last year. Though it offers several different tiers, the crown jewel in the chain’s private label portfolio is the clean label Simple Truth brand, which pulled in $7.5 billion in 2019, making it the country’s leading natural and organic brand (private label or national brand). According to Cadent’s Private Brand Equity Study, 93% of respondents rated Simple Truth “equal to or better than national brands” – the highest of any private brand studied – while 95% viewed it as “trustworthy.”
‘EMERGING’ PLANT-BASED PL
Like most decisions at Kroger, says Saunders, the newest addition to its Simple Truth lineup, a plant-based meat collection under the Emerge sub-brand, grew out of the chain’s insights into changing shopper behaviors around meat purchases as well as their positive response to Kroger’s other plant-based own brands. A direct competitor to Beyond Meat, “The new collection gives the retailer a stake in a very high growth area where a lot of brands are innovating.” He adds, “Kroger has been an early mover among supermarkets in developing its own plant-based lines.” In fact, it has announced plans to add as many as 50 plant-based products to its private label line this year. The chain is also reportedly testing dedicated 3-foot sets for refrigerated plant-based foods in 60 stores, further highlighting its willingness to lead rather than follow.
Kroger’s entry into the plant-based space comes at a very opportune time, says Cadent Consulting Group business analyst Justin Ernsting. “We anticipate short-term shortages of meat and limits on meat purchasing, which will increase trial of plant-based alternatives, Kroger’s included.” Add to that high unemployment and an impending recession that are likely to drive at least some shoppers to more affordable store brands, and the new line looks like a winner.
Even before the coronavirus crisis, Kroger was expanding its private label presence, especially in the premium segment, reports Gundelach. In fact, it reportedly introduced more than 750 own brand items in 2019. Thanks to the additional SKUs combined with all the trial during COVID-19, “Kroger’s private label share will probably hit 30% this year.”
Manufacturers say they’re not surprised. For example, in the natural and organic space – where it’s clear Kroger is unwilling to cede anything to Whole Foods – many private label SKUs have pushed out weaker national brands. And according to one supplier, the chain’s cauliflower crust pizzas outsell many me-too branded items. “The challenge for Kroger is finding the right balance between own labels and national brands,” he says. “There is a tipping point where they begin to offer too few choices. Some customers just prefer national brands.”
INNOVATING IN FROZEN
Kroger’s decision-making around merchandising, adjacencies and product placement are also driven by data. One change Gundelach has noticed is a growing number of frozen and refrigerated cases in other areas of the store (think refrigerated pasta in the dry pasta set, for example). “It’s capital-intensive so it only happens with remodels and major category reinventions, but Kroger is taking a page from some of the specialty grocers and showing some merchandising flexibility.”
Another way Kroger is doing things differently than other mainstream supermarkets is its self-serve frozen prepared food bars. Similar to hot bars or salad bars – except everything is frozen – the bunkers are filled with bulk quantities of flash frozen entrees and sides (chicken Alfredo, chicken fried rice, chicken sausage gumbo, etc.). Consumers scoop out whatever quantity they want into a container and then pay for it by the pound at checkout. Not available in every store, “It’s an innovative meal solution that you just don’t see in mainstream grocery,” says Gundelach. Plus, frozen food bars may give Kroger an opportunity to continue offering the build-your- own prepared meals consumers want – but in a way that’s less risky than hot-to-go foods (since cooking at home would kill any viruses).
One possible catch: Kroger’s new “fresh for everyone” rebrand, which debuted in November. It’s intended to signify that everyone should have access to fresh, affordable, delicious food, says the company. “The new positioning bodes well for refrigerated categories,” says Gundelach. “But frozen doesn’t really seem to fit under that umbrella. If I worked in that segment, I might wonder where my product fit in long term.”
That said, manufacturers we talked to expressed no doubt about the importance of frozen foods to Kroger’s success. For example, says Graeter’s Denman, “The chain’s ice cream section was rated by consumers as the department offering the highest level of satisfaction, not only within 129 categories at Kroger but versus any competitive retailers.” So clearly, it puts a lot of effort into that particular frozen section.
HIGH MARKS FOR KROGER BUYERS
Although data-driven decisions around brand segmentation, assortment and space allocation are a big reason for the department’s success, Denman says it helps that Kroger buyers actually listen to their suppliers. Instead of assuming they know best, “The team asks compelling questions about what we see in the industry. They want to learn something in every call.”
While Denman calls Kroger buyers tough but fair and experienced but open to change – two sentiments echoed by several manufacturers – one supplier says the chain’s own margin and promotional requirements sometimes force partners to accept lower margins in order to get on the shelf. He adds, “The most challenging part about doing business with Kroger is trying to get a price increase through. They rarely accept them.”
On the plus side, “The frozen buyer in our category is the most knowledgable we’ve seen,” says the supplier. “He doesn’t let the big CPGs dominate his sets and is willing to give small brands shelf space. He bases his decisions on innovation, taste and quality.” And, of course, data.
“Kroger is aware of what its competitors are doing,” he concludes. “But it runs its own race.”
VENDORS LOVE KROGER
Mostly, anyway. A confidential survey of manufacturers turned up high praise of the expertise of category managers and fairness in negotiations. Here’s a summary.
BY WARREN THAYER
What key things does Kroger ask about during sales calls? Is your brand growing/outpacing the category in the total market, and in my stores? Why do I need it in the category? What’s its role? What are some emerging flavor profiles? What trends do you see/where is the category headed? What’s your marketing plan to create traffic and pull your product off the shelves?
Vendors consistently speak highly of the professionalism and knowledge of Kroger buyers and merchandisers. They stay in their jobs for several years instead of being transitioned to different departments. What’s more, the personnel and data support helps them as they focus on just a few categories instead of an entire department, as is the case at many chains. This allows them to develop true expertise.
Their inquisitive nature is a real plus. As one vendor put it, “Some retailers just want you to drop a one-page summary on their desks and walk out. But nobody’s looking at a stopwatch at Kroger – they’re likely to give you 45 minutes to an hour if you need it. But you better know what you’re talking about. They expect seasoned people to come calling on them – they haven’t got the time to educate new salespeople.”
Says another vendor, “Kroger people have a very good attitude/mindset. They want to collaborate with the manufacturer on growing the business. Not every retailer is good at that.”
What do you need to know about 84.51°? Before setting foot in Kroger’s door, educate yourself about this data analysis tool that provides granular insights on consumers and their shopping habits, average basket rings depending on specific items are in the cart, trips per month, key purchase times, product preferences, etc. It’s vital to Kroger’s success, and you can buy data for, ballpark, anywhere between $15,000 and $200,000. Most small brands can’t afford that, and the consensus is that they don’t have to. But it’s still a good idea to know your way around this program, to gain insights into how Kroger thinks. But if you are buying the data, make sure the Kroger category review manager tells you who to contact at 84.51° and what data set they are going to be using for your product group. Otherwise you could be looking at two different worlds.
For a lower price, Kroger also sells its Market 6 scanner data, which provides insights into pricing, assortment, planograms, promotion effectiveness and more.
How is Kroger on slotting? They’re definitely better than the norm in the industry, in that they don’t ask for exorbitant slotting. They want to partner with you and would rather see you put money into cost of goods and promotions that will sell your product.
In past years, observers say, this wasn’t always true. And some vendors say slotting became tougher after Kroger bought Harris Teeter and saw how much money the chain was making from slotting and fees. The higher slotting requirements really bothered some members of Kroger buying teams, who felt that higher slots were closing the door on small companies with innovation. But all in all, there’s agreement that Kroger is fair in terms of what it charges. I’ve yet to meet a vendor who is happy about slotting.
What does Kroger do well in terms of promotion and merchandising? Kroger varies its promotions a lot, instead of just sticking with one type. As a result, shoppers are less likely to think, “Well, I see this brand is 2 for $7 again, so I guess I’ll load up on that and wait until the next time.” It’s not predictable, and it’s never boring.
They’ve also done a good job of incorporating natural products into their endcaps the past few years. That’s a real sea change for them. They’ve driven dollars to a higher level, because the premium/natural consumer is bringing more dollars to the category.
Is the buying centralized out of Cincinnati? With the exception of Harris Teeter, the decisions are all made at Kroger headquarters. There are some complaints about it being impossible for headquarters buyers to understand the strength of regional brands. But strong regional brands may get facings in different banners or a promotion tweaked for them, especially when their regional Kroger office pushes for it with headquarters.
Kroger doesn’t force anything into Harris Teeter. Different vendors have opposite opinions about the relative strength of Harris Teeter’s assortments and merchandising versus Kroger, and this seems to be based on their particular category. There’s agreement that Harris Teeter doesn’t like being compared with Kroger. One vendor says “It’s not a badge of honor to say that Kroger took your product on.” Another advises being extremely tactful if you suggest copying a promotion that worked well in Kroger. Having said that, the loyalty vendors feel toward both Kroger and Harris Teeter buyers/managers is unusually strong.
How does Kroger handle private label? Kroger does a great job with its private label, although vendors report that some category managers gripe about the Simple Truth brand being forced down their throats. For example, a Simple Truth item might be the fourth or fifth player in a category, but be given better positioning or more facings than deserved.
What improvements might Kroger make in product curation? The company gets good reviews across the board here. But (you knew there was a “but” coming, right?) some say that Kroger, and other chains, would do well to cool their jets on plant-based proteins. As one vendor says, “At the height of the COVID-19 pandemic, you never heard of any shortages in plant-based items, did you? But there were lots of meat shortages. It’s a delicate balance, and I think everybody should look at this more closely.”
Any changes coming from the top? The dynamic has changed with today’s CEO, who is a finance guy, versus the previous CEO, who was a grocer. The focus used to be more on “customer first” and getting the sale. Now it’s more about earnings per share.
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