CEOs of the Year

McMullen Continues a Winning Tradition

CEOs of the Year
Rodney McMullen
Kroger

A venerable company like 132-year-old Kroger needs a CEO who will carry on its traditions.

Especially when one of those traditions is spectacular success.

Rodney McMullen, who became CEO of Kroger at the beginning of 2014, has kept America's biggest pure grocer on its winning path. Kroger's last quarterly report marked its 47th consecutive quarter of growth, a streak that began under McMullen's predecessor, David Dillon. In that quarter, Kroger's same-store sales (excluding fuel) rose 5.3 percent and net income rose 24.8 percent. The success was spread evenly across Kroger's vast geographic and product expanse, with all regions and supermarket departments reporting same-store sales increases. Those increases reached double digits in natural foods—an area where Kroger has made an especially strong push.

McMullen's tenure at the helm has been marked by both imaginative competency at carrying on the strategies that have lifted Kroger to success (some of which he spearheaded), and an embrace of new strategies to deal with the trends that are shaking up modern food retailing. This is why McMullen is one of Retail Leader's co-CEOs of the Year for 2015.

Like many grocery company CEOs, McMullen started with his company in a humble position: as a stock boy, while he was attending the University of Kentucky. He worked many jobs at the store in Lexington; ironically, cashier was the only one the accounting major couldn't master. After he earned both an undergraduate degree and a master's degree from Kentucky in four years, he accepted Kroger's invitation to join its accounting department, in its division office in Charlotte, N.C.

That was in the early 1980s, and it was the beginning of a career in which McMullen helped shepherd Kroger through some wrenching episodes. It was the "Barbarians at the Gate" era of corporate raiders, and in 1988, Kroger faced a challenge from venture capitalists who wanted to take over the company and turn it private. McMullen, who had risen in the ranks of Kroger's accounting department by then, helped put together a counterstrategy in which the company borrowed more than $4 billion to distribute a one-time bonus to shareholders to persuade them to keep the company public. McMullen was able to ascertain that cash flow going forward would be sufficient to support the bonus.

McMullen continued his rise, becoming chief financial officer in 1995. In that role, he helped put through the 1999 acquisition of Fred Meyer, the Oregon-based chain that made Kroger America's biggest pure grocer. He became vice president of strategy, planning and finance in 2000.

SQUEEZED FROM BOTH ENDS

About that time, the perils of being a mid-market grocer began to intensify. Walmart developed its food retailing capacity, using its supply-chain efficiency to offer prices lower than competitors could match. What had bowled over dry-goods retailers was threatening to overwhelm grocers. In addition, competitors like Whole Foods were squeezing the high end of the price-value continuum.

Kroger responded in 2003 with "Customer 1st," a broad initiative to complement lower but still profitable prices with better service and selection than Walmart or any other discounter could possibly offer.

In cutting prices, Kroger was guided by McMullen's skills in predicting price elasticity. Kroger kept hitting the sweet spot: Margins decreased, but sales zoomed up to keep profits on the rise. Sales increased 117 percent, to $108.5 billion, from 2002 to 2014, which ushered in a 50 percent increase in net earnings over that period, reaching $1.2 billion in 2014.

The predictions were on target in large part because of Kroger's long-running, cutting-edge capabilities in amassing and evaluating sales data. Kroger established dunnhumby, the pioneer in running loyalty programs and assessing data from them, in 2003 (in partnership with Tesco, Britain's leading retailer). dunnhumby data gave Kroger invaluable insights into not only pricing and promotions, but also operational aspects like merchandising.

As conceived by then-CEO Dillon, Customer 1st was a four-pronged strategy of people, shopping experience, products and prices. It continues under McMullen.

"Our team of associates continues to derive our Customer 1st strategy by taking care of our customers in big and small ways, offering fresh foods and keeping costs down so that we can reinvest those savings in our associates, store experience, products and prices," McMullen said at Kroger's most recent earnings conference, in September. "As a result, we continue to earn customer loyalty and gain market share."

NATURALLY PROFITABLE

Product selection has been enhanced by Kroger's jumping on the trend for organic and natural foods. That has turned out to be one of Kroger's most consistent recent profit centers, reaching 10 percent of total sales in 2014. Those sales were greatly boosted by its Simple Truth store brand of natural and organic products, which has generated double-digit growth since its inception.

These initiatives were conceived and executed in large part with the assistance of McMullen, who was promoted to president and chief operating officer in 2009. Since becoming CEO, McMullen has embarked on several major initiatives, both enhancements of existing ones and brand-new ones. Last April, Kroger bought out its share of dunnhumbyUSA and formed it into a new company called 84.51°, named after the latitude of its location near Kroger's headquarters in Cincinnati. The new company continues to provide analysis of Kroger's sales and loyalty data, as well as serve as a profit center by providing similar services to non-competing companies.

Kroger has made some other acquisitions under McMullen. The purchase of Harris Teeter, an upscale grocery chain based in North Carolina, was engineered while he was president and COO, and was finalized a month after he became CEO. In November, Kroger announced a deal to buy Roundy's, the supermarket chain based in Milwaukee that owns Pick ‘n Save, the market leader in the Milwaukee area, and Mariano's, a chain of upscale groceries in and around Chicago, among other banners.

McMullen's success is due in part to the way he encourages teamwork, says Scott Mushkin, an analyst who covers Kroger for Wolfe Research.

"It's not the Rodney show," Mushkin says. "He's very good at giving his team responsibility, putting the team together, and making sure they have everything they need to drive the business. He's not a star-power CEO—it's not all about him."

Kroger's future ambitions extend to e-commerce. It has been moving forward with curbside pickup—an initiative spurred by the acquisition of Harris Teeter, which already had a well-developed online program. Kroger's click-and-collect program, which it branded as ClickList in 2015, has spread to five major markets.

The aggressiveness toward online commerce is an example of McMullen's principle for dealing with the competition: Assume they'll come after you as hard as you go after them.

"When we look at competition, we always assume that competition's going get more aggressive going forward than it's been in the past," he said at the September earnings meeting. "And we always find that if that doesn't happen, then life's easier."

Gheysens Guides Wawa's Growth

CEO executes expansion strategy he helped conceive during 15 years with the convenience-store chain.

CEOs of the Year
Christopher Gheysens
Wawa

Wawa has gone on quite a journey in the last few years, and Christopher Gheysens has been right there in the driver's seat.

Gheysens became CEO of the convenience-store chain, originally based in Pennsylvania and other Northeastern states, in 2012, right when Wawa was about to execute one of its most momentous decisions: a move to Florida. But as a 15-year Wawa veteran, Gheysens was in a position to contribute to the decision to leapfrog across the United States, which was several years in the making. This is why Gheysens is one of Retail Leader's co-CEOs of the Year for 2015.

Gheysens started with Wawa in 1997, rising to the position of president and chief financial officer before he was made CEO at the end of 2012. He oversaw one of the boldest moves in Wawa's long history: The company leapfrogged down the U.S. East Coast, landing in Florida. Wawa's first Florida store opened in July 2012 in Orlando; it now has some 85 stores in central Florida, for a total of about 850.

Wawa's decision to expand to Florida came after several years of study, during which Gheysens and other Wawa executives had a mandate to recommend a move to literally any other part of the country that looked promising. They considered areas including Boston, New York, Seattle, Maine and San Diego before settling on Florida.

The reception in Florida has been outstandingly successful. Gheysens called it "frankly humbling" and said, "From the beginning, one of our mantras was that we had only one chance to make a great first impression" in an interview with Convenience Store News (CSN), a sister publication of Retail Leader.

The primary reason Wawa has done so well with its Florida launch is that, while it was new to the Sunshine State, it had a base of retirees, tourists and others who remembered it fondly from their days in the Northeast.

"The [Florida] market already has many people who knew the brand," says Steven Montgomery, president of b2b Solutions LLC, a consulting firm that specializes in convenience stores. "Whether these are snowbirds, residents who had moved to Florida or vacationers, many of these people missed ‘their' Wawa and were advocates of the brand."

But it wouldn't have worked if Wawa didn't give those consumers reasons to be advocates. Wawa has long been known for the quality of its fresh food, especially its hoagies and breakfast sandwiches. Under Gheysens' leadership, Wawa enhanced that aspect of its service with a new look and layout. Its goals were both to reassure those who might have been familiar with Wawa's rep, and to introduce Wawa's strong points to Floridians unfamiliar with the chain.

"We felt we needed a fresh design, driven by the psychology of the Florida consumer," Gheysens told CSN. "The new store design has really informed the majority of people who didn't previously know Wawa and what the brand stands for: fresh, great-quality food and beverages, and convenience."

To get this across, the redesign incorporates a kitchen and sandwich assembly area that's easily visible to customers. "When you walk into the store, you see people making food, as well as digital signs romancing the offer," Gheysens said.

Gheysens has spent much of his career at Wawa, after an initial stint at Deloitte. He grew up in Vineland, N.J., the son of an owner of a string of car washes, and graduated from Villanova with an MBA from St. Joseph's University. He became the second Wawa CEO, after his predecessor Howard Stoeckel, to be outside the chain's founding Wood family.