KROGER Takes the Middle to the Top

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KROGER Takes the Middle to the Top

By Pan Demetrakakes - 09/01/2015

The middle of the road is where you get run over–so the cliché goes.

Well, Kroger has been roaring down the middle of the road for years, setting speed records and bowling over the competition. And it shows no signs of stopping.

America's largest pure grocer has been posting terrific numbers for years, particularly its 47 consecutive quarters of same-store growth. In its most recent quarter, same-store sales (excluding fuel) rose 5.3 percent and net income rose 24.8 percent, to $433 million, over last year's figures. Kroger is now on track to increase same-store sales by as much as 4.5 percent for the year.

Kroger's been doing all this as a conventional, middle market grocer–the kind that is supposedly getting squeezed by high-end food retailers at one end and discounters at the other. But "servicing the middle market," while accurate, is an inadequate description of Kroger's strategy. Under the leadership of CEO Rodney McMullen, continuing the path forged by his predecessor David Dillon, Kroger has been nimble in responding to multiple challenges to its middle-market niche, from introducing successful organic private label products to broadening its reach, geographically and market-wise, through strategic acquisitions.

Scott Mushkin, an analyst who covers Kroger for Wolfe Research, concedes that about 10 years ago, he subscribed to the "stuck in the middle" view of Kroger. But he's come around to the opposite view: "Fast-forward ten years, and it's almost like the middle strikes back."

Mushkin attributes Kroger's success to its agility in responding to consumer trends, especially among younger consumers, in large part through its capacity for data analytics.

"What looked like a bad place to be 10 years ago is an absolutely wonderful place to be right now," he says. "It's wonderful demographically, and it's also wonderful because of what Kroger has done with their business, to move and evolve with the consumer. And they've done this because their data analytics and ability to read these trends is faster than anyone."

A large part of that evolution has to do, paradoxically, with center-store products. The "perimeter" with its fresh food has been getting a lot of attention in the grocery industry, but Kroger's CFO, Mike Schlotman, told an investor conference in June that the center of the store is a big key to Kroger's progress. It's a question of volume, Schlotman said: Center-store items represent half of Kroger's total sales volume, while produce comes to only about 10 percent.

Kroger can tailor its center-store and other selections to local needs and wants in large part because of its data-analysis capacity. The company has long been a pioneer in the use of store-level data to guide operations; it has capped that with the recent purchase of most of the assets of dunnhumbyUSA, the loyalty program/data gathering system it owned jointly with British retailer Tesco, and their conversion to a new company called 84.51° (named for the longitude of the new office, in Cincinnati). 84.51° will enhance Kroger's data-analysis capacity while keeping it out of the hands of competitors and allowing Kroger to use it as even more of a profit center (by servicing non-competing retailers).

Another way Kroger is defending its market position is through acquisitions of upscale competitors, like last year's purchase of Harris Teeter and this year's of Hiller's, an eight-store chain in the Detroit area. In some cases, like the Harris Teeter stores in the Southeast, it's keeping the acquired banner; others, like the Hiller's stores and three Harris Teeters in Nashville, will be converted to Krogers.

"Kroger at this stage is a better mousetrap," Mushkin says. "They can run a better store with better private label, better pricing, better perishables, better customer service."