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In the last five years, Kroger CEO Rodney McMullen and team beat back Amazon by deploying high-tech solutions, increased convenience and competitive pricing.
Corrie Schaffeld | Cincinnati Business Courier
On his desk in Kroger’s downtown Cincinnati headquarters, CEO Rodney McMullen keeps a copy of the Cincinnati Business Courier from June 16, 2017. The cover headline reads, “How Amazon is crashing Kroger’s party.”
The newspaper has remained on his desk for more than five years, a talisman of sorts. That day, Amazon.com shook the business world when it announced plans to dive headfirst into the grocery business, reaching an agreement to buy organic chain Whole Foods for $13.7 billion.
Amazon’s move was supposed to change everything for the ultra-competitive food business, and Kroger was squarely in its crosshairs.
“It’s just a reminder,” McMullen said recently, “that you can’t take anything for granted.”
McMullen and Kroger certainly didn’t. And what many industry watchers thought would happen, that Amazon would eat Kroger’s lunch, never did. Quite the opposite, in fact.
But back in 2017, the market had other ideas.
Investors reacted swiftly and fiercely. Kroger’s market value was slashed by $2 billion that day as its shares plummeted 9%. Ironically, that drop came a day after Kroger’s stock plunged 19% as it posted mixed quarterly earnings and lowered its guidance. That double whammy meant Kroger had lost a staggering $7 billion in market value in two days, its stock plunging 26%.
Kroger was far from alone. Grocery-related stocks lost $22 billion in market value the day Amazon made the big announcement. CNBC’s Jim Cramer didn’t mince words and called the deal “a game changer” for the industry.
“They will dominate food in the next two years,” he said then. “Amazon wants to do for food what they did for every other part of retail. This is a threat to everybody who sells food because you can’t compete with Amazon. They will not let you compete.”
Fast-forward five years. Kroger’s stock has since doubled, jumping to $45.68 on Oct. 4.
Its national share of the grocery business has actually climbed 1.5 percentage points in those five years while the combined grocery market share of Amazon and Whole Foods has held steady.
As of June, data and consumer insights firm Numerator puts Kroger’s national share at 9.9%, second in the country behind Walmart with 20.9%. Amazon and Whole Foods combined weigh in at just 2.9%.
By any measure, Kroger has thrived.
“That is a surprise,” said Burt Flickinger, managing director of New York-based Strategic Resource Group. “People thought Amazon was on its way to conquering the world in food retailing the same way it had done in book, audio and music retailing.”
But Kroger didn’t back down.
“Kroger is clearly the supermarket leader,” Flickinger said.
According to experts, Kroger has flourished through a mix of smart moves and improving on existing advantages.
To begin with, Kroger execs weren’t shocked by Amazon’s acquisition of Whole Foods.
“We had always assumed Amazon was going to get into the supermarket business in a more aggressive way,” McMullen said.
Whether or not Amazon got in the game, Kroger planned for a future that would be more competitive, he said. “That’s been true for the last 100 years.”
While Kroger stuck to its formula for success, it also made some changes.
Since the Whole Foods deal linked Amazon’s digital retailing prowess with organic grocery expertise, Kroger needed to address those two areas immediately.
“Kroger blunted that threat effectively by scaling up its organic offerings very successfully,” said Tim Meyer, president of Anderson Township-based Meyer Capital Management. The grocery giant’s Simple Truth brand now generates $3 billion in annual sales.
Kroger dramatically ramped up its digital strategy as well, and to great effect. Even pre-Covid, the company attacked Amazon’s convenience factor by scaling up customer pickup and home delivery capabilities. It formed partnerships with delivery firms, experimented with driverless cars and rolled out fast-delivery programs. Once customers began social distancing, the demand for delivery only snowballed.
“It’s a company at the vanguard of digital ordering and fulfillment,” JPMorgan Securities analyst Ken Goldman said of Kroger at a Sept. 21 investor conference.
In 2018, Kroger formed a U.S.-exclusive partnership with British online grocery delivery company Ocado, known for automated warehouse and distribution centers.
“Kroger got a five- to 10-year head start on everybody else,” Flickinger said.
The grocer is also investing billions in digital. It’s since opened five huge Ocado customer fulfillment centers, including the 375,000-square-foot facility in Monroe in March 2021. Over the next two years, Kroger plans to have 17 Ocado facilities around the country, providing entry into new markets in the process.
Long term, the partnership will dramatically improve Kroger’s speed and efficiency in filling digital orders for store pickup and home delivery.
Kroger’s digital sales have soared from a $5 billion annual rate at the end of 2018 to $10 billion in 2020. The company has a goal to double that to $20 billion by 2023.
In addition, Kroger has improved its online shopping experience and added services such as Kroger Delivery Now, a service that delivers groceries in as few as 30 minutes. In July, the company launched Boost, an Amazon Prime-like membership program that offers unlimited delivery once customers pay a subscription fee.
“They’ve turned into something of a technology company, and I don’t think they get credit for that innovation,” Meyer said.
Along the way, Kroger gave customers options. James Lewis, equity research analyst at downtown-based Bartlett Wealth Management, credits Kroger’s ability to recognize the value of its seamless strategy to offer customers shopping in stores or digitally for pickup or delivery.
“It was really smart, having its store base complemented by its online presence,” he said.
Amazon, Lewis points out, acquired only 500 stores with Whole Foods. That wasn’t enough to compete when compared with Kroger’s 2,742 stores, spread across 35 states.
“People thought stores were dead, but they’re not,” Lewis said. “Brick and mortar is a good complement to click and order.”
CNBC’s Cramer looks no further than his daughter’s shopping habits to see Kroger’s strategy. She lives in Oregon near a Kroger-owned Fred Meyer store.
“She said, ‘Look at Simple Truth and the branded product next to it. It’s the exact same stuff but it’s much cheaper,’” Cramer said in an interview. “There’s no reason why you would buy something other than Simple Truth. That’s something they did brilliantly.”
Kroger has also done a terrific job, Cramer says, of understanding what customers want – value and quality – and giving it to them when and where they want it.
“Kroger has good stuff at inexpensive prices,” he said. “It is kind of a marvel. Kroger represents value. Whole Foods represents extravagance.”
Kroger has invested billions of dollars in the past five and 10 years in keeping prices low. Flickinger’s firm studied its prices and found them significantly cheaper than Whole Foods.
The store brands, such as Simple Truth and Private Selection, which as a group Kroger refers to as Our Brands, generated $28 billion in revenue last year. Sales grew 10% in the second quarter.
The grocery giant bought meal kit company Home Chef in 2018. That became a $1 billion brand by annual sales last year. And it helped Kroger’s push into prepared and quick-prep meals as consumer demand for those products soared.
On the other side of the aisle, Amazon didn’t move into grocery the way observers expected.
“I remember thinking at the time, this was a good first step,” Lewis said. “But they really haven’t (taken) a second step. They’re kind of debating how to move forward. You would have thought if they were going to do it on a store level, they would get that store base up to 2,500 or 3,000 stores.”
Cramer doesn’t think Amazon is sure how it’ll proceed. It has launched its own stores, such as Amazon Go and Amazon Fresh. But nothing comes close to Kroger’s breadth.
“I still think it’s an experiment,” he said of Amazon’s efforts.
In the meantime, Lewis believes Kroger is well positioned.
“Sometimes the sea is smooth and sometimes it’s rough, but they’re able to manage it no matter what,” he said. “They’re like a steady, safe harbor.”
Finally, Kroger’s attitude toward competition is crucial to its success. McMullen refuses to let the company rest on its laurels.
“I’ve been around a long time, and I never remember us talking about beating somebody,” McMullen said. “We’re much more focused on making sure the customer’s experience continues to improve. In our meetings, sometimes we have to remind ourselves we had a pretty good quarter.”
Investors ask about Amazon all the time. “I tell them, ‘If you hear us say we think we’ve figured it out, it’s probably not a good sign,’” he said. “The beautiful thing about free enterprise is you have to win the right to serve your customer every single day. If you take that for granted, there are a lot of other people out there who want to serve them as well. They’re getting better every day, so you darn well better get better every day.”
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