Kroger’s Sales Rise in Midst of Digital Transformation

Kroger reported identical sales without fuel of 2.2% during its second quarter of 2019, marking its strongest quarter since it launched its transformation plan. The grocery retailer is halfway through the second year of its three-year Restock Kroger plan, designed to reposition its core business by 2020 to meet shifting consumer behavior and consumer demands to shop how, when and where they want.“Our internal customer measures are improving even faster than our identical sales growth,” said chairman & CEO Rodney McMullen during the company’s earnings call. “There is always a lag between improving the customer experience and when the customer will reward us.”During the quarter, Kroger expanded its digital coverage area to reach 95% of its customers, meaning most of Kroger shoppers now have the option to choose pickup or delivery fulfillment, in addition to shopping in a store. Specifically, Kroger expanded to 1,780 pickup locations and 2,225 delivery locations.“We know the seamless experience is essential to the customer experience both today and tomorrow, which is why we continue to invest heavily in our capabilities in this area,” noted McMullen.Kroger's digital sales grew by a solid 31% in the second quarter. Pickup and delivery sales growth continued to perform in the mid 30%.“Going forward, we expect our digital sales growth rate to moderate year-over-year, primarily due to the cycling of Home Chef and as a result of our disciplined focus on growing the ship customer of our other digital offerings like Vitacost,” said McMullen.“Importantly, we are starting to see improving operating profit trends in our digital business,” he also noted. “Our digital business is becoming less of a headwind, which is an important inflection point as we continue to invest in new capabilities to support our transition to seamless. However, I do want to note this is still a significant investment for the company. A great example of partnering for customer value is our continued rollout of Ocado sheds.”Kroger's Fifth Fulfillment CenterKroger and Ocado, one of the largest dedicated online grocery retailers, announced Dallas, TX, as the fifth location for a customer fulfillment center (CFC). Kroger and Ocado announced plans for a new high tech customer fulfillment center in Forest Park, GA, in July."Kroger is incredibly excited to construct one of our industry-leading customer fulfillment centers in Dallas, Texas — one of the largest cities in America — in relationship with Ocado to bring fresh food to our customers faster than ever before," said Robert Clark, Kroger's SVP of supply chain, manufacturing and sourcing in a press release. "Through our strategic partnership, we are engineering a model for the region, leveraging advanced robotics technology and creative solutions to redefine the customer experience for our customers in North Texas and across America."Kroger has committed to building up to 20 CFCs, powered by Ocado, to accelerate its ability to provide customers with anything, anytime, anywhere. The CFC model – an automated warehouse facility with digital and robotic capabilities, also known as a "shed" – will be replicated to serve customers across America.“What's so exciting about Ocado is that their model to deliver to customers is significantly less costly than our existing model,” noted McMullen in the call. “So not only will sheds accelerate our ability to provide customers with a seamless experience, they will also help us to do it in a much more cost effective way. We know Ocado's value is not just its current capabilities, but also in how quickly the company is able to innovate to serve a rapidly developing online consumer market.”The Dallas CFC will measure 350,000 square feet and is expected to create up to 400 new jobs."The Dallas-Fort Worth area is one of the fastest-growing metropolitan areas in America and with this cutting-edge technology, Kroger is confident our partnership with Ocado will play an integral role in the continued commerce growth of this dynamic region," added Tom Schwilke, Kroger Dallas president. "This transformative fulfillment center will create local jobs and accelerate Kroger's ability to expand our products and services to a larger footprint.” The Dallas CFC will be located at Interstate 20 at the corner of 4200 Cleveland Road and 4241 Telephone Road. The CFC is scheduled to break ground in early 2020 and become operational in the following 24 months.McMullen noted during the call that the profitability modeling that Kroger has done for the projects used the experience Ocado had in their ramp ups in England, adjusting for traffic patterns in the U.S., locations of stores and customers, and labor rates.Kroger broke ground on its second CFC in Groveland, FL, in July. “Obviously, until you get a facility open, you don't know whether to follow those assumptions are correct,” he noted. “We would typically expect that facility to be somewhere in year two to year three before it gets to profitability. But, time will tell.”

Kroger’s Sales Rise in Midst of Digital Transformation

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