KROGER USES DATA TO SEGMENT STORES

CINCINNATI - Kroger, which has been tailoring shopping offers to consumers through its loyalty card data, is now using the same information to inform decisions about store design.The company, based here, has been segmenting its combination stores into "upscale," "value" and "mainstream" categories and designing and merchandising them accordingly during remodels, expansions and new store openings,

CINCINNATI - Kroger, which has been tailoring shopping offers to consumers through its loyalty card data, is now using the same information to inform decisions about store design.

The company, based here, has been segmenting its combination stores into "upscale," "value" and "mainstream" categories and designing and merchandising them accordingly during remodels, expansions and new store openings, Michael Schlotman, senior vice president and chief financial officer, said at the Morgan Stanley Retail Field Trip conference last week in Miami.

"Kroger does not believe in a one-size-fits-all approach," Schlotman said. "As we remodel, expand and open new stores, we are using resources, including our proprietary loyalty card data, to understand the needs and expectations of people who shop in our stores. Based on this understanding, we are segmenting our combination store base into three primary iterations: Value, mainstream and upscale."

Value stores are designed to appeal to customers focused most on price, while upscale stores serve shoppers who "place their primary emphasis on customer service and finding the extra products they want," Schlotman said. Mainstream stores "serve the vast majority between those two extremes," he added.

While the stores will offer the same products in most cases, Schlotman noted that value stores, for example, would feature more facings of value brands such as Gain detergent in the laundry aisle than mainstream or upscale stores. Upscale stores are likely to feature more displays of organic items. "We don't have any one store with only one kind of customer segment," he said.

Kroger has previously detailed its partnership with the British loyalty data firm Dunnhumby as it relates to efforts to target particular shoppers with custom offers, based on purchasing history gathered from its loyalty cards. Schlotman's remarks last week indicated the first time Kroger was using the data for store design and positioning.

"Today's typical grocery store shopper is no longer the stay-at-home mother who makes a weekly visit to her local supermarket," Schlotman said. "Consumers have fragmented into different segments depending on household size and structure, income level, life stage and ethnicity."

Kroger, according to Schlotman, recognized this shift in 2001 and modeled a long-term strategy to grow identical-stores sales in such a framework. The plan involved making operating cost reductions to invest in lower prices and improved store environments. An accompanying financial strategy involves using approximately one-third of operating cash flow to buy back stock and/or pay a dividend, and two-thirds for debt reduction.

Schlotman said the plan was similar to that of European retailers such as Tesco but not often employed in the U.S.

Kroger uses dense locations with tight geographic draws as an advantage in the company's market-share battles with Wal-Mart, Schlotman said. "We want to make sure the customer has to drive by at least two or three good Kroger stores before they get to the Wal-Mart Supercenter," Schlotman said. "That's not too difficult for us to achieve in major markets, where our stores are set to serve a 2.5-mile radius."

From a competitive standpoint, Wal-Mart Supercenters tend to differ from traditional supermarkets only in that the business impact arrives sooner after a competitive opening but also subsides sooner, Schlotman said.

"The business disruption is not any different if it's Publix or Wal-Mart coming in," he said. "The difference is that Wal-Mart disrupts the market quicker - you suffer business loss faster and regain it faster, vs. a Publix, where [disruption] can take five or six years to drain through the market."