NEW YORK -- Kroger Co., Cincinnati, said it is using its massive buying power to negotiate "coordinated purchases" from suppliers in order to drive down product prices and cut transport and warehousing costs.
Joseph A. Pichler, chairman and chief executive officer, told a group of investors here last week that the move was part of a strategy to use Kroger's geographic diversity and marketplace dominance to lower prices on grocery items and other merchandise.
The initiative is also designed to reduce inventory costs in Kroger's warehouses by moving product "upstream" and freeing space.
"We'll use cost efficiencies of our $25 billion sales to negotiate additional coordinated purchases from suppliers," Pichler told investors at the annual Donaldson, Lufkin & Jenrette Food Retailing Conference. "Notice I said 'coordinated,' not 'centralized.' "
Kroger has set up four "consolidation warehouses" that are currently servicing all 16 Kroger divisions. These facilities (located in Fountain, Colo.; Bluffton, Ind.; Cleveland, Tenn.; and Portland, Tenn.) allow the company to buy and ship health and beauty care, general merchandise, grocery, private-label and slow-turning merchandise in whole truckload quantities, cutting product costs, Pichler said.
Kroger has also reduced logistics costs with the warehouse consolidation, which includes an increase in cross docking and a reduction in inbound freight costs, Pichler said. In addition, the company has closed two warehouses, cutting costs further, Pichler said.
"Our fundamental strategy is to achieve the responsiveness of decentralized merchandising and operating authority, combined with the economies of scale available from coordinating volume-based activity across our $25 billion size," Pichler said. "We want to have our cake and eat it too."
Kroger operates 1,356 stores under the banners Kroger, Dillon Food Stores, King Soopers, Fry's, City Market, Gerbes Supermarket and Sav-Mor Foods. Kroger led all supermarket companies in 1996 with sales of $25.2 billion. In addition to supermarkets, the company has 831 convenience stores, 35 private-label food processing plants and a network of distribution centers.
For many years, Kroger had procured some of its products centrally, including health and beauty care items, produce, fresh meat, deli products and company supplies. But 10 years ago, each of Kroger's divisions began purchasing on its own.
Under the new, coordinated program, Kroger will consolidate some purchasing at the national level, Pichler said. The program was made possible through $128 million worth of investments in logistics in 1995 and 1996.
Although consolidation plans have been in the works for about two years, actual implementation began just "a couple of months ago," Pichler said. The company will fine-tune the program over the next six months based on data it gathers from its stores, warehouses and vendors.
Pichler would not disclose the potential savings, the number of stockkeeping units or the vendors involved in the initiative because he said many leading competitors were seated in the audience. However, he said vendors have reacted favorably to the idea so far.
The consolidated purchasing effort will be transparent to the average customer, Pichler said, except that customers may see some lower prices. The only change individual stores will notice is the effect on the bottom line, Pichler added.
"We had 16 divisions, and we had 16 different ways of buying, and that's OK up to a point," Pichler explained. "What we didn't want to do was what Kroger did in the old days -- when we would buy centrally and tell Memphis what was best for Memphis and then turn around and tell Phoenix what was best for Phoenix. They are different markets, with different competitors. The efficiencies on paper looked terrific, so we were buying stuff cheap, but there was only one problem. The customers in Arizona don't want it. We wanted [low prices] as well as flexibility."