Key development: Producing early success of margin/sales growth plan.
What's next: Continuing to execute sales strategy.
Kroger three years ago took the lead in the industry when, recognizing that traditional supermarkets can't beat Wal-Mart Stores on price, it embarked on a plan to grow market share through a mix of price and customer-service initiatives.
Initially, results were erratic. They turned up, though, in the quarter that ended May 21, when sales and profits showed smart gains of 6.2% and 12%, respectively.
One quarter is just that. But David Dillon can afford to bask in the results. They restored confidence in Kroger's plan to balance profit margins and sales through a mix of item price, store atmosphere, variety and service, an approach Dillon has continued since becoming chief executive two years ago and chairman a little more than a year ago.
The biggest conventional food retailer's progress showed the game is far from over for old-fashioned supermarkets.
"Clearly, they want to drive the business through sales growth," said Chuck Cerankosky, an equity analyst for KeyBanc Capital Markets, Cleveland. "It's beginning to see a payoff in earnings, while consolidation in the industry is clearly affecting weaker players."
Under Dillon, Kroger's been advancing on other fronts.
Knowing that shoppers prefer more than one channel, the company is increasingly mirroring the fragmenting food retailing industry in its store makeup. It's expanded such diverse formats as its Food 4 Less low-price banner, perishable-oriented Fresh Fare model and Marketplace superstore, a key defense against Wal-Mart.
Kroger also is setting the pace in technology, a particular interest of Dillon. The retailer courts big spenders through rewards tied to purchases they make using a new Kroger credit card, especially when they buy items in its vaunted private-label program. Kroger made a big commitment to loyalty marketing in 2003 when it invested in Dunnhumby, the London-based marketing firm, and sources said it's since begun a direct-mail test in certain markets aimed at current and potential best shoppers. "They're very clever in understanding that to compete against big-box stores, they need to hold onto their shoppers better than they have in the past," said Steve Bachler, who heads planning and customer development at the Ryan Partnership, Wilton, Conn.
Time will tell if Dunnhumby can repeat in the United States the success it had with U.K. food giant Tesco. The knowledge gleaned from Kroger's broadly accepted loyalty program, though, will help the retailer as it tweaks assortments and diversifies its formats, observers said. "The database is out there," Cerankosky said. "The key is using the technology to mine that data and get the right promotions to those customers."
Dillon needs to stick to the margin/sales plan while holding down costs -- not an easy task for a company whose workforce is almost entirely unionized -- and quelling impatient shareholders. "Some observers might not want to be as patient and want to see each and every quarter showing a specific gross profit margin," Cerankosky said, "where the reality is, it's going to move around some." With three years invested in the strategy, though, Dillon, who strives to operate undistracted by outsider attention (he declined to be interviewed for this article), isn't likely to start managing for the short term.
