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krogerprivateselection.gif Kroger Co.
Products from Kroger's Private Selection specialty brand.

Kroger unveils plan to invest in technology, store resets

“Restock” initiative includes private brand growth, digital shopping, meal solutions

Kroger on Wednesday unveiled a series of strategic moves that include reducing its investments in new stores and leveraging technology to accelerate changes in assortments and improve customer service at existing locations.

As previously reported, the company also is considering the potential sale of its convenience-store division, a $4 billion business operating 784 locations in 18 states.

The “Restock Kroger” initiative will involve an accelerated and more data-driven effort around pricing, personalized communications with customers and a massive revamp of product assortments, executives form the Cincinnati-based company explained in Kroger’s annual Analyst Day. Kroger is the largest collector of food purchase data in the U.S., the company said, and it intends to use that data as a competitive advantage as it expands its efforts to provide meal- and food-shopping solutions.

“We will change the way people eat in the U.S.,” said Rodney McMullen, chairman and CEO. “If you are eating, we want to serve you. Unless you are eating in a white tablecloth restaurant, we want to be able to provide that meal for you.”

Among other initiatives in that area, the company is rolling its Prep + Pared meal kit program out to five additional markets in the coming months, up from three markets where the kits are currently offered.

One of the most significant elements of the Restock Kroger plan involves a reset of stores in which it anticipates making dramatic changes to product assortments, based on its trove of data. While the company has long curated its assortments to meet customer demands, the new initiative will be much more aggressive, touching more categories and more stores than in the past, the company said.

While last year the company revamped its category assortment in 6% of its stores using its new data-driven mechanisms, it anticipates do so in 20% to 30% of its stores per year beginning in 2018.

In the pasta category, for example, the company has learned that its own private label brands far outsell name-brand competitors, which has led it to reset the pasta category, giving its own brands a much more prominent positon on the shelves. Similarly, sparkling waters have been strong sellers lately, leading the company to completely rethink the beverage category in some stores.

“We’ve reinvented what beverage sections look like,” said Stuart Aitkin, CEO of Kroger’s 84.51° data analytics division. “We need to make sure our stores stay relevant.”

The resets, which the company describes as the “space optimization” element of Restock Kroger, will vary on an individual store basis, and will involve both optimizing product assortments in each category, improving product adjacencies, and integrating and expanding natural and organic product assortments. Private brands, particularly the Private Selection specialty line and the Simple Truth organic and natural offerings, will see significant expansion.

The category resets “will be done in categories where customers told us it matters,” said Aitkin.

Data will also be used to enhance the personalization of offers to consumers through digital coupons, recipe suggestions and other means, and to help guide the rollout of the company’s ClickList online shopping offers.

Asked by analysts about the possibility of making click-and-collect shopping free for customers, Kroger said that customers don’t appear put off by the $4.95 flat fee and are willing to pay for the convenience.

Kroger will also roll out its “Scan, Bag, Go” mobile app-driven self-checkout service, which has been in test for the past couple of years in about 20 locations, to 400 stores in 2018. The service has been enthusiastically received by customers, Kroger said.

The company is leveraging technology to improve store operations in other ways as well, such as monitoring wait times at the pharmacy counter to alert pharmacists when customers need attention, and helping guide production levels by relaying sales data to employees so they know when to prioritize the restocking of certain prepared-foods items, for example.

Leveraging digital displays at the shelf edge is another element of the technology upgrades the company is rolling out, primarily on endcaps.

Overall, the company will increase technology spending by 200% in 2018 on areas including digital shopping, merchandising, in-store technologies, health and wellness and payments, any by 50% on areas including data, in-store WiFi and legacy system modernization.

“The business we are going to run next year or the year after that can’t be the same as the one we’ve run in the past,” said Chris Hjelm, executive VP and chief information officer.

Overall the company will re-align capital expenditures to spend $1.15 billion on building new and replacement stores and store expansions from 2018-2020, down from the $3.56 billion spent in 2015-2017 as the company invests in its new digital and product optimization initiatives.

Kroger also said the Restock plan is expected to generate $400 million in incremental operating margin by 2020.

Overall capital expenditures for 2018 are projected at $3 billion.

The company also projected that its earnings per share in 2018 would be flat to slightly higher compared with current-year levels, and that identical-store sales would be stronger in 2018 than in the current year.

The company also reaffirmed its financial guidance for 2017, including ID supermarket sales growth of 0.5% to 1%, excluding fuel, for the remainder of the year, and net earnings of $1.74 to $1.79 per diluted share, including an estimated 9 cents per share for the 53rd week. The company said the hurricanes that hit the U.S. in recent months will not have a material impact on its financial results.

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