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2012 Power 50: No. 2 David Dillon

David Dillon knows how to keep a good thing going.

After 10 years at the helm of the nation’s largest traditional grocer, Dillon, chairman and chief executive officer of Cincinnati-based Kroger Co., has finally implemented its key pricing and promotional strategy throughout the company and is ready to expand its share-grabbing ways in new territories.

For the first time in several years, Kroger is projecting that it could open more supermarkets than it closes in 2012, company executives have recently told analysts and investors. Kroger said that after 34 consecutive quarters of same-store sales gains, it now believes its core “Customer First” operating philosophy has proven itself and can be rolled out to more markets.

In reporting its first-quarter results recently, Kroger also boosted its profit outlook for the current year. Last year, the company boosted sales by nearly 10%, to more than $90 billion.

“We’re very optimistic,” Dillon told shareholders at the company’s annual meeting last month. “Our overall retail environment seems to be improving slightly. We expect earnings to be even stronger than in 2011.”

Andrew Wolf, a Richmond, Va.-based analyst at BB&T Capital Markets, noted that Dillon has directed what can be described as a “tectonic change in strategy” when the company implemented Customer First in 2003.

“They actually mean it,” Wolf explained. “They bet the company that if you take care of the customer first, sales and profits would come from that.

“Here we are almost 10 years later, and the whole organization is aligned with that approach.”

Earlier this year Kroger rolled out a key element of its Customer First strategy — the component described as everyday fair pricing — at its Ralphs division in California.

“Ralphs is the last large chunk of the company that wasn’t aligned that way to go to market,” Wolf explained, noting that early indications from the rollout at Ralphs are positive.

“Now the entire, nearly $100 billion food, drug and gasoline retailer is out at the forefront of what we think of as traditional grocery stores — by a lot — and they are increasing their lead against the others,” Wolf said.

“They are bringing value to customers and gaining market share, and now they are in a place where I believe in the kind of economy we are in, they are going to show operating margin expansion, and that’s going to make investors happy.”

In addition to pricing, the other components of Kroger’s Customer First strategy include the in-store experience, “people” — meaning employees — and product, which includes a strong, three-tiered private-label program.

Late last year, Kroger launched Simple Truth, a new natural-product brand that it is gradually rolling out to replace the company’s previous Naturally Preferred and Private Selection Organic brands.

Other highlights of the past year include deals with Schnuck Markets to acquire most of that chain’s stores in Memphis, Tenn., and a massive consolidation of Kroger’s pension plans to create more cost-effective and predictable solutions for the long term.

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