While the market knows relatively little about the Kroger Co.'s incoming CFO, it should know this: Gary Millerchip has big shoes to fill and ambitious goals to meet.
Millerchip, 47, will take the Kroger CFO seat in April as its longtime occupant of 18 years, J. Michael Schlotman, begins a transition to retirement after a 30-year career at the Cincinnati retailer. Millerchip will also arrive at a critical juncture of the Restock Kroger strategy engineered in part by his predecessor, where the heavy investments and partnerships forged in this first year are expected to begin turning into heavier financial rewards. His elevation from his current role as CEO of Kroger’s Personal Finance business underscores the importance of alternative revenue streams as part of the Restock outlook, analysts say.
He also has a hard to act to follow in Schlotman, for whom admiration poured from the financial community upon the announcement of his retirement this week.
Analysts following Kroger say Schlotman played a critical role for Kroger as it navigated a rapidly changing landscape for U.S. grocers—with much of that change influenced by his own strategies. They described Schlotman as a highly skilled financial executive with a feel for the art of retailing that’s rare among peers.
“Mr. Schlotman, in our opinion, is a fierce competitor and provided Kroger invaluable financial stewardship over the last two decades through unprecedented change in the consumable industry,” Scott Mushkin, an analyst for Wolfe Research, wrote in a recent note to clients. “Kroger and investors, in our minds, have gained much from his service.”
Schlotman started his career with the Coopers & Lybrand accounting firm in Louisville, Ky., and joined Kroger in 1985. He was elected VP and corporate controller in 1995 and was then named CFO in January 2000, succeeding Rodney McMullen, who since became Kroger’s CEO.
McMullen described having “personally worked side by side for several decades” with Schlotman.
Chuck Cerankosky, an analyst with Northcoast Research in Cleveland, said Schlotman was tested in the 1980s when Kroger fought off two runs at a leveraged buyout and recapitalized, the latter event eventually leading to strategic M&A activity including the $8 billion merger with Fred Meyer Inc. in 1998. That deal helped Kroger reach the West Coast and become the nation’s largest traditional U.S. supermarket retailer by annual sales, a lead it has dramatically grown in the two decades since.
“What’s unique about Mike is how much he’s been through with corporate financing at Kroger,” Cerankosky said in an interview. “He had a great feel for corporate strategy and merchandising you don’t often find in financial people.”
Schlotman was named CFO shortly before Kroger embarked on a customer-centric strategy that came to be known as “Customer 1st,” pioneering the use of shopper data to inform decisions about pricing, assortment and development while building customer loyalty. That resulted in a remarkable span of more than 12 years of consecutive quarterly same-store sales increases even as Walmart rapidly blanketed the country with its Supercenters and grocery stores. After the streak came to an end, Kroger developed its newly launched “Restock” plan, which contemplates turning Kroger into an omnichannel growth company seeking to win a greater share of all food sales.
Restock’s ambitious financial goals include realizing $400 million in incremental earnings before interest and taxes (EBIT) by fiscal 2020.
Chris Mandeville, an analyst with Jefferies, described Schlotman as one of the “chief architects” of the Restock strategy and noted he will be stepping down just as the financial rewards of Restock will be arriving, if all goes to plan.
“We believe this coming year will prove to be a defining one for Mr. Schlotman’s legacy,” Mandeville said in a note to clients. “As such, we'd expect that Kroger does everything in its power to begin showing [quarter on quarter] progress and, eventually, EBITA growth within the next few quarters.”
Millerchip, a native of the United Kingdom, came to Kroger in 2008 from Royal Bank of Scotland, where he led the bank’s personal credit card business among other roles.
In his current assignment, Millerchip leads a division of Kroger that delivers financial and retail services such as credit cards and insurance through Kroger-owned stores. Officials at Kroger’s investor conference earlier this year highlighted growing revenue from that division, noting 8% growth in 2016, 13% in 2017 and an expected 20% this year. These alternative revenue streams, which also include revenues from media, “provides that glide path through the $400 million by 2020,” said Keith Dailey, VP of corporate affairs for Kroger.
At that same event, Millerchip spoke of the company’s new partnership with Walgreens, which includes utilizing some of that chain’s stores as pickup points for online orders and establishing satellite Kroger food departments inside of them.
“We think it has the potential to significantly accelerate our vision for serving America through food inspiration and uplift,” Millerchip said, by expanding Kroger’s core strengths in food and technology with Walgreen locations, loyalty and expertise in health and beauty. “When you combine those two sets of unique assets, we believe we truly have an opportunity to create a shopping experience and even more importantly a level of convenience that’s really hard for anybody in the U.S. to replicate.”
Winsight Grocery Business'August cover story examines the state of The Kroger Co. as the Cincinnati-based retailer enacts the first steps of its Restock program announced last fall. Far more than a collection of tactics, Restock contemplates the changing nature of the food industry itself and Kroger's role in it.
One key to that reinvention are partnerships that are helping Kroger to gain new capabilities and skills that it cannot develop on its own. This, sources say, is a strategy common to the technology field and illustrates how food retailers are evolving to become networks in and of themselves.
This wild, high-speed transformation, expressed in whimsical commissioned cover art by Serge Seidlitz, is indeed something of a “Magical Mystery Tour” for Kroger. Here's a playlist showing how it’s getting by—with a little help from its friends.
Scan, Bag & Go isn’t an outside partnership so much as a means of bringing together Kroger’s technology and operations teams to create a way to give shoppers a faster and more convenient shopping experience while providing the retailer the opportunity to get closer to the customers in the store. The company is expanding it to as many as 400 stores this year.
Earlier this year, Kroger announced an exclusive agreement with the British online retailer Ocado to license its proprietary Smart Platform to facilitate online grocery and delivery via Ocado’s robotic warehouses. Considered by some to be the most advanced of their kind, Ocado says they can make online delivery of even fresh food profitable, at a cost to consumers of about $2 per order. If that turns out to be the case in the U.S., it’s a game-changer.
A partnership with Silicon Valley robotics firm Nuro is, in the words of one observer, a “moon shot” that could provide a cost-effective home-delivery solution via driverless delivery vans, and at the least, it is helping to raise Kroger’s profile among retailers to take seriously when it comes to pursuing delivery solutions in creative ways. It also inspired WGB magazine's August cover design.
As stores lose traditional center store categories to their online counterparts, something has to fill that space. For now, the proprietary clothing line Dip is headed only to Kroger’s Marketplace and Fred Meyer multidepartment stores, but sources speculate that clothing could one day provide a margin balancing, low-weight item to help make e-commerce baskets more profitable. The new line, which will replace any number of current brands at Kroger stores, is designed by Club Monaco founder Joe Mimran and appears to be taking a fresh cue from Kroger’s existing private brands, most notably, Simple Truth.
Kroger tried its own line of meal kits, then handed it over to an expert. Earlier this year, it acquired Home Chef, which is taking over its Prep + Pared line, adding a new offering in stores, and providing an expertise in formulations and consumer tastes and demand that comes with the tight bond of home delivery.
While reaching out to new partners for new capabilities, Kroger at the same time is offering its own secret sauce. It has set up a subsidiary called Sunrise Technologies LLC that is pursuing alternative revenue streams through licensing of its proprietary technologies like the Kroger Edge digital shelf-tag program shown here and the Zigbee router.
Too late for WGB’s print deadline, but along the line of its expansion of digital offerings for customers, Kroger has announced a new direct-to-consumer offering called Kroger Ship. Built atop its Vitacost vitamins and supplements online store and fulfilled through that company’s warehouses, Ship is now offering shoppers more than 50,000 dry grocery and household SKUs and comes with a subscription replenishment model similar to those used by pure-plays such as Amazon.