As The Kroger Co. approaches the finish line of its Restock transformation, its investments—along with a structural jolt that came with the coronavirus pandemic—will lead to stronger-than-anticipated results this year and next, CEO Rodney McMullen said in a presentation to investors this week.
The update to investors came a little more than three years after the company first introduced Restock—a comprehensive investment strategy meant to position the retailer to meet changing consumer behaviors and adapt to the oncoming omnichannel world, while resetting its shareholder return goals. Digital sales have quadrupled since then, a new source of revenue through digital advertising has opened and a “seamless ecosystem” connecting Kroger shoppers to a breadth of online and physical shopping, delivery and pickup options is now available for 98% of its shoppers, McMullen noted. Along the way, Kroger changed assortments and presentation in physical stores; acquired or partnered with multiple technology, service and product partners; begun developing a direct-to-consumer online business including nonfood; and is nearing the opening of a fleet of high-tech distribution centers that promises to transform the profitability of those omnichannel options.
“Kroger’s success has always been tied to our ability to see where the customer is going, and proactively address those changes. So we set off on a journey to transform our business model. And while this journey hasn’t been perfect, we have made significant progress,” McMullen said, according to a Sentieo transcript.
“Under Restock Kroger, we have made significant investments to transform our business,” he added. “These investments, combined with the structural shifts related to customers eating more meals at home, give us more confidence that Kroger’s performance in both 2020 and 2021 will be even stronger than previously anticipated, and we are incredibly excited about the future.”
The remarks—which were “directional” in nature, reiterated previously stated outlooks and stopped well short of a presentation of a succeeding Restock strategy—came in lieu of a previously scheduled investor conference that has moved to March of next year. At that event, Kroger officials said they would share outlook and additional detail of the drivers of its long-term growth model, including the closely watched partnerships with Ocado and Walgreens.
The global coronavirus pandemic, McMullen noted, has played a role in improving the outlook for Kroger by further altering consumer behavior in ways to play to Restock’s strengths in fresh food presentation and omnichannel offerings.
“We believe several of these shifts are structural and will last well beyond the pandemic,” McMullen said. “Customers are rediscovering their passion for cooking at home, learning to cook and have an aspiration to eat more healthy foods. As families prepare more meals at home, Kroger’s reputation as a leading choice for fresh product, plus the quality, value and selection of our brands, becomes an even more important driver of customer choice.”
During the pandemic, Kroger has gained market share along with sales, and the move among customers to omnichannel has further accelerated. “We knew that our decision to invest in digital would be rewarded by our customers,” McMullen said. “Over time, digitally engaged households spend more with Kroger. And from a profitability stand perspective, we will reach a point of indifference regardless of which channel they choose to engage with us.”
Analysts participating in the call had a variety of questions for McMullen and Kroger Chief Financial Officer Gary Millerchip, many that would appear to determine the degree to which the pandemic has impacted results and how sustainable that boost will be going forward, when Kroger will lap massive sales boosts achieved this year.
“There’s certainly going to be some headwinds around cycling the sales and the impact of the business there,” Millerchip said, while urging analysts to recognize there are likely to be “puts and takes,” including ongoing productivity and a cost-savings initiative. More details on that are to be shared at the March presentation, Millerchip said.