The Kroger Co. closed out a volatile fiscal year on a high note, with fourth-quarter financial results hitting or exceeding expectations and with officials confident they could continue to navigate what’s been a rocky path to reinvention.
For the quarter ending Feb. 1, the Cincinnati-based retailer reported sales of $28.9 billion, an increase of 2.3%, excluding fuel and adjusted for dispositions; same-store sales increase of 2%, excluding fuel; and adjusted earnings per share of 57 cents. Revenues and comps met Wall Street expectations, and the company’s guidance and earnings beat estimates by a penny. Gross margin as a percent of sales was 22.1%, an increase of 6 basis points and also ahead of analyst expectations.
Those results cycled a disappointing fourth-quarter performance a year ago that triggered a loss of confidence in the retailer’s ongoing Restock initiative, eventually leading to a reset of its financial ambitions, but essentially doubling down on its goals supported by a new “Fresh for Everyone” marketing campaign. Officials this week noted Kroger was delivering on those revised expectations behind renewed sales momentum and execution in stores, strength in private brand and digital sales, and progress in areas such as alternative revenue generation steams that were supporting profits—all goals of the Restock program. These are “widening and deepening competitive moats” for the company, CEO Rodney McMullen said in a presentation.
Kroger’s stock—which had been beaten down for much of last year and more recently gaining momentum behind, among other things, new investment from Berkshire Hathaway—shot up by nearly 9% following the news, which sparked a new 52-week high.
“We felt really good about the progress and momentum during the year … in terms of identical sales. And if you look at the operational execution, I think [Chief Operating Officer] Mike [Donnelly] and the whole team really have done a great job on those areas; we’re really taking care of the customer," McMullen said. "We continue to aggressively invest in the seamless experience. And if you look at the alternative profit, it continues to come as we expected it would."
“So when you look at all those things together, the last two or three years,” McMullen continued, “we’ve been working hard on transforming our fundamental business model, and we feel like we’ve made significant progress on that. And we continue to invest in the future from a digital experience. So we’re excited about where we are. We’re even more excited about where we’re headed.”
Private Brand Strength, CPG Marketing
Company officials highlighted $23 billion in private brand sales this year, led by its core Kroger brand, which did $13.7 billion in sales. The retailer’s natural/organic Simple Truth label generated more than $2.5 billion, and its premium Private Selection exceeded $2 billion in sales for the first time. Simple Truth, McMullen said, was the country’s largest natural/organic brand. The company introduced 758 new private brand items last year, including trend-right selections in plant-based foods. Simple Truth Emerge, a new plant-based fresh meat brand, was introduced in January and already is the third-leading product in the category, McMullen noted.
At the same time, McMullen said Kroger is capturing more trade dollars from consumer brands who are partnering with Kroger on media and merchandising initiatives, a key alternative profit generator. McMullen cast this as a win-win partnership. “We tell the CPGs it doesn’t do us any good if you just move the trade dollars over. What we’re trying to do is provide something that you can’t get in the marketplace from a media standpoint. We’re getting great feedback from the CPGs. We have incredibly high retention rate. And many CPGs continue to expand the amount of money they spend with us,” he said.
Digital Sales Rise on Fee Cut Promotion
Kroger’s temporary suspension of fees for online pickup orders announced late last year as a means to help launch its new brand—and respond to the accelerating speed and price reductions of competitors in the e-grocery space—helped digital sales to grow by 22% in the quarter, but officials were coy as to answering the “fee vs. free” question going forward.
Emphasizing its goal wasn’t to arrive at a price for a service but to lower its own costs and support a “seamless” experience for customers, McMullen said Kroger was anticipating the opening of its Monroeville, Ohio, e-commerce fulfillment center built in partnership with Ocado in about a year, with a second Ocado facility in Florida set to open soon after.
McMullen said those warehouses would serve as nodes in a “flexible” system that would also use stores and other regional facilities to support e-commerce at a lower cost. “You should not assume just large facilities,” he said. “We are designing a flexible distribution network, combining this aggregated demand and proximity of our stores, medium-sized facilities and large facilities. Our network will flex as demand matures, and the optionality will allow us to fulfill same-day or next-day delivery or pickup.”
In other matters, Chief Financial Officer Gary Millerchip, in response to a question, said it was “way too early” to determine the degree to which customer shopping patterns could change due to the coronavirus, although he acknowledged higher sales volumes in certain goods categories such as water, paper products and soups.
McMullen said the company has established a task force that has activated a pandemic preparedness plan, with a focus on our customers, associates and supply chain. “We generally believe that we have limited supply-chain exposure in China, as the majority of the products we source is domestic. We certainly feel for those in America and around the world who have been affected. The health and well-being of our associates, our customers and our communities is Kroger’s top priority. Always being there for our communities is part of our heritage, and especially in times of uncertainty," he said.
The Kroger Co. this week unveiled a comprehensive new branding and marketing initiative that includes a tweak of its corporate logo and utilizes animated spokespeople called “Krojis” to help carry its message.
Stemming from Kroger’s first engagement with an external ad agency, DDB New York, the unveiling has drawn mixed reaction from a group of designers, brand experts and industry people contacted by WGB. In general, they are applauding the clever use of animation, the joyfulness and the egalitarian message reflected in the new approach, but they also expressed reservations over the new logo. Others worry whether Kroger—traditionally a humble brand in the midst of a massive reinvention that has not gone completely smoothly—is prepared to stand up to the new attention it is calling to itself and its brands.
What follows are more images, background and reaction.
Todd Radom, a Brewster, N.Y.-based graphic designer who specializes in design for pro sports, called the change “an engaging brand refresh. The updated logo retains the quirky and kind of charming attributes of its predecessor, and it seems like it’s digital-friendly and well-constructed. The DNA and the history are retained thoughtfully here.”
“Thematically, the idea of ‘Fresh for Everyone’ seems spot-on. After all, what’s not to like about that? The Kroji characters are fun and attention-getting, but I do wonder how long they will retain their relevance,” Radom told WGB. “If the intent is to cut through the clutter and to put forth an ownable and noticeable brand identity and platform, mission accomplished. How this will age is another story entirely, but even a five-year window of relevance represents a win.”
Armin Vit, who runs a Bloomington, Ind.-based branding firm called UnderConsideration and an associated blog devoted to corporate brand reinventions called Brand New, expressed mixed reaction in a post this week, saying Kroger’s odd-but-iconic logo made for a tricky reinvention. The new treatment, he said, is “both not terrible AND terrible, which adds up to mediocre unfortunately.”
Of the Krojis, Vit wrote: “I think they are kind of cute, and the flexibility to create people of every gender, race and age on demand is actually quite brilliant but it feels like a random solution for a grocery store and, somehow, like an antiquated creative approach to take.”
Brand New’s readers—a group of design critics generally not known for doling out universal praise—pointed out lots of minor criticisms of the logo, including some alleged sins of kerning, and were actively posting their own examples of what they might have done differently. An online poll accompanying the post showed about half of all voters calling the logo and the execution “bad,” but they were kinder to the Krojis. Just 38% of them called them “bad,” with 28% choosing “great” and another 34% “fine.”
“The hideous K is something they’ve been clinging to, weird and likely unintentional S-curve and all,” one commenter wrote. “Obviously, Kroger must find some equity in it since they've been using it for so long, but surely there's a better way to execute it. I'm very enthusiastic about the 3D characters, though. They're very cute and are carrying most of the weight in conveying the new tone of the brand.”
Another said: “Dear, oh dear, this is possibly the worst rebrand I’ve ever seen on here.”
Veteran industry consultant Mark Heckman reacted to a Twitter post on the new branding with a single word: “Zzzzzzzzz.” When pressed for more substantive remarks, the Bradenton, Fla.-based president of Mark Heckman Consulting said he’d be willing to retract the snore if he could be convinced he would also see “sustainable improvement” in the retailer’s stores.
“I have been through so many of these branding campaigns and unfortunately, have become a skeptic of most,” he said. “Unless there are visceral changes to the customer experience that accompanies a new logo or tag line, it just becomes an internal mechanism for shareholders to believe something interesting and new that actually warrants this attention.”
Laura Ries of Atlanta-based advertising agency Ries & Ries does not consider herself a fan of the new look and is a similar skeptic of Kroger.
“The logo tweak makes it less legible. Hard to believe they exaggerated the swoops more,” Ries said. “Focusing on fresh is going to differentiate them? I don’t think so. In a sea of sameness, saying you are fresh is just more of the same. Kroger is stuck in the mushy middle of the market. They aren’t upscale and organic like Fresh Market. They aren’t low cost like Walmart or Amazon. And they even don’t make shopping a pleasure like Publix. When you think fresh, Sprouts or Trader Joe’s or anything but Kroger probably comes to mind. Consumers have an image of Kroger in the mind and changing that is going to be difficult. Some cute characters might distinguish the ads but it won’t make much of a dent in the brand.”
In Jim Stengel’s "The CMO Podcast" published this week, Amanda Rassi, VP of marketing for Kroger , explained that the new brand followed 18 months of internal reinvention to bring a more strategic edge to Kroger’s marketing, media and creative teams as they, like stores, orient themselves to a fast-changing retail world built behind consumer data. In practice, that’s meant retitling dozens of jobs and acquiring new talent, and in advertising, bringing forward attributes of a brand that the company has traditionally been hesitant to share in a bold way.
“In today’s world, if the creative isn’t light-yourself-on-fire awesome, it’s not going to break through,” Rassi said.
A key learning for Kroger as it explored agencies to work with and a new approach to creative was examining Instagram feeds of various grocery brands. Without corporate logos accompanying them, Rassi said, there was nothing to distinguish the photos of one supermarket to the next, giving Kroger the opportunity and challenge of cutting through a “sea of sameness.” The retailer considered several pitches, she added, but said DDB New York’s treatment “was the one that stuck in your mind. It was the one that everyone was talking about the next day.”
In that sense, mission accomplished.