In his first full quarter as CEO of the nation’s largest supermarket retailer, Rodney McMullen had the pleasure of reporting sales and profits that exceeded estimates and increasing the growth forecast for a company that was already poised to surpass annual sales of sales of $100 billion.
McMullen became CEO of Kroger on January 1 when he replaced Dave Dillon, a veteran supermarket executive who cemented his legendary status by leading Kroger to a remarkably consistent performance during the past decade in one of the retail industry’s most competitive sectors. During Dillon’s tenure, Kroger notched 41 consecutive quarters of identical store sales growth. The stronger than expected 4.6% increase McMullen announced on June 19 extended the streak to 42.
The improved productivity of the retailer’s existing stores combined with an aggressive stock buyback program enabled Kroger to grow adjusted earnings per share 18.5% to $1.09 from 92 cents. Net income increased to $557 million from $481 million. With the year off to a stronger than expected start, McMullen raised the company’s full year outlook and indicated the identical store sales growth will continue in the coming quarters.
"Our strong first quarter results set us up to deliver a 12% to 15% net earnings growth rate for the year, partly due to the benefit of Harris Teeter, compared to our long-term growth rate of 8% to 11% plus the growing dividend,” McMullen said. “We are pleased to start the year with growth momentum while also returning $1.1 billion in cash back to shareholders this quarter through our buyback program."
Kroger closed on its acquisition of the 227 unit Harris-Teeter chain on January 29, so the first quarter results benefited from the inclusion of the regional supermarket operator’s sales which totaled $4.7 billion in 2013. Kroger’s total first quarter sales increased 9.9% to nearly $33 billion and grew at an even faster 11.4% rate if fuel sales are excluded.
The company now expects its full year identical store sales to increase in a range of 3% to 4%, versus an earlier forecast of 2.5% to 3.5%, and said full year earnings per share would range from $3.19 to $3.27, versus an earlier forecast of $3.14 to $3.25.
"Kroger's customer first culture, remarkably consistent execution and renewed commitment to growth have led us to 42 consecutive quarters of positive identical store sales. We will continue building on this resilient foundation to grow aggressively into the future,” McMullen said.
While most retailers profess to a customer first strategy, few execute it as well as Kroger, a company that benefits from leadership by old school grocers and a unique operating model. McMullen is a Kroger lifer who joined the company in 1978 as a part time stocker, rose through the ranks to earn a seat on the board in 2003 and was named president and COO in 2009. Last September he was given the nod to succeed Dillon, a 37-year Kroger veteran, who will remain chairman of the retailer’s board through the end of the current fiscal year, December 31.
Filling McMullen’s shoes was Michael Ellis, another longtime Kroger executive who joined the company three years earlier than McMullen as a 16 year old parcel clerk. After McMullen was tapped to succeed Dillon, Ellis assumed the role of president and COO after previously serving as SVP of retail divisions. In that capacity he oversaw five of the company’s supermarket divisions and Kroger’s jewelry and convenience store business. Prior to that he served as president of Kroger’s Fred Meyer division, a retailer Kroger acquired in 1999. To replace Ellis, Kroger named Mark Tuffin SVP of retail divisions. With Kroger since 1996, Tuffin had previously served as president of the company’s Smith’s Food and Drug Stores division.
Beyond leadership, underpinning Kroger’s “Customer 1st” strategy is a decentralized operating structure that involves 20 distinct divisions. Customer-facing decision-making about merchandising is placed in the hands of local leaders while non-customer facing functions are centralized to realize expense synergies. The approach works for Kroger even though a case could be made that operating stores under a single name plate nationwide and consolidating the 20 divisions down to 10 regions could yield expense savings. Even so, Kroger shows no signs of heading in that direction with the Harris-Teeter deal the latest example. The company plans to operate the stores under the well-established name and kept the retailers senior leadership team largely intact.
The Harris-Teeter deal will give Kroger’s top line a big boost this year with additional growth expected to come from identical store sales. Longer term though, a huge opportunity looms to enter new markets while building upon some other well established strategies. For example, Kroger now has one store in Florida, the nation’s third most populous state, and that came as a result of the Harris-Teeter acquisition. Meanwhile, it doesn’t have any stores in New York or Pennsylvania or Iowa, Minnesota and Wisconsin. Even in a state like Texas where the Kroger nameplate is well known, it operates only 202 supermarkets. Kroger ended last year with a total of 2,640 supermarkets.
Beyond store expansion, Kroger continues to drive growth with private brands and an industry leading loyalty program. Kroger’s private brands accounted for 27% of unit volume and 24% of dollar volume last year. Both figures are expected to increase this year as the company undertook major initiatives in 2013.
The company had its largest brand launch in history in January 2013 with the introduction of Simple Truth and Simple Truth Organic. The 100 item launch expanded to 400 products by year end and Kroger expects Simple Truth to be a $1 billion brand this year. In addition, the company’s Private Selection brand underwent the largest brand relaunch in the company’s history and now includes more than 1,000 items. A new opening price point brand called “P$$T” was introduced to replace an existing value brand. P$$T, Private Selection and Simple Truth are in addition to the company’s “banner brand” which carries the name of the particular store in which it is offered and consists of 12,000 SKUs spanning 275 categories. Facilitating execution of the company’s private brand strategy are Kroger’s 38 manufacturing plants which produce approximately 40% of the private brand volume
Tying the entire value proposition together is a customer insights and loyalty operation driven by a partnership with London-based Dunnhumby. The long-running relationship commenced in 2003 which is about the time Kroger began its identical stores sales growth streak. The relationship with Dunnhumby allows Kroger to personalize offerings for individual needs and target promotional dollars and pricing investments to the most loyal customers.
To build on its customer engagement capabilities, Kroger in February bought the digital coupon and promotion company YOU Technology Brand Services as a means to bridge online engagement and in store activation. Kroger began offering digital coupons in late 2009 and reached 500 million digital coupon downloads three years later.
And in another major digital undertaking announced earlier this year, Kroger began digitizing its entire store based in an effort called Project Mercury. The multi-year initiative will reinvent the gathering of item-level data, and according to the company, provide the most accurate data in the industry and allow customers to be engaged on a whole new level.
If that proves to be the case and Kroger continues executing against the other opportunities in front of it, the prospects look good that new CEO McMullen will be able to replicate the success of his predecessor and current chairman Dillon.