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NEW YORK -- Cincinnati-based Kroger Co. is doing better than surviving in a fast-changing retail landscape, in full command of the challenge to deliver on the diverse needs of its customers in many markets, said the vice chairman and c.f.o. at an investor's gathering here earlier this week.
Rodney McMullen, Kroger's vice chairman, said at Lehman Brothers Ninth Annual Retail Seminar that Kroger has a formula in place to continue competing successfully against supercenters, supermarkets, and the growing number of alternative formats selling food.
Its magic bullet? A formidable business model based on providing what customers want, on a format-by-format and store-by-store basis. "Our business model supports merchandising and operating strategies to connect better with our customers," said McMullen. Kroger's healthy, sustained identical sales growth is fueling the progress, he added.
The company is focused on improving customers' shopping experience in three major areas: value, service, and product selection.
Kroger's work with Dunnhumby USA is a key driver of the effort, according to McMullen. "[We have] one of the most robust customer loyalty databases in America," he said. Kroger is using that data to segment on a granular level the diverse customer base that shops its broad range of formats, including 2,214 combo stores, which combine food and drug; and 27 of its smaller Marketplace format. On the back end, the data helps Kroger target promotional dollars and pricing investments toward its most profitable customers, he said.
"As we remodel stores and expand, we're using several resources, including our proprietary loyalty card data, to understand the needs and expectations of our customers," noted McMullen. "Based on this, we're segmenting our combo stores into three primary iterations: value, mainstream, and upscale."
Value stores serve shoppers who are primarily focused on price, while upscale stores focus more on service and product mix. The mainstream stores serve the vast majority in between, he said.
However, shoppers in all segments want a clean, convenient place to shop, according to McMullen. Thus Kroger will stay focused on improving store conditions throughout the company.
To stay current, the retailer is adding a wide range of organics in its stores to address customer requests. In a bid to offer more convenience, it's adding more drive-through pharmacies, fuel operations, and coffee bars. Meanwhile, gleaning from its experience with Fred Meyer, Kroger is featuring more seasonal, general merchandise items in its combo stores.
Private label is another part of Kroger's strategic plan, according to McMullen. "We're continually adding new items, ranging from our Private Selection specialty meats and cheeses to Big K Diet Cola." Private label now accounts for 24 percent of Kroger's grocery dollar sales, he said.
Dismissing the idea that Kroger is among the supermarket operators getting squeezed by Wal-Mart and other supercenters, McMullen said that at the end of 2005, Kroger held the No. 1 or 2 position in 35 of its 44 major markets. In 32 of those markets, supercenters hold the No. 3 position or higher. Kroger's overall market share expanded more than 35 basis share points during 2005 on a volume-weighted basis, he added.
Kroger's s.v.p. and c.f.o., Mike Schlotman, said reiterated the company's guidance of 6 percent to 8 percent earnings per share growth in fiscal 2006. On the investment front, the retailer plans to invest $1.7 billion to $1.9 million in capital spending, to build 30 to 40 new stores, and conduct remodels of 150 to 175 stores.
When asked whether rising fuel costs have had a major impact on Kroger's operations, McMullen said he's been "surprised" that it hasn't. "One advantage we have is that our stores are close to our customers, so they don't have to drive far," he said. Customers like the company's supermarket fuel center setup, he added, as it eliminates an extra trip. "Plus, we're always priced right on fuel," he added. Kroger operates 579 supermarket fuel centers.
-- Jenny McTaggart