Kroger Continues To Kick Butt, Take Names
It truly has been a remarkable run. Not since late 2003 has Kroger posted negative identical store sales. What’s even more impressive than just the number itself is the manner in which the nation’s largest supermarket chain continues to execute at a level unachievable by any other traditional competitor, while continuing to place great faith in its people, programs and training.
While Kroger was one of the first food retailers to seek a centralized model more than a decade ago, it was also one of the first (and the best) at tweaking that model by empowering local managers to make critical decisions.
Kroger has also worked hard to find the right blend to make its customers’ shopping experiences considerably more pleasant than most traditional supermarket retailers. In addition to a creative item mix, Kroger hasn’t seen fit to reduce labor in its stores; its training program ranks among the best in all of retail food and it doesn’t try to shove private label product down customers’ throats (Kroger’s percent of own brand sales last quarter was about 26 percent, a very modest total).
The Cincinnati-based merchant has been consistent in its cap-ex spending over the past five years (about $2.9 billion this year for its more than 2,600 stores) and has been aggressive in expanding its real estate pipeline. It is also one of the few strategic thinking operators still in the acquisition game, having purchased Harris Teeter earlier this year and stating that it would like to make at least one more large acquisition in the near future.
Management has remained steady over its great run, first with the great Dave Dillon, who stepped down as CEO at the end of last year after an 11 year run (and who will retire as chairman of the board at the end of this year), handing the leadership reins over to another Kroger veteran Rodney McMullen at the beginning of 2014. The leadership change has been seamless. (McMullen will also assume the chairman’s role on January 1.)
Kroger has also benefited from its ability to be flexible, operating various formats from c-stores (Turkey Hill, Quik Stop, etc.) to jewelry stores (Fred Meyer, Littman’s), but its bread and butter remains grocery stores, where no attempt has been made to integrate banners, allowing the familiarity and strength of its regional chains (Fry’s, Ralph’s, Smith’s, Kings Soopers, etc.) to maintain their local identity.
Even at its newest acquisition, Harris Teeter, several key HT executives have noted that Kroger has made no attempt to change any major facet of store operations or merchandising.
“They promised they weren’t interested in radically altering a model that clearly was working, and after nearly a year, they’ve lived up to that promise,” said a senior executive at the Matthews, NC based operator. “In fact, they’ve sought our assistance in many areas where they thought our learnings and input would help the overall enterprise. These are good people who also happen to be very intelligent and have a high degree of supermarket smarts.”
Unlike many supermarket chains and some mass merchants that have proven they cannot change stripes and effectively create or manage multiple formats, Kroger not only already operates in several channels, it has taken its traditional supermarket model and expanded in into its larger Marketplace format.
Marketplace is on the verge of becoming a beast as Kroger continues to aggressively grow that combination store banner. It may not have quite the pricing edge of a Wal-Mart SuperCenter, but it far outperforms the Bentonville Behemoth in terms of in-stock conditions, store cleanliness, in-store labor and training.
You have to look no further than the Richmond, VA market where Kroger currently ranks fourth with 18 stores and an ACV market share of approximately 13 percent. Three years ago, Kroger’s share was just under 11 percent with 16 units. In that period of time, Kroger opened its first two Marketplaces in the capital of the Old Dominion and has two more planned (one is a conversion from a traditional Kroger) and will also build a 90,000 square foot conventional Kroger supermarket. The Richmond market is already overstored and, with the current Kroger/Marketplace expansion underway as well new entries Aldi, Neighborhood Markets, Wegmans and another Whole Foods also coming, I’d say current market leaders Martin’s (Ahold USA) and Food Lion are in serious trouble. I also expect Kroger to gain market share despite the additional competition.
To this reporter, the shopping experience at Kroger isn’t as eye-popping as visiting a Wegmans, it isn’t as exciting as a trip to Whole Foods, nor does it have the “treasure hunt” vibe of a Costco.
Kroger’s secret is in its functionality: well-stocked, clean, priced right, creatively merchandised, very good customer service and a level of consistency that rings as true in Salem, VA and Salem, OR.
Remember when that was the norm in the supermarket industry?
‘Round The Trade
Doug McMillon, who was named chief executive at Wal-Mart 10 months ago after spending his whole career at the Behemoth, is now fully engaged in personnel change mode. Just before presstime, the Bentonville, AR merchant promoted Judith McKenna to COO of its U.S. stores succeeding Gisel Ruiz who was named executive VP of Wal-Mart International. McKenna had been chief development officer for Wal-Mart U.S. will report to U.S. CEO Greg Foran, who replaced Bill Simon in August. Other recent changes include moving Steve Bratspies from executive VP-general merchandise to executive VP-food. Also departing a few days before “Black Friday” was Duncan Mac Naughton, who served as Wal-Mart’s chief merchandising officer. Foran has deliberately chosen not to name a new CMO, electing to have his senior management team report directly to him because “I would like to use this opportunity to get closer to the merchandising organization.” As for Mac Naughton, all I can add is, “good riddance” to one of the biggest blowhards I’ve ever met in my 41 years of covering the grocery industry…Steve Neibergall, former president of Safeway’s eastern division, has been named chief operating officer for PetSense, the 10th largest pet retailer in the nation and one that is growing rapidly with 108 locations in 23 states and a strong online presence. The company was founded by PetSmart founder Jim Dougherty in 2005. Neibergall will report to CEO Bob Angstead, who worked with Steve more than 25 years ago at the beginning of their grocery careers. More good news for Steve: PetSense is based in Phoenix, which happens to be where Steve grew up and relocated after leaving Safeway last December…Jason Hart has been named CEO of Aldi’s U.S. stores effective April 1, 2015. Hart joined the privately-held German discount merchant in 1993. He had been one of three executives who comprised Aldi’s “office of the president” which also included co-presidents Chuck Youngstrom and David Behm, who will retain their positions. While Whole Foods and Wegmans may get the hype (and deservedly so), nobody has performed better than Aldi over the past three years. And that accelerated growth plan will continue in the next few years as the extreme value retailer plans a major southern California expansion next year and hopes to have 2,000 stores in the U.S. by 2018, about 700 more than it currently operates. Aldi also just acquired 66 Bottom Dollar stores in the Delaware Valley and Pittsburgh markets from Delhaize America…the seemingly endless and unusual tug of war between Dollar Tree and Dollar General to acquire competitor Family Dollar continues on. Family Dollar management and its board still favor Chesapeake, VA-based Dollar Tree over larger rival Dollar General, whose offer of $9.1 billion topped Dollar Tree’s by a whopping $600 million. One of Family Dollar’s key concerns is how many stores will have to be divested after a deal is completed. Dollar General said it is prepared to close as many as 1,500 units (other sources say that the FTC could order as many as 4,000 stores to be divested) while Dollar Tree CEO Bob Sasser predicted the divestiture would be fewer than 500 stores if his firm wins the bid. Currently Dollar Tree operates nearly 5,300 stores and Dollar General runs approximately 11,700 discount units…Crossmark, one of the “big three” of national food brokerage firms, has named Steve Schuckenbrock as its new CEO replacing Ben Fischer who will become chairman of the Plano, TX-based sales agency. Schuckenbrock most recently served as chief executive of Accretive Health and also previously held management posts at Frito-Lay and Pepsi…riding into the sunset shortly will be two “sales guys” for who I have the highest level of respect. Nick Milano will be retiring at the end of 2014 after more than 50 years in the grocery business, the last 20 of which were at Murry’s, where he served as national sales manager. A true gentleman and a real pro, I’ll miss Nick’s dry sense of humor and enthusiasm. And if there ever was a walking encyclopedia about the frozen food business, Nick’s your man. Also packing it in on January 1 after a 38-year career in the biz is Tom Gargan, who most recently was senior VP and general manager of Acosta’s Metro NY and eastern PA customer teams. Tom began his career at Oscar Mayer and in 1984 he joined Baltimore-based brokerage Chaimson as executive VP. He remained with the company when MAI was created by the joining of three large Northeast broker firms which ultimately became part of Acosta in 1999. What you may not know about Tom is that he’s a true Philly guy, and he played quarterback for four years at Georgetown University. He’s also one of the finest golfers in the food industry and one of the best peddlers in our business. However, more than that, he’s just a good person whose positive outlook on life and his strong people skills are special. Tom and his wife Helen will be relocating to their vacation home in Delaware. To Nick and Tom, I wish you only the best in all your future endeavors…feel good story of the month: the family of iconic reggae singer Bob Marley plans to introduce a new brand of marijuana (ganja) products which it hopes it can capitalize on the efforts to legalize the seductive herb in the U.S. (it’s already legal in Colorado and will also become legal in Alaska next year). Privateer Holdings, a cannabis investment firm, is a partner in the venture which in late 2015 will launch “Marley’s Natural,” a line of organically grown (no fertilizer) heirloom Jamaican marijuana strains. The company also plans to offer other cannabis and hemp infused products such as sun repair creams and lotions. Bob’s son Rohan is also trading on the family name with his Marley Coffee, which was founded in 2009. As Bob might have said: “Get up, stand up (if you can).”
Local Notes
Dick Boer, Ahold’s CEO, said that his company is looking to grow online sales by about 80 percent over the next three years. In a presentation to analysts and investors in Utrecht, The Netherlands, the 57-year old chief executive noted the rapid shift and growth of food and general merchandise to online purchases which he said would increase Ahold’s online sales from its current $1.7 billion to $3.1 billion by 2017. The Zaandam-based merchant will also increase its global e-commerce investment by $75 million over the next three years. As part of that initiative, Boer stated that Ahold will expand the geography of its Peapod unit (it will open a new distribution center in Indianapolis in 2015 and recently opened a new depot in Jersey City to create better efficiencies – it carries 18,000 SKUs in the new facility) and continue to broaden its offerings and variety. In the U.S., Peapod sales for 2014 should reach about $590 million, an 11 percent annual growth rate. Practicing what it preaches on a local level, Peapod and Giant/Landover are in negotiations with Washington’s Metro transit agency to set up distribution areas at the agency’s Fort Totten (DC), Van Dorn (VA) and Glenmont (MD) Metro stations. The six-month pilot program, if approved, could begin as soon as next spring and allow customers to order groceries online and pick them up as they exit the station. In a sense, these would serve as additional “Pick-Up Points” of which Giant/Landover currently operates 52 in the region. Ahold also released its third quarter earnings and, for the first time in 2014, there was an improvement in identical store sales at its nearly 800 U.S. units. Excluding gas, ID store revenue jumped to 1.2 percent and overall revenue also grew by 1.6 percent to $5.62 billion. However, underlying operating income declined 5.1 percent and underlying operating margin (as a percent of sales) dipped to 3.8 percent from 4.0 percent last year. “In the United States, the rollout of our program to improve quality, service and value (“Project Thunder”) for our customers is progressing well,” said Boer. “By the end of this quarter, the program was active in over half of our stores.” The company noted that the continued focus on its private label assortment resulted in an increased penetration of 60 basis points, bringing total own label sales to 37.8 percent. The big Dutch retailer attributed the underlying operating margin decrease to the cost of its improved customer proposition rollout and an increase in meat prices, which were partly absorbed by Ahold. Also noted in the sales gain was a 140 basis point improvement at its Stop & Shop unit from the virtual six week work stoppage at rival Market Basket in New England (excluding the 49 Stop & Shop stores affected by the Market Basket dysfunction, ID sales would have declined by 0.2 percent in the quarter). Unfortunately for AUSA, that will be a one-time vault as the Demoulas family feud has been resolved and business is stronger than ever for the Tewksbury, MA regional chain…C&S has now officially completed its acquisition of AWI and White Rose and currently plans no changes in personnel or day-to-day operations. That means Matt Saunders will be staying on as president of the recently bankrupt company. Also, several vendors have informed us that they have received “settlement” checks for outstanding invoices that were caught in the web of the Chapter 11 process. Those “creditors” said that they have received slightly more than 50 percent of the receivables they were owed…an informal survey of about 15 retailers in the Mid-Atlantic revealed that merchants were generally pleased with their Thanksgiving sales, noting slight gains from last year and significant improvements from 2010 and 2011. “We saw spending up but consumers are still exercising caution and restraint. Now that SNAP benefit reduction has cycled, we didn’t see much change in food stamp activity from a year ago when the reduction first began. I’d say we’re pretty happy with our Thanksgiving results, but it’s a new world out there – so much completion from so many channels.” That was pretty typical of the reaction we got from most retailers in our poll…the growth of Washington, DC proper continues to explode. Three new stores opened within the past month – Giant on Wisconsin Avenue NW (Cathedral Commons); Harris Teeter on M Street SE (near the old Navy Yard); and MOM’s (My Organic Market) on New York Avenue NE (at the site of the old Hecht’s warehouse). Both the Giant and Harris Teeter supermarkets are doing very well while the MOM’s unit (its first in DC) is a work in progress, the first shop to open in a large mixed-use development in an area that has been blighted for years. I give MOM’s CEO Scott Nash lots of credit for having the vision and cojones to open a new store that clearly is a few years away from maximizing its potential…Safeway also had a productive month opening two on-site replacement stores – Upper Marlboro, MD and Alexandria, VA. Both stores are already showing significant sales gains when compared to their older versions….Whole Foods has agreed to become the anchor tenant in a new development in Towson, MD which will begin construction next year…opening its first store in the Philadelphia area (Ridley Township) later this month is Royal Farms. The Baltimore-based family-held c-store chain also has its eyes on locations in Upper Chichester, PA and Concordville, PA, smack dab in the middle of Wawa country. And speaking about Wawa, after nearly a two-year political battle, Wawa has received the go-ahead to build its first Loudoun County, VA unit, a 5,300 square foot c-store with 12 fuel pumps in Sterling…Shoppers Food and Pharmacy and UFCW Local 400 have agreed on a new three-year contract that increases the wages and maintains the health and retirement security of the more than 2,500 clerks and meatcutters at Shoppers’ 36 stores in the metro DC area. The new pact is retroactive to July 13. According the Local 400, the contract culminates a months-long, difficult round of bargaining that required multiple extensions of the old agreement to resolve complex issues, many of which revolved around increased costs imposed by the Affordable Care Act. “Because our Shoppers members stayed strong throughout this challenging process, they won a collective bargaining agreement that improves their standard of living and keeps their comprehensive health and pension benefits,” said Local 400 president Mark P. Federici. “This is a solid contract that compares well to others in the industry, and it’s testimony to the power of member activism.” Key provisions of the new pact include guaranteed wage increases of up to 90 cents/hour over three years, with all of the agreement’s financial benefits coming in the form of permanent raises rather than one-time bonuses; increased employer contributions to fully fund pension benefits; health care maintenance of benefits, which ensures that Shoppers will contribute whatever is necessary to the health care fund to pay all benefits; spouses will continue to be covered under the health benefit plan; overtime will continue to be paid for work exceeding eight hours in any day; and Sunday will continue to be treated as separate from the basic work week. Local 400 also announced that it has relocated its office, very close to its former location in Landover, MD. The union’s new address is 4301 Garden City Dr., Landover, MD 20785. The phone number remains the same – (301) 459-3400…Costco just announced dynamic first quarter earnings, which jumped 16.7 percent to $496 million. Overall sales also jumped 7 percent to $26.3 billion and comp revenue (excluding fuel) also rose an impressive 7 percent. CFO Richard Galanti on the earnings call termed deli, candy and spirits as “standout” departments and noted that organic foods sales are $3 billion currently (and growing quickly), more than double that of comparable sales of organics just two years ago. Costco’s e-commerce business increased 20 percent and now repr
esents about 3 percent of total sales. One more note about the nation’s largest club store operator: when Jim Sinegal, the founder and prodigal son of the Issaquah, WA-based discounter ran the ship, he was well-known for being among the lowest paid chief executives of any publicly-traded firm in the U.S. Now his successor, Craig Jelinek, who took the reins from Sinegal in 2012, has also become a member of the “thrifty” club. According to USA Today, last year Costco earned $3.2 billion on sales of $103 billion. Its stock value has increased about 20 percent over the past year and Costco’s market cap has risen to $63 billion. Jelinek’s compensation: $5.6 million (most of that came from a stock award; his annual salary was $650,000). That’s 50 percent below the median compensation for all S&P chief executives and among the top 10 when you measure compensation with performance. A better indication of what’s generally wrong with CEO compensation can be seen when compared with Fairway Market, the New York City-based specialty merchant that went public 20 months ago after being owned by private equity firm Sterling Investment Partners since 2007. Sterling’s co-founder, Charles Santoro, remains chairman of the 15-store retailer. His booty last year was an unconscionable $5.4 million for a company that has lost nearly $27 million in the first two quarters of fiscal 2014, has a market cap of only $169 million and whose stock is languishing in $3 per share range (it was as high as $28.58 per share in July 2013). A tip of the hat to you, Mr. Jelinek, for doing things the right way…there are some notable deaths to report this month. It is with great sadness that I report the passing of Ralph Klein, founder of Klein’s ShopRite, the nine-store independent which operates supermarkets in Harford and BaltimoreCounties and BaltimoreCity. What a great operator Ralph was. With Klein’s roots as a general store, dating back to 1926, Ralph and his wife Shirley were instrumental in building stores as HarfordCounty began its rapid growth in the 1960s and 70s. Ralph Klein was a dynamic leader whose fine-tuning skills as a merchant helped make him one of the best independent operators in the region. While he was a tough businessman and a fierce negotiator, Ralph had a soft side as well, giving generously to many philanthropic and charitable causes. “My dad was the real thing, who always kept the community values close,” said Andy Klein, who along with his brothers Howard and Michael, took over the reins from Ralph and Shirley. “He was a straight shooter. He had keen instincts and if he said he would do something, he kept his word – no double talk, period. He will be missed.”…also passing on was Irv Kaplan, who for many years was “Mr. Frozen Food” at B. Green & Co. Irv was one of the first people I met when Dick Bestany and I arrived in 1978. What a gentleman. Irv loved teaching younger people the nuances of the business and had a repertoire of jokes that could rival any Borscht Belt comedian…from the world of music, Ian McLagan, keyboard player with The Faces and a well known side man and sessions player for Bob Dylan, The Rolling Stones, Rod Stewart and Bruce Springsteen, has passed away at the age of 69. McLagan’s jazz-oriented Hammond B-3 organ style can be heard on Stewart’s hit song “Maggie May” and the Stones’ “Miss You.” He was 69 when he suffered a stroke in Austin, TX where he resided for the past 20 years. McLagan was inducted into the Rock and Roll Hall of Fame as a member of the Faces in 2012. Also passing on is a man who knew and worked with McLagan – Bobby Keys. A legendary sax player who performed one of the best tenor solos in rock history (on The Rolling Stones’ “Brown Sugar”), Keys also played with John Lennon (another great solo on “Whatever Gets You Through The Night.”), Eric Clapton and solo albums by former Beatles George Harrison and Ringo Starr. Coincidentally, Keys was born on the same day as Rolling Stones guitarist Keith Richards – December 18, 1943…and finally, to all our readers and advertisers – may you all have a safe healthy and happy Holiday Season. See you in 2015!