How Kroger’s transforming its profit growth model through data

Date : 05 November 2018

We look at how Kroger is developing a new approach to profit growth and transforming its income streams as part of its ‘Restock Kroger’ strategic plan.

Aiming to redefine the grocery shopping experience

Launched at the start of the current financial year, the central element of Restock Kroger is focused on redefining the grocery experience. While ecommerce is a key part of this, the retailer is aiming to provide its shoppers with new experiences through optimising its capabilities with data and personalisation, continuing to grow its private brands business and rebalancing space within its stores. The retailer has made significant progress in many of these areas, including rolling-put grocery ecommerce pickup to over 1,600 stores, optimising space within over 600 stores and launching its private brands in China through a partnership with Alibaba’s Tmall.

Accelerating alternative profit streams

However, many of these programmes require significant ongoing investments in technology. To support this, Kroger is focused on taking costs out of the business and accelerating alternative profit streams. It has identified an opportunity to generate an additional $400m in operating profit over the three-year duration of the Restock Kroger strategic plan through growing complimentary businesses and partnerships that generate alternative profit streams.

Restock Kroger
2018-2020
Incremental
Operating
Margin
Growth
Incremental
Operating
Margin
Investment
Shareholder
Value
Redefine the customer experience $2,300m $3,100m -$800m
Partner for customer value $1,775m $400m $1,375m
Develop talent $375m $500m -$125m
Live our purpose   $50m -$50m
Total $4,450m $4,050m $400m

Source: Kroger

Virtuous circle of investment and data

This table highlights how the importance of these alternative profit streams in the context of the entire business. Investing in the customer experience, which includes pricing, space optimisation and digital, is forecast to create a headwind over the three-year period. The growth in operating profit will come from partnerships and new income streams. However, growing its core stores business, along with its fast-growing ecommerce operations, will enable Kroger to monetise both the traffic and associated data, further enhancing its alternative profit streams. This will enable ongoing investment in the grocery experience, creating a virtuous circle.

What are the alternative profit streams?

While some of the new business areas are yet to be defined, Kroger is already making significant progress through its Kroger Personal Finance business, delivering insights for product suppliers and its growing digital media operations. Central to all of these is data. The retailer has amassed behavioural data on over 60m households, with 96% of transactions tied to its loyalty programme. This provides Kroger with the ability to deliver on measurable, personalised experiences.

Closing the loop on investment and purchase

The retailer is aiming to be the most transparent media company in the media industry. Through its capabilities, it can measure the impact of the exposure of digital programmes and advertising through to purchase and provide this visibility back to the companies which are investing with it. Kroger is currently working with a range of suppliers on digital marketing initiatives through its own and third-party digital properties and targeted loyalty marketing campaigns. Recently, it has launched new in-store digital marketing opportunities for suppliers through its ‘Edge’ digital shelf-edge and end-cap technology.

Source: IGD Research

Kroger playing to is strengths

The Restock Kroger plan brings to life the challenges that many retailers are currently facing. There is a need to invest in their stores, to ensure they reflect changing shopping missions and shopper expectations, while also growing their ecommerce operations. All of this comes with a cost, and for many, an impact on profitability. Kroger is addressing this head-on through developing alternative sources of profitability which are tied to its core business. However, this approach is not easy to replicate given that the retailer has developed these businesses and underlying capabilities, particularly around data and personalisation, over several years. 

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