Kroger Customer Focus Carries It Through Tough Times

(MoneyWatch)  Kroger has become a more complicated retailer over the years, yet, despite the range of major initiatives it has pursued, it has remained focused on its customers and how it can address their needs while still taking care of its own.

Kroger's 53 cents-per-share earnings beat the analysts' consensus estimate by two cents, doing so by providing price breaks that were attractive to the customer and profitable to the company. One way Kroger managed that is through expanding private label products that offer consumers who are reevaluating how they are spending their grocery money more, apparently attractive, choices. Kroger sold more own-brand product than ever in the fourth quarter, CEO David Dillon stated in a conference call. Private label generated 27% of Kroger grocery sales and accounted for 35% of individual items moved in the period. Just a few years ago, a company that did 15% of sales in private label would have been considered remarkable. Kroger is looking to cut prices on private label products in a period of declining commodity costs, Dillon said, adding that producers of big national brands are holding the line on prices. As a result, Kroger private label products will be able to provide an even bigger relative value going forward.

At the same time, Kroger has been refining its ability to address specific consumer priorities. Dillon noted that Kroger has "unique tools that enable us to identify and act on changes in consumer behavior more quickly than our competitors." Through its work with Dunnhumby USA, a specialist in analyzing and addressing consumer behavior, the retailer has enhanced its loyalty card program and, through it, developed the capability to address specific preferences through targeted coupons and other means. By giving consumers the bargains they want most, Kroger doesn't have to engage in shotgun tactics like blanket coupon distribution that cut its profit margins on sales that are of secondary interest to shoppers. So the consumer is better satisfied, and Kroger makes more money from a shopper's store visit. That's the theory, anyway, and initial evidence doesn't seem to refute it.

On the complicated side of the equation is general merchandise. In addition to conventional supermarkets, Kroger operates Fred Meyer, a supercenter chain, as well as marketplace format supermarkets, which devote about a quarter of their floor space to general merchandise. As is the case with many of its competitors, Kroger's business in consumables and food is driving business while general merchandise such as housewares, and toys, the so-called discretionary product categories, are acting as a drag. Kroger's comparable store sales, a measure of performance in stores open for at least a year, came in at 3.8%, short of the 4.6% consensus analyst estimate. Dillon said discretionary items represented most of the shortfall in comps, which would have come in at 4.2% without them.

Recently, Kroger has been expanding the marketplace format, adding about 55 stores since the end of 2007 to exceed 90 today. Given the weakness in discretionary purchasing, the timing of that expansion can't be termed ideal. Still, Kroger took a decade to develop, evaluate and refine that store concept, and it has been important in the retailer's strategy of targeting mainstream shoppers who are looking for a little more service than Wal-Mart supercenters provide. Marketplace fills more of their common needs than a traditional supermarket, giving them fewer occasions to visit Wal-Mart for general merchandise and, perhaps, food. Something similar may be said for warehouse clubs and Costco.