The big lesson learned from Kroger’s recent quarterly report is that its massive investment in technology, which Wall Street considered risky, is delivering huge returns.
In 2017, Kroger embarked on a multi-year IT transformation plan it called “Restock Kroger.” The tech part of the plan included investing hundreds of millions of dollars in fully robotic warehouses, advanced customer analytics, and partnerships with major universities to open digital innovation labs.
As recently as October 2019, the plan was considered too expensive and risky by Wall Street financial experts. One analyst at equity research firm Jefferies downgraded Kroger stock from buy to hold due to its large investment in cutting-edge, fully robotic warehouses, an initiative Kroger is pursuing with Ocado. The Jefferies analyst called the Ocado project a “misstep” that was not likely to achieve “a positive ROI by year three.”
However, Kroger CEO Rodney McMullen, understood how IT investment works in retail and how the plans Kroger set in motion three years ago are paying off spectacularly today.
How ROI Works for IT Investment
One hard, cold fact retailers learn about leading-edge technology is that it is unnecessary. That is, it is unnecessary if you simply want to maintain your place in the food chain. If that’s your goal, then ROI for tech investments will be elusive and take many years in most cases. In fact, it may actually interfere with making small, incremental improvements.
However, if you want to reward your stakeholders with strong growth plans, impressive profits, the ability to meet unexpected challenges (from new and established competitors), and maintain a healthy level of customer loyalty and satisfaction, then investment in technology is essential.
ROI in this scenario occurs as revenue and profit increase while the enterprise flexes efficiently to manage growth without incurring extra or unplanned costs.
Kroger is a perfect case in point, which CEO McMullen noted in a recent analyst call: "If you look at the strategic decisions we’ve made over the last several years, those decisions have really paid off in the current environment.”
When McMullen and team began implementing its ambitious investment plan in 2017, Kroger posted $110 billion in sales and net income of $2 billion. The figures for 2018 demonstrated improvement in sales to $123 billion, however profit fell back to $1.9 billion as the cost of investment increased.
When profits drop, Wall Street takes a dim view (except for Amazon, of course), so analysts began scrutinizing Kroger’s tech investment plan during the course of 2019, which was the year the analyst from Jefferies downgraded its stock.
However, when 2019’s final figures were tallied, Kroger posted $3 billion in profit even as sales remained flat at $121 billion.
And then came even better news. Just recently Kroger posted its 2020 financial results for the first quarter, which clearly demonstrated the astuteness of its ambitious technology investment plan.
Sales rose to $41.5 billion, which was an expected gain for an essential business during the coronavirus lockdown. However, the big story occurred in the operating profit, which rose to $1.3 billion. This is not for the full year, it is $1.3 billion in profit for the first quarter.
“Under Restock Kroger, we have made significant investments over the last several years to establish a seamless digital ecosystem, and strengthen ‘Our Brands' and our personalization capabilities,” said McMullen in a statement.
Although Kroger chose to invest hundreds of millions of dollars in a massive digital and IT ecosystem and suffered negative consequences initially, ROI was easily achieved as Kroger's growth strategy kicked into high gear.
The difference between raw growth and optimized growth through investment in technology is higher profit, as demonstrated by Kroger.