Why Kroger Struggles to Make Money From Digital

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Why Kroger Struggles to Make Money From Digital

By Jamie Grill-Goodman - 03/08/2019
Kroger has committed to building 20 customer fulfillment centers, powered by Ocado, to accelerate its ability to provide customers with anything, anytime and anywhere.

Kroger’s growth plan may be setting it up to compete with Amazon and Walmart, but in the meantime the grocery retailer’s earnings took a hit.

Its total sales decreased 9.5% to $28.1 billion in its 2018 fourth quarter, as the retailer closed out the first year of its ambitious three-year investment plan dubbed Restock Kroger. Sales increased by 1.6% when not factoring in fuel, an extra week in 2017, the convenience store divestiture and a merger with Home Chef.

"Kroger solidly delivered on what we set out to do in 2018, which was an investment year that laid the groundwork for us to achieve our 2020 Restock Kroger targets including financials,” claimed chairman and CEO Rodney McMullen.

Showing promise, the grocer's digital sales spiked 58% in its fiscal 2018 and the company expanded its pickup and delivery to reach 91% of its customers.

Restock Kroger positions Kroger to create long-term shareholder value, according to McMullen, but the foundation is just the beginning.

“Planning the first year of a three year plan is always the toughest and most critical since everything that follows builds on the foundation that gets built,” he said on the company’s earnings call.

Kroger continues to make significant investments to build out its omnichannel platform and expects by the end of 2019, with full integration of Kroger Ship into its ecosystem, the grocer will reach 100% of America, according to McMullen.

The company also is banking on its partnerships, including those recently made Home Chef, Microsoft, Nuro, Ocado, and Walgreens. McMullen noted the company is optimistic about how its partnership with Ocado will “set Kroger up for accelerated growth in the future.”

Kroger is also betting big on its “alternative profit businesses,” including Kroger Personal Finance, 84.51, and Media, which it said all beat their operating profit targets for the year. Kroger expects 20% profit growth in its alternative businesses in 2019 and McMullen said the company will launch a “few more new businesses.”  

“Plainly stated Restock Kroger is all about transforming our growth model,” McMullen said. “We will grow market share by creating a virtuous cycle built on our grocery business.”

So how is Kroger's new growth model a virtuous cycle? 

“A constantly improving customer ecosystem generates traffic, customer data, and insights, which then fuel the growth of adjacent alternative profit streams,” McMullen explained. “We see tremendous potential in these asset light margin rich businesses built on the foundation of an omnichannel grocery experience. The profits generated by these businesses will create shareholder value and generate cash to invest in Kroger's core so we can further redefine the grocery customer experience."

If Kroger can pull off its modernization scheme it may be strong digital competition for competing retailers. However, its per-share earnings were four cents short of Wall Street expectations, according to The Seattle Times, which dropped shares down more than 12% on Thursday, in its worst day of trading this year.

We understand and acknowledge that we have our work cut out for us and the market showed that this morning,” McMullen said. “But I want to emphasize that we are incredibly confident about the future of Kroger especially with Restock Kroger.