#krogercosts

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Bring(ing) Home the Bacon

The Kroger’s C-Suite knows where, how, and why the bacon is made. Now, it seems like it’s their turn to bring it home. Although not completely diversified, Kroger is a large enough entity for their divisions and division chiefs to be split by region and subset. As Barney notes, traditionally, compensation is only loosely tied to economic performance (357) and may be more of an interpersonal factor between the CEO and the board of directors. It seems as though Kroger CEO, Rodney McMullen, has certainly made an impression on his board of directors. 

As reported by a local news source in Cincinnati (home to Kroger HQ), McMullen made 483x more than the median pay of an Kroger employee in 2019. Other members of the c-suite shared in the $7.5million bonus payout due to the $1.1billion in savings that McMullen helmed as part of “Restock Kroger” initiative. 

In previous years, Kroger has used net operating profit as it’s the “performance metric” tied to bonuses. But Kroger’s board changed that approach in 2018, in a move that boosted bonus awards. Kroger’s approach suggests that there may be some performance based metrics to be met. 

It will be interesting to see how 2020 will play into the bonus structure and if any of the diversification efforts like the purchasing of Home Chef and move into ‘ghost kitchens’ will pay off dividends during the COVID-19 pandemic. 

Sources:

- Barney, Jay B. Gaining and Sustaining Competitive Advantage. Pearson Education (US), 2011. [VitalSource Bookshelf]

- https://www.wcpo.com/money/local-business-news/kroger-co-beefs-up-bonuses-for-highest-paid-bosses

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Diversification on the Horizon

The Kroger Co. is an inherently slim and streamlined corporation - they focus on the manufacturing and selling of food products (and outliers, like gas, gift cards, etc). Thus far, they have been able to capitalize on vertical integration in order to reduce margins and increase profits. However, for The Kroger Co. to continue to see growth in their profits and in their earnings portfolio, diversification may be on the horizon.

In December 2019, Kroger announced be the launch of four delivery-only kitchens — also commonly known as ghost kitchens — in partnership with a startup called Clustertruck. With this new service, customers who live within the applicable delivery radius will be able to go to Kroger’s website, and choose from a variety of prepared meals to be delivered directly to their home. Kroger said that customers won’t be charged a service or delivery fee, and that orders prepared by Clustertruck are delivered, on average, in 30 minutes or less.

Delivery-only kitchens helps Kroger address two issues: one, it gives Kroger another offering to convince customers to buy dinner from a grocery store, instead of going out to eat.  Second, it also provides a more cost-effective way for Kroger to deliver prepared meals to customers, since the company won’t be opening a full-service restaurant.

In 2019, Kroger also purchased meal kit subscription company, Home Chef, hoping to tap into a diversified revenue stream. However, interest in these services have waned.

Staying within the realm of food is a good idea for diversification with or without Kroger’s name attached to the services. If Kroger is able to diversify and then implement their own distribution channels within the services, they will be able to yield maximum output from their production facilities. 

The global pandemic of COVID-19 has yet to release the torrent of data that may or may not have affected Kroger’s attempts at diversification but when the horizon clears, it will be clear that in order to diversify profit margins, new approaches to fresh will be in order.

Sources:

- Barney, Jay B. Gaining and Sustaining Competitive Advantage. Pearson Education (US), 2011. [VitalSource Bookshelf]

- https://www.modernretail.co/retailers/to-grow-kroger-is-diversifying-beyond-grocery/

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Climb the Vertical Integration Ladder

Vertical integration for The Kroger Co. has been a valuable form of governance for the company almost immediately as the benefits outweigh its costs (Barney, pg. 273). For The Kroger Co., by keeping manufacturing and production in-house, they are able to cut ancillary costs and increase the added value spectacularly.  

The Kroger Co. owns 38 plants that manufacture approximately 40 percent of its private brands, including about 60 percent of its center-store items. Nineteen plants are dairy, 10 are bakery (including two that also manufacture deli products) and the remaining make grocery items. The plants are strategically spread across the country and located near Kroger’s divisions. Kroger operates all of the plants except two meat plants — one in Colorado and one in Southern California, both of which it owns but outsources operations.

Manufacturing its own private brands is a competitive advantage for Kroger for several reasons, one being that it provides the company with “incredible sourcing power,” says Erin Sharp, Kroger’s group vice president of manufacturing. The bigger the buy, the better leverage the company has (Storebrands.com).

“By manufacturing our own products, we lower our costs and pass the savings on to our customers,” Sharp says. “We constantly monitor our costs to ensure we are delivering high-quality products at a competitive price.”

All the dairy plants are 100 percent vertically integrated, which allows Kroger to be faster to market with products.

Kroger is also investing in other areas of private brands such as apparel and floral. In October, Kroger opened its own restaurant, Kitchen 1883, which features a fresh take on new American comfort food. If The Kroger Co. is able to source, manufacture, distribute, and then use their own products in a restaurant, they would be able to reach the top rung of the vertical integration ladder. At that point, is it still vertical integration or would the term be monopoly?

Sources:

- Barney, Jay B. Gaining and Sustaining Competitive Advantage. Pearson Education (US), 2011. [VitalSource Bookshelf]

- https://storebrands.com/crowning-kroger

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Collusion All Around

The competitive world of grocery may be one of the last bastion for regular old consumer driven rivalry. General grocery stores are not really in a position where they can engage in explicit or tacit collusion as they sell a wide array of products (specific brand only stores, like Trader Joe’s, may be a different story, however). Grocers must rely on market pricing and consumer tendencies in order to gain their advantages.

Kroger tends to be a price leader for the grocery industry which helps to create a sense of law of order that could enable possible collusion (Barney, 262). When suppliers are looking to introduce new products to market, they will aim to be aligned with the pricing points that are already sold at Kroger. This makes their product more attractive to distributors and the purchasers as they already have an understanding of the margins involved. 

Unverified tacit collusion could be the in keeping large inventories and order backlogs (Barney, 263). Kroger could very well keep large inventories in order to keep prices stable - this may be soon to come if COVID-19 continues to disrupt supply chains.

Collusion in grocery seems to come from the providers of medication, seafood, and other distributed commodities. When multiple producers begin to inflate prices, Kroger and other grocers allege collusion and price-fixing. On the visage, it seems as though Kroger is taking care of it’s customers by fighting for fair pricing but, really, Kroger is looking out for their bottom line. If similar products are undercutting Kroger pricing, then consumers will most likely choose the cheaper option. If similar products are too expensive, consumers may be driven to alternate sources of the goods, like Amazon. 

Although Kroger may not be privy to direct collusion, they are in a precarious position that requires them to be on the lookout for collusion from other companies. 

Sources:

- Barney, Jay B. Gaining and Sustaining Competitive Advantage. Pearson Education (US), 2011. [VitalSource Bookshelf]

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Product Differentiation

How can a grocery store differentiate themselves from other grocers? For Kroger, their differential is the size, price points, product offerings and customer perception. Combined with extensive market research that to help localize stores, Kroger is able to lower the barrier to customers and provide significant differentiation from other stores. 

Kroger asserts itself as not a cost saving experience but as a one-stop shop that can fit the budget of any shopper. In Memphis, that helps to differentiate themselves from budget grocers like Cash Saver and Super Lo and from high end grocers like Fresh Market, Whole Foods, and Trader Joes. Part of this financial differentiation is also due to customer perception and interaction. 

Kroger is able to capture key consumer data through their loyalty card program that converts the analysis of over 60 million consumer households into the dispensing of over 1.6 billion personalized coupons (Fact Book, pg. 15). This kind of data is invaluable to Kroger - they are able to tailor their marketing, product offerings, and gain key insight into spending and shopping habits across the United States. Data management is useful to Kroger’s marketing campaigns but also to their key stakeholders as they can give valuable information to other suppliers on quantities of goods needed per market creating margin stability.

Kroger’s marketing, including their new “Fresh for All” campaign aims to present Kroger as a store for all people, regardless of status. Kroger’s store placements also indicate key research and differentiation by making sure stores are in areas with a high enough income level to support their shopping styles and habits. One habit identified is the desire for the consumer to finish all of their shopping in one trip. Easy Way, a local Memphis chain of fresh produce stores, went out of business recently, partially due to the death of the owner but also cited were the competitive costs of Kroger. Easy Way could no longer compete with the price points and consumer demands - people wanted to shop in one store instead at multiple stores. 

It will be fascinating to watch how Kroger will differentiate once if and when there are no more new markets to enter or dominate. They will be forced to differentiate in new and exciting ways...hopefully at the benefit to the consumer.

Sources:

- Kroger Fact Book 2019

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VRIO: Very Resource Intensive Outlook

A firm’s organizational strengths and weaknesses can help to provide a sort of star chart for the c-suite. Using their current coordinates, can they successfully navigate themselves into new territories and financial gains? Can they successfully steer themselves from operational icebergs and competitive hyenas? What are the most important attributes that can help organize a course to success? 

VRIO is a framework that “builds most directly on the resource based view of the firm and on two critical assumptions: that firms have different resources and capabilities (the assumption of resource heterogeneity) and that these differences can persist over time (the assumption of resource immobility)” (Barney, pg.146). This framework utilizes four questions that can help determine the competitive potential of the organization. See the table below from Barney for the questions that make up the framework:

Based on these questions, let’s answer for Kroger:

1. Yes. As seen most recently with COVID-19, Kroger was able to swiftly react to (literal) environmental threats and create varied shopping opportunities for customers.

2. No. From a US perspective, grocery stores are not a rare commodity. This is from a macro perspective - if getting into particulars of cities or neighborhoods, that answer can change due to food deserts and remote areas.

3. Yes. If Kroger had not been able to implement click-list style shopping where consumers can order online and have their groceries available for pick-up or delivery, they would lose a significant market share.

4. Yes. All Kroger policy and procedures are designed to push products and to entice shoppers. However, a serious process improvement inquiry may find weak spots to be improved.

Based on these answers, Kroger has competitive parity in the larger grocery store market. VRIO can help to translate prophecies into profits. 

Sources:

- Barney, Jay B. Gaining and Sustaining Competitive Advantage. Pearson Education (US), 2011, pg. 61. [VitalSource Bookshelf].

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Evaluating Environmental Opportunities

Heading any sized organization requires one-part real world analysis and one-part soothsaying ability in order to remain competitive and build long lasting success. The measure of the two parts is very much aligned to the focal point of the organization and the overall industry; a novel industry may require advanced soothsaying prior to emerging in the market while a long-standing industry may require little soothsaying in the beginning but an increase when looking to diversify or grow the market share.

Inherently, grocery stores are a mature and competitive industry, as they provide an essential service and have been able to flourish in the last century as a global mainstay. There are disrupters in online ordering and direct food to home services but, by and large, grocery stores are a part of the fabric of American life. For grocery stores, like Kroger, to remain competitive they can isolate specific markets and stores to ensure that they are providing goods to demographics based on survey and purchasing data. According to Barney, grocery store shoppers are more likely to stay a consistent customer in order to save time and mental power when looking for goods (pg. 84). The same could be said for a particular brand carried or if sale prices can be expected on items or goods. If an organization is able to keep customer-switching costs high, then they would be able to preserve their customer base.

Customer-switching costs are a blend of real life pricing and the perceived cost that is an evaluation of time and energy. A high customer-switching cost would mean that it costs the customer too much perceived mental costs and too low financial savings to switch their customer loyalty to a new store. Stores with low customer-switching costs are those that cannot keep competitive pricing and do not offer any other saving in the form of time or energy. Grocery stores, like Kroger, also provide additional incentives to keep customer-switching costs high with the bonus points accrued that can be redeemed to lower gas costs and other perks.

In a hypothetical world, Kroger could help themselves in analyzing their environment and creating incentives for customers to switch by exploring alternative versions of their flagship store. For example, they could create a miniaturized version that still sells quality goods but could be located in smaller neighborhoods that may not need as robust of a shopping experience. Or, in neighborhoods with specific dietary or cultural identities, stock shelves with more directed and culturally relevant items. For example, in a neighborhood with a large population of orthodox Jews, the Kroger store would have a majority of goods be Kosher certified and imported good from Israel and other mediterranean countries. In Tennessee and parts of the south, Kroger could also diversify and amplify their alcohol sales by creating a more robust tasting area and tailoring offerings to their clientele. This would take some upfront cost in market surveys and analysis but would yield tangible profits as well as a stronger tie to customers and strengthen the loyalty base.

Until a device is created that can accurately predict the future, firms will need to be able to pay attention to current markets while keeping their pulse on anticipated customer needs.

Sources:

- Barney, Jay B. Gaining and Sustaining Competitive Advantage. Pearson Education (US), 2011, pg. 61. [VitalSource Bookshelf].