#freshforall

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]

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]

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]

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. 

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Flexibility and real options would seem to be the enemy of Kroger. As a behemoth of a company, creating flexible lanes and channels would more likely than not prove to create chaos and not generate the expected positive outcomes. There appears to be little uncertainty in the world of grocers: customers will, under normal circumstances, will always need to purchase food goods and supply chains tend to be fairly stable. If uncertainty presents in the supply chain, grocers would seek to eliminate any uncertainty and seek the option to lock in optimal conditions. So, inherently, if “flexibility is valuable under conditions of high uncertainty” then flexibility wouldn’t need to be employed by Kroger (Barney, 225).

Customers depend on Kroger to remain rigid to a certain degree - they may expect some variety but it does not come close to creating flexibility within the market itself. Flexibility in the form of changes to the goods offered may create confusion for consumers and reduce their loyalty if there cannot be some semblance of normalcy (Barney, 224). 

Fascinatingly, COVID-19 has presented uncertainty for both Kroger and the consumer. Unexpected changes in the supply chain created a chance and need for Kroger to explore flexible options but without the infrastructure to be nimble, Kroger was unable to pivot quick enough. Stores were depleted of certain items and remained with continued low inventory for multiple weeks (CNBC). Interestingly, Kroger passed the onus of flexibility onto the customer in terms of their purchasing choices (CNBC). This is a fascinating tact as it has the potential to seriously backfire - if a consumer is continuously faced with out of stocks with their preferred vendor, they may choose to switch their loyalty and shop somewhere else. However, this is an unique situation with COVID-19 since so many of the same vendors and suppliers were negatively affected and the same problems presented in other grocery stores. It will be interesting to evaluate the data of shopping preferences and loyalty after COVID-19 and try to learn if the inflexibility of Kroger had any adverse effect. 

It seems unlikely that Kroger will choose to incorporate aspects of flexibility into their pricing, stocking, or front-facing consumer options but there is a real opportunity for them to evaluate other flexibility options. Due to the pandemic they may see a need for certain distributors or manufacturing plants to be able to pivot and adjust production as needed. They may also do analysis that suggests a need for diversification in order not to face the same shortages. Consumers (for grocery stores) tend to be typical and predictable but there is always an opportunity for a surprise or uncertain situation to arise. Flexibility seems to be unlikely in the future for Kroger but they may find the need arise when other, more nimble competitors create paradigm shifts. 

Sources:

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

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.

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Competitive advantage is a choice to be exercised, not experienced, meaning that successful leaders are proactive in creating their competitive advantage before experiencing the pain of another firm’s advantage being leveraged on them. Competitive advantage can be the result of several factors: “ size differences and economies of scale; size differences and diseconomies of scale; learning curve economies; differential access to factors of production; and technological advantages independent of scale” (Barney, pg. 176). Cost leadership is also a factor to take into consideration - the choices of the c-suite can create critical ripples to promote and encourage cost savings initiatives and thought processes throughout the organization.

Kroger Co. has been able to see and enjoy sizable growth over the past 10 years by differentiating their product lines, establishing in-house lines, and diversifying their production models. Each step taken has created savings for the company that allows investors to profit. 

Looking at manufacturing, Kroger, per their 2019 Fact Book, has 35 manufacturing plants that create 33% of the products sold in their stores nationwide (pg. 19). This is an incredible margin since 1/3 of their items sold in stores are manufactured by themselves they are able to cut significant costs in purchasing and sourcing, streamline the distribution across channels, and reduce external factors that can negatively affect manufacturing. Looking ahead, it would be a safe bet to assume that in the future Kroger would look to bring in even more of their manufacturing in-house to bolster their production factor.

Zooming in on the micro level and looking at product offerings, in 2013 Kroger introduced two new in-house brands, Simple Truth and Private Selection, bringing their in-house “our brands” to a total of three with the inclusion of the ubiquitous Kroger house brand. In 2019, over 16,000 out of about 45,000 products stocked in their supermarkets are one of the three brands mentioned. Again, we are seeing the thirds rule in effect: by supplying themselves with 1/3 of the brands stocked, Kroger primes themselves to be the product picked by consumers. There isn’t a mention as to the diversity of products, i.e., if there is a Kroger brand for every item, but it would be safe to assume that there is a Kroger brand alternative for a vast majority of products. This puts Kroger in the position of having their brands chosen with greater frequency, especially with a lower price point than non Kroger brands. According to the 2019 Fact Book, the sales demonstrate that point with Kroger brands exceeding $23.1billion out of the $122.29billon in total sales (pg. 13). 

If Kroger continues to manufacture brands in-house and create cost savings for themselves they are primed to see an increase in their brands sales and continue their march to cost advantage over other supermarkets.

Sources:

- Kroger Fact Book 2019

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. 

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