Kroger has a format for every taste and wallet
Kroger has a wide range of store formats catering to consumers in the upper, middle and lower end of the grocery spectrum. While the grocery giant recently made news for a significant investment in Lucky’s Market, the Boulder, CO-based organic and natural foods chain, it has also continued to expand the store count of its hard discount Ruler Foods business.
There are currently 43 Ruler Foods operating in six states across the Midwest. Kroger has said it will announce another 10 units this year. Similar to other hard discount operators, such as Aldi, Ruler Foods operates smaller stores with a focus on merchandising store brands.
In an earnings call last month, Kroger CEO Rodney McMullen admitted in a response to an analyst’s question that the company is still trying to get a handle on managing the Ruler Foods business.
“We’re still trying to understand the economics of the model to get to where it actually performs at an ROIC that we’re happy with,” said Mr. McMullen (via Seeking Alpha). “We continue to make progress, but we do not think we’ve figured it out.”
The investment in Ruler Foods goes to Kroger’s attempt to provide a format for virtually every segment of the grocery market.
When asked about competition from Aldi and Lidl, the latter in the process of entering the U.S. market, Mr. McMullen said, “We have a lot of respect for those formats. There are certain customers that we believe like to shop in that environment. Everything that we can tell, it’s not all customers. It is a customer segment, and what we’re trying to do is to serve that segment.”
Discussion Questions
DISCUSSION QUESTIONS:
Do you think Kroger is pursuing the right policy of offering store formats to meet the needs of grocery consumers in the upper, middle and lower ends of the market? How do you expect Ruler Foods to do against Aldi, Lidl, Save-A-Lot and others competing for the shoppers that patronize those stores?
Poll
BrainTrust
Frank Riso
Principal, Frank Riso Associates, LLC
Richard J. George, Ph.D.
Professor of Food Marketing, Haub School of Business, Saint Joseph's University
Absolutely. We have always had any number of brands of supermarkets and we know them because of their format. Low price leaders, high service leaders and gourmet leaders to name a few, so why not have one company offer as many different formats as they can to meet the needs of their customers in all parts of the country? It is a smart move on the part of Kroger. A&P attempted to do this on the east coast but could not get their head in the game. Too many A&P-isms crept into all formats. As long as Kroger keeps the formats noticeably different they will continue to prosper.
In addition to the format listed Kroger also has a format focused on convenience. The company operates almost 800 c-stores under six banners in 19 states. Most of these locations are in smaller communities giving Kroger a reach into markets where its supermarkets might not be profitable. In addition to selling fuel at these locations about 1,300 of its supermarkets sell fuel.
Kroger knows their business and their markets. I would say that they are making a smart move by not sitting by and letting Aldi and the gang own the sub-segment of food. Kroger is also re-doing certain Fry’s stores in the West to more of a Meijer format. With clothing, great food sections, a home section and more.
Kroger is very good at mapping the stores to the regions and Ruler will do very well with the Kroger touch.
Kroger is not excellent with any format but generally good with most of them. Ruler Foods is no Aldi, Lucky’s is no Trader Joe’s or Whole Foods, Fred Meyer is no Walmart, Kroger Marketplace is no Wegmans, and the conventional Kroger stores are no Publix or H-E-B. Kroger still has a long way to go in figuring out the Hispanic market. Still in many markets Kroger is a solid number two store. Their sales per square foot is generally average to slightly above. Most grocers would be envious of their stats. Kroger has been pursuing these multiple formats for several years so it’s not news. Must be working, because Kroger is making money. Specifically for Ruler Foods, they are just another Save-A-Lot. Recycled real estate, higher prices than Aldi and a sales volume of about half of Aldi. No threat to Aldi at all. Perhaps a good fit in markets too small to support an Aldi, like their store in Bloomfield, Indiana where it’s the only store in town.
I do. The key is to develop separate standalone banners that are positioned against a particular target customer and competitor. Each banner/format can specifically speak to the needs of its selected market without confusing or diluting what the flagship Kroger format means.
Both Aldi and Lidl are terrific value retailers. I would benchmark Ruler Foods versus one or both of these retailers, rather than Save-A-Lot. With Aldi’s U.S. expansion and Lidl’s entry into the U.S. market, this segment will become more competitive and new entries into this market need to determine where and how they can outflank them.
Interesting, Tom Redd makes a comment (albeit with a wrong attribution, to Meijer and not Fred Meyer) along the lines of what I planned to say.
The reason to have multiple formats is to box out competitors. Kroger’s Marketplace format (devised from an earlier Smitty’s-Arizona format plus Fred Meyer; it just so happens that Meijer in the Midwest has a similar format and history) allows them to open combo food and general merchandise stores that help to box out openings by Target, Kohl’s and Walmart. (Same goes for H-E-B in Texas.)
They aren’t doing it because they want to expand the marketplace necessarily (e.g., they aren’t opening marketplaces in what we might call “general merchandise deserts” like center city locations), they are doing it to ward off competition.
The thing about this that’s also interesting is that most supermarket firms haven’t successfully pulled off the hard discount, let alone an even more fine-grained offering of different store types for different segments of the markets.
H-E-B and Giant Eagle are the outlier examples of success (Central Market plus general merchandise, Hispanic banners for H-E-B and Market District and GetGo convenience stores for Giant Eagle).
But Giant Eagle shut its hard discount test (Valu King). Food Lion wasn’t successful with Bottom Dollar. Supervalu has had issues with Save-A-Lot, and frankly, unlike Aldi, every Save-A-Lot I’ve ever been in is wildly different with a much different array of products from store to store. (The best one I’ve been in was a Supervalu-operated store in Hyattsville, MD, by contrast a franchise store in D.C. a few miles away seems to have about 30 feet total, and that might be an over-measurement, of fresh produce.)
Can Kroger pull it off? If anyone can, they can. They are good at letting banners be “independent” and harvesting best practice from acquisitions. On the other hand, Safeway’s acquisition of various chains destroyed billions of dollars of value as they attempted to make them over into Safeway stores, rather than valuing “not invented here” expertise.
But for the hard discount to work, it needs to scale and they will have to run it very differently, with significantly different relationships with vendors compared to traditional banners.
Kroger has been a smart operator for decades. Not only do they understand the importance of responding to market segments and geographical preferences (versus imposing a national, “more efficient” program), they also encourage a corporate attitude of continued learning (versus “we know best”).
Kroger is very smart in differentiating their product offerings so that they can better segment their target markets. Most food stores do not do this, and stick to one or two models. Kroger’s diversification recognizes that their customers are varied, as are their needs. This is a smart strategy for Kroger as the dynamic consumer of their future becomes even more targeted by Kroger’s competition.
Without question, Kroger’s portfolio approach with varied banners and formats is strategically correct, in my opinion. It has long enjoyed advantages from running semi-independent geographic banners (KMAs). It makes sense to also segment the market by format or type of demand. Both strategies help to partially offset the paradox of scale (in which the bigger a retailer gets, the further HQ gets from its customers).
The hard-earned lesson of mass retail is to beware the “big middle.” When you try to appeal to everyone you wind up being essential to no one. (Ask Sears or Kmart about that.) Kroger appears to accept the added marketing and merchandising complexity that comes with operating multiple banners with a degree of local decision making.
It’s less clear to me how much operational independence goes along with that approach. Maybe that’s a clue why Ruler Foods has not yet matched the price competitiveness of an Aldi. Perhaps you need a completely different master system to meet a quantitatively different business objective.