Kroger’s Commitment to Fresh and Digital Leads to Soaring Sales

Tim Denman
September 21, 2022
Kroger’s Commitment to Fresh and Digital Leads to Soaring Sales

Q2 Performance

  • Identical sales increased 5.8%, with digital sales swelling by 8%
  • House brand sales grew by 10.2%
  • Digital coupon downloads crested 750 million, representing a savings of almost $1 billion
  • The gross margin was 20.9% despite inflationary headwinds
  • Kroger is on track for its fifth consecutive year of $1 billion in cost savings
  • A new Ocado-powered fulfillment center was unveiled in Romulus, MI
  • 2022 CapEx is expected to be between $3.4 billion and $3.6 billion

Economic uncertainty and record-setting inflation have changed the way consumers shop and eat. Food prices continue to rise, and cash-strapped consumers are eating out less, opting instead to cook at home. To capitalize on this trend, leading grocers are doubling their efforts on fresh, house brands, and seamless omnichannel experiences to attract and retain price-conscious shoppers.

Kroger is leaning into its “Leading with Fresh and Accelerating with Digital” strategy — focusing on its fresh food offerings and segment-leading digital prowess. The approach is connecting with shoppers and leading to healthy bottom-line increases, as evidenced by the grocer’s Q2 results. For the quarter, the nation’s largest grocer saw identical sales, minus fuel, increase by 5.8%, with its house brands contributing with a massive 10.2% increase and overall digital sales growing by 8%.

“Customers continue to adjust their shopping habits in response to ongoing inflation,” Kroger CEO Rodney McMullen said on recent earnings call with analysts. “We are doing everything we can to help our customers stretch their dollars with high-quality fresh products at everyday low prices and personalized savings on the items that matter most to them. More customers are cooking from scratch and eating out less often. While other customers are choosing products like frozen fruit and vegetables, allowing products to last longer in their homes.”

One way Kroger is helping consumers save money at the checkout is by offering a large assortment of competitively priced house brands. Kroger has consolidated its 17 legacy brands into two to greater connect with shoppers and allow for increased brand recognition in the market. Heritage Farm is the grocer’s fresh and dairy line and Smart Way is its nonperishable product offering. Currently, Kroger has launched 150 distinct SKUs and expects to introduce additional products by the end of the year.

“We believe the unmatched combination of innovation, quality, and value provided by our brands is a clear competitive advantage as inflation remains front of mind for many of our customers,” said CFO Gary Millerchip.

In addition to the more than 10% bump in house brand sales the grocer enjoyed in the second quarter of the year, Kroger is experiencing a renaissance in coupon usage as consumers pinch pennies to offset the high price of goods. In Q2 digital coupons reached a high-water mark for engagement with more than 750 million digital offers downloaded, representing a value of almost $1 billion.

While its consumers are increasingly cost-conscious, Kroger is looking to trim expenses in lockstep. “We continue to identify opportunities to remove costs from our business without affecting the customer experience,” said Millerchip. “[We are] on track to deliver our fifth consecutive year of $1 billion in cost savings.” Kroger’s ability to continue to streamline operations to lower overhead has allowed the brand to post a second-quarter gross margin of 20.9% despite inflationary headwinds.

Kroger’s digital sales returned to positive growth for the quarter, fueled by the scaling of its Boost Membership across the U.S. Membership in the plan starts as low as $59 for the year and provides members with free grocery delivery, 2X fuel points, and access to exclusive offers. The top-tier plan sets consumers back $99 for the year and grants them access to two-hour home delivery. Twenty-five percent of customers that sign up for Boost are completely new to digital, helping drive the brand’s positive digital sales growth.

To help facilitate this increase in digital sales Kroger opened a new Ocado-powered fulfillment center in Romulus, MI, and expanded its Kroger Delivery network to four new geographics in Q2. In addition, the nation’s leading grocer is investing heavily in its buy online, pick up in-store offerings, with the desired effect of shortening wait times, while simultaneously lowering operational expenses.

“As our customers continue to deal with high inflation, our value proposition is resonating with them,” said McMullen. “This reflects the balance we've built into our model. We have demonstrated the ability to offer customers fresh, affordable food and the value they need to help them manage their budgets while we continue to invest in our associates, reinvest in our business, and consistently generate strong results. Our performance gives us the confidence that we have the right plan in place to build on our momentum and continue delivering value for all stakeholders.”