Earnings

Big Digital Shift Powers Kroger’s Strong Q2 Earnings

The digital shift is alive and well at Kroger. The company announced Friday (Sept. 11) as part of its Q2 earnings report that it saw a 127 percent jump in eCommerce revenue that Kroger expects will be a “lasting and structural” change in its business model.

“Even before the pandemic, our digital business had become a tailwind,” Kroger CEO Rodney McMullen said on the company’s earnings call. “That pandemic certainly has accelerated customer preference for seamless offerings. Our customers are increasingly turning to our eCommerce solutions for their groceries and household essential needs. Many of our customers are ordering groceries online for the first time, as a result of COVID-19. And the majority of them tell us they plan to continue to do so in the future.”

The company reported that overall sales minus fuel grew 14.6 compared to Q2 2019, while operating profit soared 43 percent year over year to $820 million. That’s a big achievement considering the higher costs and lower margins usually associated with online grocery.

McMullen said on the call that attention to margins will also be a structural change that goes along with Kroger’s digital shift. The company attributed the operating margin performance to encouraging customer pickup rather than delivery, reducing the cost to fulfill a pickup order. Kroger also cited leveraging personalization tools to improve its sales mix, along with continuing to reduce costs through process improvements and automation.

“Our teams [have] done a fantastic job of supporting amazing growth — and that's our technology team, our digital team, our store teams,” McMullen said. “What we're expecting of ourselves is, we will get to the point where we're indifferent if a customer connects with us digitally or [in a] physical store. And from everything that we can see, the customer actually will do both. And we made great progress on reducing costs to serve on a per-customer basis.”

McMullen also made clear that he considers the company’s recent partnership with Mirakl to be an essential part of Kroger’s digital initiative. As announced in early August, Kroger will partner with Mirakl to create a marketplace for goods not found in the grocery chain’s core offerings.

“We had plans for the marketplace in place long before COVID was a situation we were dealing with,” said Jody Kalmbach, Kroger’s group vice president of product experience. “We knew this was the right thing to do for the business. [And] with the acceleration of customers moving to eCommerce as a result of COVID, it became even more important to accelerate the delivery of this capability and be able to serve more of our customers’ needs. It was a convergence of what was already a really important business strategy for us and this incredible world issue that we’re facing together.”

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