A Rare Connection

In an era that finds many traditional grocery retailers struggling, the Kroger Co. continues to be somewhat of an anomaly. The Cincinnati-based retailer stated that it had achieved its 36th quarter of positive identical supermarket sales and realized record third-quarter earnings per share when it reported its fiscal 2012 third-quarter earnings back in November.

Kroger's most recent results, during economic times that are still far from ideal, are impressive. Clearly, the retailer is doing a number of things right.

And one of those things involves running a stellar — and ever-growing — corporate brands program, one that truly speaks to Kroger's customers. For that reason, Kroger gets our nod as Private Label ⇨ Store Brand's 2013 Retailer of the Year.

For third-quarter 2012, Kroger's own brands accounted for approximately 26 percent of grocery dollar sales and almost 33 percent of unit sales, Rodney McMullen, Kroger's president and chief operating officer, said during a Nov. 29 earnings conference call. Those numbers actually represent a slight decline from the previous quarter, but Kroger is not fretting over the results.

"Some of the decline in corporate brands' share in grocery is due to some CPG companies getting more aggressive and promoting certain items," McMullen said during the call. "While we strive to grow the corporate brand part of our business over time, we have long said our goal is to give the best value to our customers.

"And in this quarter, some of the national brands provided a great value," he added. "The mix between national brands and corporate brands fluctuates in any given quarter, and we continue to be the market leader in corporate brands."

Dual purpose for own brands

Corporate brands serve two purposes in Kroger's business model, notes Gil Phipps, vice president of corporate brands for the retailer. They are important contributors to Kroger's financial health and also allow the retailer to connect with its customers in "a meaningful way." And the goal is to offer the products customers want, whether those products are store brand or national brand items.

"It's not at the expense of national brands," he explains. "For us, it's really about meeting the needs of our customers and in many different ways. Sometimes the needs are value-driven, and sometimes the needs are for enhanced convenience in their lives — or just variety and flavor, the spice of life."

Carol Spieckerman, president of retail consultancy newmarketbuilders, believes that Kroger has done a great job in balancing its own brands with the national brands.

"Kroger understands the role that national brands play in its brand mix and has thoughtfully developed private brands that fill gaps and address real customer desires," she says. "Its [new] Simple Truth and Simple Truth Organic brands are great examples. The brands weren't developed to take on national brands so much as to offer easy-to-understand, affordable healthy alternatives to its customers."

Phipps notes that he is especially proud of the Simple Truth and Simple Truth Organic introduction. The products — free from 101 artificial preservatives and ingredients some customers have said they do not want in their foods — represent the consolidation of what had been Kroger's Naturally Preferred, Naturally Preferred Organic and Private Selection Organic brands. The brands grew out of conversations with customers, who indicated they faced a great deal of category confusion.

"They're looking for a simple, honest solution to their needs and trying to find foods that have cleaner ingredients and were raised in a way they wanted," he says. "So by putting them all under one umbrella brand, we tried to make it really simple for our customers to find what they're looking for."

Another brand that continues to be a source of pride and excitement is Private Selection, Phipps says. He says the brand delivers "rich flavor experiences" to customers, pointing to products ranging from the new gourmet coffee pods to frozen lobster-shrimp ravioli and sea salt caramel ice cream as examples.

Of great benefit to Kroger in product development are its customers. Phipps says Kroger has "unprecedented access" to conversations with them.

"We spend a lot of time and effort talking to our customers," he says, "and are able to hear what they tell us they need and really try to alleviate any concerns or challenges in their lives."

The company's wide portfolio of store brand products is designed to appeal to consumers in different mindsets, Phipps explains. For example, sometimes a shopper might be looking for the lowest-cost offering in a category, while at other times he or she might want to "reach a little higher" to impress friends and family.

"We just want to have a diverse portfolio, not only of brands within the store, but within categories, so people can achieve what they are trying to achieve on every decision," he adds.

And Ben Ball, senior vice president of Dechert-Hampe, Northbrook, Ill., suggests that Kroger understood quite some time ago that its private label products should stand for exclusivity and the highest quality.

"Kroger realized earlier than most U.S. retailers that the brands they put on their shelves with their name, or proprietary labels, on them represented much more than 'private label' value alternatives," he says.

Positioned for success

Another thing Kroger has going for it when it comes to its corporate brands program is a commitment that filters down from top-level executives all the way to store-level employees, suggests Jim Wisner, president of Libertyville, Ill.-based Wisner Marketing Group.

"The Kroger folks 'drink the Kool-Aid' in the right sort of way," he contends. "They understand private label; they understand its role in the company; their employees all the way through the stores get what role store brands are supposed to play.

And they've had a long history of doing that, [including] incentivizing store managers."

What's more, Wisner notes, Kroger has not been afraid in recent years to go after some categories that traditionally have been difficult for private label. For example, with its mirra line, the retailer was the first major grocery retailer to delve into the store brand beauty-care arena in a significant way. And wine represents another challenging private label segment in which Kroger has been very active of late.

Another fact wielding a positive influence here is that Kroger "thinks like a manufacturer" when it comes to its corporate brands program, Ball says.

"By that, I mean they view [store brands] as just as important to what Kroger is to consumers as the stores are," he says. "This extends throughout the culture … all the way to self-manufacture in several categories such as bakery."

Speaking of self-manufacture, Phipps notes that Kroger's manufacturing arm now operates 37 facilities that make roughly half of the company's grocery units. The manufacturing plants actually present an advantage, he says, when it comes to managing such a large corporate brands program.

"It allows us to control quality and cost and supply chain on our products, and really make sure we make them just the way our customers like them," he says. "And that really grows out of our heritage. We opened our first commercial manufacturing facility so we could control the way we were making bread for our customers in 1901, and we've been doing it ever since."

For products that Kroger does not self-manufacture, the retailer seeks out suppliers that offer true partnerships, Phipps says. The goal is to create a win-win relationship here, and Kroger is very much hands-on when it comes to efforts ranging from research and development to quality assurance.

Data-rich

Also helping Kroger on the private brands front is the retailer's exclusive relationship with dunnhumbyUSA, headquartered in Cincinnati, says Paula Rosenblum, managing partner with Retail Systems Research, Miami. The company is a joint venture formed by Kroger and London-based dunnhumby in 2003. The relationship, Rosenblum says, enhances the retailer's pricing in terms of competitiveness, product placement and loyalty programs.

"I'm quite certain there are a lot of analytics performed on what private label products are resonating with consumers as well," she says.

Spieckerman agrees that Kroger's relationship with dunnhumbyUSA has been critical to its success in recent years — inside and outside the private brands arena.

"Among other benefits, dunnhumby has allowed Kroger to make the most of its huge loyalty program database and to target promotions to its most profitable customers," she says. "Kroger showed incredible foresight by forging the dunnhumby relationship early on, before 'big data' was a hot topic in retail and when many retailers still relied exclusively on their internal teams and suppliers for data insights."

And Kroger, aided by dunnhumby USA, has become an expert in pricing, Wisner emphasizes.

"You can go look at shelves, look at cost-per-unit measures, look at price spreads and all the rest of that, and you can just see that Kroger knows what they are doing," he says, "and some of their competitors don't. Their entire pricing perception and level, I think, is executed more sharply than other similarly positioned chains."

Kroger has been a "pioneer" in terms of thinking strategically about the role private brands play in enhancing price image and building loyalty, adds Jim Hertel, managing partner with Willard Bishop, a Barrington, Ill.-based food retail consultant.

"They developed a private brand architecture to guide them and execute against it in a disciplined fashion," he says. "They were also one of the first to view private brand management as though they were national brand marketers — as opposed to a procurement function."

Never satisfied

To ensure its first-class corporate brands program stays that way, Kroger not only listens to its customers, but also pays attention to outside trends. For example, when it comes to new packaging design and development, the company looks at what's going on throughout the United States and the world, inside and outside the grocery retail industry, Phipps says.

"Packaging is all managed within my department," he adds. "We come up with concepts and we ask customers how they react to them."

And sustainability is another area of continuous improvement, one that is very important for Kroger overall, Phipps says. Right now, the retailer is looking at how to improve its on-package sustainability-related communication system.

"We've actually been involved this past year in a lot of research to try to bring more clarity to customers," he explains. "A lot of customers, when they see a recycled [icon] on a product, they aren't sure if the product can be recycled or has been recycled. So we're just trying to clarify that for our customers and come up with a system that's very usable for them."

On the product development side, Kroger aims to grow the Simple Truth and Simple Truth Organic lineup, now numbering almost 500 products, to better meet customer needs across all categories in the natural and organic food and beverage arena, Phipps says. Moreover, the retailer is building on the success of its CarbMaster yogurt — a higher-protein, lower-carb alternative to traditional yogurts — to introduce CarbMaster milk.

And in the years to come, Kroger is likely to even further enhance its already-inviting store environments to the benefit of its own brands — and others'.

"Kroger's private brands benefit considerably from the environment in which they reside," Spieckerman stresses. "The attention that Kroger pays to its store environments, service and premium offerings shines a bright light. Its store brands get to bask in it."

Finally, Kroger's corporate culture presents an advantage going forward. Wisner says the retailer exhibits a positive attitude not seen in many competing companies.

"I think that gets reflected in a lot of things and level of seriousness in which people [view] their jobs and their roles within the company," he says. "Their people talk like a team. … If you go from one Kroger division to another — and these divisions do have a reasonable amount of autonomy — what is striking is the amount of consistency that you hear from one to another. … People are rallying around the right flags."