Kroger's Q2 2024: Slower Growth with Gains in Private Brands and Personalization, but Digital Profitability Remains Sluggish

In the second quarter of 2024, Kroger reported a modest 1.3% increase in sales (excluding fuel), bringing total sales to $33.9 billion, down from $45.3 billion in the previous quarter. The company's gross margin reached 22.6%, bolstered by a favorable product mix, reduced shrink, and sourcing efficiencies. Kroger’s improved performance can be attributed to its strategic focus on offerings like the Our Brands private label, personalized promotions and improving delivery solutions.

Key Highlights

Private Brand 

The national retailer has made significant strides in enhancing its product offerings and customer experience by focusing on its private label, Our Brands, which serves as a key differentiator in the market. This year, the retailer has introduced 223 new product mixes within Our Brands and launched a total of 600 product innovations. These additions, including seasonal fresh and private brand items, have driven Our Brands sales to outpace national brand sales, offering customers high-quality alternatives at lower price points. More than 90% of customers have purchased Our Brands products, with budget-conscious consumers particularly benefiting from lower prices, loyalty discounts, personalized offers, and fuel rewards. This strategy aligns with Grocery Doppio’s market pulse report, which indicates that 47% of shoppers are becoming more cautious with their spending due to rising prices. Additionally, 65% of grocers see expanding their private label offerings as a key strategy to improve profitability and customer loyalty. By focusing on affordability and quality, the retailer is successfully catering to the evolving needs of its customer base while improving its market position.

Personalization

Kroger continues to strengthen its loyalty program by offering personalized promotions and value-added services tailored to its customers' needs. Through data collection and insights, Kroger enhances its personalization capabilities, delivering more accurate product recommendations and effective promotions. The Boost paid membership program further supports these efforts, providing members with exclusive savings, free delivery on orders over $35, and double fuel points. During the recent Boost Bonus Days event, members enjoyed even greater savings over a two-week period. This strategy aligns with Grocery Doppio’s report, which indicates that 83% of grocers view personalization as a key differentiator, and 77% believe it improves sales, though only 4% have successfully scaled advanced personalization capabilities.

Digital Engagement 

In the first quarter, the retailer reported a 9% increase in digitally engaged households compared to the previous year, and by the second quarter, Kroger had further grown its e-commerce households by 14%. This expansion reflects the company’s success in converting app users into loyal digital shoppers. Kroger emphasizes that these e-commerce households are among their most loyal customers, and their continued loyalty is crucial as it enhances retail media monetization opportunities. The retailer's strategy focuses on moving customers up the loyalty ladder through targeted promotions and seamless digital engagement, ensuring greater use of digital channels, including beyond the app, for purchases. This strategy aligns with Grocery Doppio’s market pulse report, which highlights that 41% of grocers believe introducing membership models is necessary to improve digital profitability. Moreover, Kroger underscores that customers who shop both in-store and online tend to be more loyal, contributing to increased retail media revenue. Grocery Doppio's research also shows that 53% of shoppers switch to a different grocer after experiencing three poor digital interactions, further emphasizing the importance of seamless digital engagement in maintaining customer loyalty.

Delivery Solutions and AI Integration

In Q1, Kroger reported an 8% growth in digital sales and a 17% increase in delivery sales from their customer fulfillment centers compared to the previous year. By Q2, digital sales grew further by 11%, with a particular emphasis on pickup, which saw a 10% increase, while delivery solutions maintained a 17% growth rate. These gains were driven by improved operational efficiencies, including reduced wait times and a 33% improvement in "perfect orders." Customers continue to appreciate the convenience of on-time, refrigerated deliveries directly to their homes. Kroger is also focusing on improving weekly and daily demand patterns and refining trade areas to enhance customer delivery density.

Kroger has adopted AI for dynamic batching and routing, which has led to shorter lead times for pickup orders. According to the State of Grocery in AI report, 71% of C-suite grocers believe AI will have the greatest impact on operational efficiency, and 87% see its role in logistics optimization and inventory management. This aligns with Kroger's use of AI to improve delivery operations, contributing to long-term profitability by refining trade areas and enhancing customer satisfaction. Additionally, Grocery Doppio’s report highlights that curbside pickup times significantly influence customer satisfaction, with 100% satisfaction achieved when pickups are completed in under three minutes, reinforcing the importance of Kroger's focus on operational efficiency.

Future Outlook

Kroger emphasized keeping prices low and leveraging fresh and private brands to increase customer loyalty. This strategy, coupled with a focus on personalization, fresh product offerings, and seamless shopping experiences, aims to drive long-term growth. Additionally, the company completed a $10.5 billion debt offering, part of which will fund its proposed merger with Albertsons. If the merger does not proceed, a portion of the proceeds will be subject to a mandatory redemption.