Kroger's Stealth Battle
There have been numerous stories in the press over the past few days talking about a new round of fierce price competition as big retailers lower prices in hopes of driving top line sales. One of the articles — “Kroger is taking drastic measures to slash prices — and Walmart should be terrified” [Business Insider, Aug. 26, 2016] reported that the company recently cut prices on 1,000 popular products in over 100 of its stores and is hiring an additional 14,000 people to increase customer service at its 2,800 stores.
Cutting prices while increasing overhead is a recipe for disaster at most retailers. But Kroger is waging a different fight. And what scares me is how few retailers and wholesalers understand what is going on.
Kroger is lowering prices to bolster the value provided to its existing customers, helping insure customer retention. But the company is also lowering prices to attract more customers to its doors… and feed the powerful customer-fueled growth machine Kroger has built over the past decade.
Over a dozen years ago, Kroger’s then CEO David Dillon launched the company’s Customer First initiative, believing that by truly putting the customer at the center of all activities that customers would, in turn, reward Kroger with more business. Kroger has integrated the intelligent use of customer data into merchandising decisions, promotion planning, pricing, and many other operational areas. A key part of the initiative is the use of precision promotion targeting to strategically acquire, grow, and retain customers… one at a time.
As loyalty advocates know, higher spending customers are more more profitable, providing a higher gross margin to the retailer than lower spending customers. Kroger has significantly grown the number of premium loyal customers over the years using precision promotion targeting. That change in sales mix has resulted in growing margins - that Kroger has strategically reinvested in lowering prices and strengthening customer service.
Here’s the beauty of Kroger’s strategy: Competing retailers fail to see what’s happening because Kroger’s share-of-wallet strategy is stealth marketing at its finest, executed via direct mail and digital channels. As Kroger grows spending from it’s customers by siphoning visits from competing retailers those competitors are left with lower spending, less profitable customers. In the face of faltering sales, competitors typically increase promotional activity, putting more downward pressure on margins. Instead of Kroger’s upward spiral of value creation, competing retailers often find themselves on a downward spiral, the opposite of Kroger.
And for those retailers who sit back thinking they are safe because Kroger is not in their market I have bad news. Kroger’s success has not gone unnoticed by other Tier 1 retailers; companies like Albertsons / Safeway, CVS, Walgreens, Target, and even Walmart, are aggressively seeking to collect and use customer data in similar fashion. And don’t forget the big CPG brands who have realized that precision targeted promotions produce better results than traditional mass trade promotion.
Kroger’s stealth battle for customer share-of-wallet has quietly opened a new front in retail competition and far too many retailers and wholesalers fail to understand that competition has fundamentally changed. It’s a new world and the strategic use of customer intelligence is the advanced weaponry for today’s retail competition.
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