As food retailing’s big three go, so goes all of food retailing. That’s not as extravagant a claim as it might seem. Walmart, Kroger and Albertsons together sell the vast majority of all food and related consumables in the nation. And all three are all on the move in response to competitive pressures, and are leading their competitors in many ways. The smaller brands will play catch-up if they can, or risk withering away.
Forces driving these three operators are well known: Amazon, discounters and the worry that direct-to-consumer food deliveries will finally find traction. I’ve been covering the food-retailing industry long enough to know that there’s never been a time when retailers didn’t bemoan competition and the business environment in general. But this time it’s different. There are existential challenges re-shaping the industry and retailers have awakened.
So, let’s take a look at what each of these companies is doing, their capabilities and their future. Their situation predicts what awaits food-retailing as a whole – as well as the future of other retail sectors.
Any look at food retailing must start with Walmart. This company alone sells more than a third of all grocery-related product in the nation plus a lot more internationally. It’s an economic powerhouse chalking up nearly $490 billion in sales across all product lines and in all countries where they operate.
It would have been very easy for Walmart to declare victory and cruise along on its vast revenue stream. And for a while it seemed to be doing just that. It’s not uncommon for big brands to get too comfortable and lazy. Consider Toys R Us, Sears, Radio Shack, Winn-Dixie, A&P and countless others. But Walmart decided to get off the dime and change in a big way. As we’ve seen in The Robin Report, credit goes to changemaker CEO Doug McMillon.
McMillon’s vision is to extend Walmart well beyond its big-box roots to become a true multi-level retailer reaching consumers through whatever platform they prefer. Walmart’s strategy was to acquire other companies for their business models and executive expertise.
As we all know, Walmart spent $3 billion to acquire e-commerce company jet.com to gain entry into direct-to-consumer sales of food and other products. That was Walmart’s biggest domestic acquisition but it has bought dozens of other companies including Bonobos, Modcloth, Eloquii and online shoe retailer branded shoe.com. Internationally, Walmart acquired India’s Flipchart for a whopping $16 billion.
Walmart has also sold assets, such as Asda in the U.K., to fund its acquisitions. It has also moved its entire selling proposition upscale by bringing in brands such as Donna Karan, Tommy Hilfiger and more. This tick upscale predicts a future direction for Walmart. Very likely, Walmart’s food presentation will head that way too.
So, Walmart seems well positioned to face a future that might otherwise be entirely dominated by Amazon. Most conspicuous is its e-commerce success. It has now passed Apple to become the third-largest e-commerce player, trailing only Amazon and eBay. Walmart’s future includes the strength of its huge physical-store presence. Once considered a liability, Walmart’s store holdings will help define its future. Many stores can be repurposed as multi-use buildings, category killers or delivery depots Some can stay as they are. Walmart is even re-imagining its real estate to create local “villages” full of customer a range of experiences.
Meanwhile, Kroger – the nation’s largest conventional supermarket operator – is on the move too. Like Walmart, Kroger is a big battleship that’s difficult, but not impossible, to turn around. Kroger operates 2,800 big supermarkets across much of the nation, generating annual revenue of nearly $125 billion, most attributable to food-sales alone.
Kroger is taking a different tack from Walmart to change. It’s opting to develop internal expertise and enterprises. Led by CEO Rodney McMullen, it’s working through its successful “Restock Kroger” initiative that features expanded use of data to find out what products most consumers want, where they want it and then changing the business accordingly. For instance, Kroger has upgraded the visibility of its fairly new Simple Truth organic and natural private brand that has become successful beyond all expectations. The initiatives make use of intelligence developed by the internal Kroger Precision Marketing unit.
Kroger is moving toward e-commerce by way of order online, pick up in store. Instacart provides deliveries at about half its stores and a “Kroger Ship” program manages direct-to-consumer shipments.
Kroger’s also has a partnership with a Silicon Valley startup that is developing a custom-made driverless vehicle for direct-to-consumer deliveries. The program started in Scottsdale, Arizona. Interestingly, Walmart has partnered with Ford for a similar program in Miami. Such initiatives may not amount to much in the short term, but they do position companies as technology mavens, which appeals to younger shoppers just as the Amazon Go cashier-less stores do.
Beyond consumer-facing initiatives, Kroger has forged an alliance with Alibaba for sale of its products in China and has partnered with U.K.-based Ocado for development of automated warehouses. Kroger has also sharpened its focus and liberated capital by selling its convenience-store unit for more than $2 billion and is backing away from underperforming stores in several smaller markets. It is also attenuating new-store rollouts.
Kroger was founded in 1883 and has long institutional experience in adapting to change. That heritage is now serving Kroger well and will continue to do so in the future.
Among the big-three food retailers, Albertsons is the smallest in terms of revenue and isn’t as well equipped to finance big moves to protect its business. Albertsons, which operates supermarkets under several banners besides its own, has 2,300 stores that generate annual revenue of nearly $60 billion. So, its stores are about half as revenue-productive as Kroger’s.
It has a complex and relevant financial history. Several years ago, it was apportioned into two parts, one sold to a wholesaler, the other continuing separately under the Albertsons name. Later, the parts were reunited into one company. Those financial moves were orchestrated by its primary owner, Cerberus Capital Management. Since it’s owned by an investment fund, financial moves are its hallmark. It has bought Safeway and attempted unsuccessfully to buy Rite Aid. Such transactions cost billions and have burdened Albertsons with debt. As its financial capabilities have been siphoned away, its capacity to make innovative changes defining its future have been compromised, but not entirely stamped out.
Albertsons recently acquired Plated, the meal-kit company, to sell its kits in store, It has also partnered with Instacart for deliveries and is working on a store-pickup system to fulfill online orders. Its best bulwark against the changing retail climate may be its mass, buying power and geographical reach across its 29-state operating terrain.
These three retailers present us with some instructive lessons. Walmart and Kroger are demonstrating that legacy companies need not throw in the towel. Positive change is possible and liabilities can be turned into assets.
They also show that there are two parallel pathways to success, and both are required. The pathways are visionary leadership and sufficient capital to make the vision a reality.
Finally, we should keep an eye on Albertsons to see what fate awaits a large-scale food retailer that can’t make moves as bold as can its better-capitalized peers. Albertsons is something of a control company.