The Kroger Co. (KR) 13th Annual U.S. All Stars Conference (Transcript)

The Kroger Co. (NYSE:KR) 13th Annual U.S. All Stars Conference September 20, 2022 1:00 PM ET

Company Participants

Rob Quast – Director, IR

Stuart Aitken – Chief Merchant & Marketing Officer

Gary Millerchip – Senior Vice President and CFO

Keith Dailey – GVP of Corporate Affairs and Sustainability

Conference Call Participants

Ken Goldman – JPMorgan

Ken Goldman

All right. Hello, everybody. Thank you for joining us today. I’m Ken Goldman with JPMorgan. I’m the U.S. food producers and food retailer’s analyst. And I’m really excited to be hosting the Kroger Company for today’s Fireside Chat. For those of you who may not be quite as familiar with Kroger, they are the biggest full selection, grocer in the United States, actually is one of the largest companies period in the United States in terms of revenues, and employee count. And of course, it’s in the business of feeding family. So it’s not just sizeable, but also fundamentally important.

And of course, Kroger is not just a traditional brick and mortar company. It’s also a company, I think it’s fair to say at the vanguard of digital ordering and fulfillment, whether through clicking collective first person delivery, and they’ve ofcourse, built a very impressive and higher margin, stream of alternative revenues and profits. I could list all of them, but that would take up the entire 45 minutes, I think.

So with me today are Gary Millerchip, Senior Vice President and Chief Financial Officer to my immediate left, then Stuart Aitken, Chief Merchant & Marketing Officer, and Keith Dailey, GVP of Corporate Affairs and Sustainability. We also have with us Rob Quast, Director of Investor Relations.

So, gentlemen, thank you all for joining us today. And it’s great to see all of you in person.

Gary Millerchip

Good to be here.

Ken Goldman

I wanted to start out by asking you’re in a period of extraordinary growth right now. I think it’s fair to say and really extraordinary change as well. And just to highlight a few areas where you have the delivery, we talked about, we have the non-traditional sources. And we talked a little bit earlier today in some of our smaller meetings about what you’re doing in terms of fresh and what you’re doing in terms of personalization, which I think are sort of core competencies of the company, but always working to get that better.

I’m curious, it feels to me like, there’s a lot of balls in the air right now. And that’s not necessarily a bad thing. But how do you manage all of these? How do you prioritize certain ventures certain efforts of the company, given how many things you’re trying to sort of improve at the same time? Is there a system in place to do that? Because I think it’s fair to say it’s, there’s not a lot of companies that I cover anyway, that have this many endeavors at once.

Gary Millerchip

Well, thanks, Ken. Good afternoon, everybody. Great to be with you. There’s probably a couple of things I would call out, it’s a great question, because there is a lot going on. And we’re excited about the opportunities that are ahead of us. But every company, I think, has to prioritize in some way, given the complexity of what we’re dealing with, and all the different factors that are affecting both Kroger as a company and the U.S. at large. I think overall, first of all, the thing that we did as a team was to really identify what is our strategy? So how do we grow the company effectively? And for those of you that were able to either join us or watch on the investor day that we hosted back in March, we spent quite a bit of time talking about our go-to-market strategy.

And that was really intended to give you a framework for this is how we run the company and how we believe we can unlock value going forward. And the whole leadership team really uses that as our lens to decide what are the most important things that we should focus on that we should be investing capital in to really drive our growth, and also kind of where we maybe shouldn’t be spending time and where we shouldn’t be investing our resources. And maybe we can outsource or, or have those activities done by others for us.

What I’m sure we’ll get into the go-to-market strategy a little bit more detail later. But it focuses a lot on our key competitive moats, as we call them. So ensuring that we’re delivering great value for the customer, improving their freshness, as we lead with fresh with customers today, they tell us that we index better in that space than all of our large public competitors, which very much focused on growing our digital business into a seamless ecosystem across store and digital, investing in our brands, and also leveraging the data that we have available to us to improve the experience for the customer, and to be able to grow revenue and alternative profit streams.

So I think that’s really the basis on which we make decisions and prioritization calls to make sure that we’re prioritizing the things that truly drive the most value for our associates, for our customers and for our shareholders. The only other thing maybe I would add is what we also focus on is how do you expand capacity in the company? And I think there are two things I would call out there.

One is very much taking a step back, because we’ve all been through a tremendous amount of during the pandemic and saying, what are the things we can learn from that? And how do we move at a faster speed, allow more accountability and responsibility to be lower in the organization where it’s best to make the decisions? And we sort of embraced a transformation in the company during COVID to say, how do we make sure we put the right structure in place to take the learnings from COVID to be able to accelerate the way we run the company day to day bringing those learnings from COVID together?

And I think the second piece of that would be I think, Chairman and CEO Rodney McMullen, has done a great job of continuing to grow the talent in the organization. So we look back five or 10 years ago, we had tremendous leaders within Kroger, who were all very much experts in their field of food retail. And we still have that expertise in the core operation. But I think that there’s been an expansion leadership team to bring together a broader set of talents that additionally bring in new experiences from outside the organization, so that we can respect the past and build on those successes, but also bringing new opportunities to the company.

Ken Goldman

Thank you for that. And I, I wanted to build on something that you mentioned fresh, right? It’s one of the questions that I get a lot on Kroger, which is what differentiates Kroger’s fresh offering what allows them to be better than some of their competitors. We talked about it a little earlier today. I think it’s really important perhaps to sort of build on that a little bit here. If you guys had to emphasize a couple of areas, within fresh where you think you have a chance to or already are different temps chance to be already are very differentiated from your competitors. Well, what might be some of the highlights there?

Stuart Aitken

So I’ll take that, Ken, and thanks for having us today. A clear differentiator for us today and fresh is dairy. We offer customers 10 days of shelf life, on milk, something nobody else in the U.S. does. Think about it for yourselves going and picking up a gallon of milk or a liter [ph] would that be 10 days of shelf life. The reason we can do that is we’re fully integrated on that side of the business. And we’re taking the learnings and expertise we’ve developed there and bringing that to other areas of fresh. We’ve established through a lot of customer research, the most important areas of fresh, first and foremost it’s produce, then meat, then dairy, then seafood. And within each of those we have prioritize them. And our job and our goal is to bring more days of freshness to the consumer, an example would be within produce strawberries, we need to get strawberries to our customers as quickly as possible. We work with the farmers themselves.

Instead of one driver driving across the country, we have two drivers driving across the country, it gets there in half the time getting it to the store that much faster, offering more days of freshness. And how do we do that across every single aspect of our business, offering customers more days of freshness. Why is that important? 70% of all consumers decide where to shop based on fresh. And so for us, this becomes critically important. And from a margin mix perspective, it’s beneficial as well.

Ken Goldman

One of the other areas of emphasis for the company for a while has been convenience, right? I think you guys have talked about that. Can you maybe walk us through some of the ways in which Kroger is making the shopping experience with a more than a holistic experience a little more convenient for consumers? You’ve talked about home chef, maybe you could emphasize or really elaborate a little bit on your plans for that to keep to keep it growing. And there are other kinds of key convenience efforts that we should think about that are prioritized for the company at this time.

Gary Millerchip

Yes, maybe I’ll start then Stuart can add some color as well. I think first of all, it’s important to remember that our stores are a huge competitive advantage from a convenience perspective. We’re generally within two miles of all of our loyal customers. So it gives us the opportunity to win by being very close proximity to our customers and being able to use the stores as an asset to deliver on that convenience that the customer is looking for. And that permeates through really how we designed the store and how we design products.

So you know simple things like even in recent years. And going back a number of years, actually, we’ve invested meaningful capital and technology to improve the speed of checkout through the store. So when you’re shopping a big store environment, you can get through the checkout very quickly. That would be by using technology for resourced checkout lanes, but also for self-checkout and using new technology to allow customers to scan their own products or testing baskets in the store. So really focusing on how do you help customers through the checkout as quickly as possible. Leveraging technology and tying technology across the store to your telephone and digital access to Kroger. So as you shop the store, how do we give you more access to information on your phone. So whether it’s building a shopping list really quickly navigating the store and then which file the product would be in to be able to get in the store conveniently and maximize the experience.

So it’s kind of permeates through how we deliver the experience because it is so important that you know fresh value is certainly important. But customers still really see convenience is critical to overall where they choose to shop and how they choose to shop. I think if you add to that what’s happened in the last couple of years is really digital is changing the way customers define convenience as well. So as a recent example, we launched something called Kroger delivery now, which allows us to be able to deliver to customers within 30 minutes if they order online or a more sort of narrow assortment of products. And, and that’s a great opportunity for us to grow the company because we index really high on the big shopping trip. But we still have a large opportunity to grow our business on those smaller baskets for the customer. And we can also the customer is comfortable paying a slight premium on price for that product. Because, if they’re not getting it from Kroger delivery, now they’re going to a convenience store, which obviously is more expensive than we’re offering.

So it’s offering a great convenience solution. And it’s offering the customer a great value to be able to get access to that immediacy as well as Stuart any examples you want to share to?

Stuart Aitken

So I might focus on the products themselves and the convenience from that Ken, you brought up a home chef. So Kroger has we call it our brands private label. And our private label business is a $28 billion business. So it is significant for the company. Home Chef is our latest $1 billion brand we broke through that mark last year. And it’s growing significantly. In fact, this last quarter, it grew by 14%. So significant growth largely because of convenience.

It’s our meal kit company, but it’s also our install, ready-to-heat, ready-to-cook, ready-to-eat solution as well. And that brand has resonated incredibly well with the consumer, especially the more affluent time starved consumer.

Ken Goldman

I wanted to widen out a little bit. I think it’s fair to say that in general, the consumer environment in the U.S., maybe it’s been a little more challenged since last year. And yet in food retail pricing has been passed on with a I think it’s fair to say limited elasticity as well. And it feels at least to me like competition, it’s never easy, right? But it’s not acting, I guess irrationally in any significant way.

So, Kroger has always discussed the importance of value to consumers. To what extent are you surprised if at all, that the industry remains what I would consider rational? Maybe you do or don’t? And also, how surprised are you that the industry continues to just generally perform extremely well, in this environment? I think, not to extend the question longer. But I think a lot of investors are kind of waiting for the other shoe to drop, or even the first shoe to dropping, they’re waiting sort of for the whole food retail industry to go back to maybe it’s not even true, we’re sort of imaginary, super low growth environment. It hasn’t been that in a long time now. I’m just curious for your thoughts on that.

Gary Millerchip

Yes, I think overall, we expect the food at home, the food retail environment to be competitive. It’s a low margin business, as you mentioned. Ken so we always assume that we need to be competing for customers and winning their loyalty over time. And we, as you probably aware, have continued to invest in price for customers and value for customers throughout the pandemic, because we felt it was really important to be consistent with our brand promise of finding ways to help customers save as they were navigating the pandemic overall. We did that in different ways, because obviously, product availability was more of a challenge in certain categories. But we nevertheless continued to invest and felt that was very important.

I think one of the things that has changed over overtime that we’ve been able to really kind of help the performance of Kroger but also help our customers is when you combine the power of the data that we have as a company with the fact that so many more customers are now digitally engaged, you’re able to offer that value in a more personalized way. So we think that is something that continues to really resonate with customers. And it’s allowing us to be able to navigate some of the challenges of the headwinds around cost in the market, while at the same time still finding ways to get value to the right customer that’s really looking to manage their budget on a sort of fixed budget schedule, by really providing those offers and those capabilities.

Generally, I think we’ve shared on our quarterly earnings calls that we do think the markets acting relatively rationally. And I think that’s partly because of some of the broader complications in the market as well. I think, in an inflationary environment, around product inflation, obviously, that’s one factor. But if you think there’s also been supply chain challenges, labor shortages, labor cost increases, so many companies are having to also invest as we are in our hourly associates. We’re investing in increasing hourly rates for our associates to make sure that we have talents that’s motivated and feeling excited to serve our customers. And at the same time, you’re managing supply chain constraints and fuel headwinds as well.

So I think there’s a broader dynamic going on that means, you’re, you’re balancing all those different elements of the business to make sure you’re delivering for customers, while also managing margin for the company as well. And Stuart, you have any specifics there that you want to talk about.

Stuart Aitken

I might just build on Gary’s macro point on fuel and what’s happening with fuel and the rewards program we have. The way we look at that fuel program, a customer can save up to $1.50 on their fuel purchase on every gallon that’s significant to the consumer. The significant for us is we will pay for that. And we do pay for that in the model. But we pay for it based on a behavior that is achieved versus trying to incent a behavior, which allows us to actually calculate that in a way that makes sense within the model itself.

And we’ve seen greater participation rates, given the cost of fuel in our fuel program over the last call it a year or so. For us, we see big benefits by offering that to consumers, not only on an everyday basis, but also promotional basis. So versus offering a discount that is dollars based, we might offer 2x, 3x, 4x on fuel, we’ll do the same with our gift cards and the likes to incent people to buy gift cards, which is an alternative profit business for us as well. So great benefit through some of those macroeconomic opportunities.

Ken Goldman

Thank you for that. You mentioned the word value, you as a team mentioned the word value. Do you think investors sometimes think about value too much as just exclusively price? I already kind of know the answer to that. But I guess maybe what I’m asking is has the definition of value evolved over time within the company.

Kroger for a long time has been known as a company that is, I don’t want to say more eager to invest in price, no one’s eager to invest in price but more dedicated to it, that I think some of your competitors are and there’s obvious results there that are positive. Is the company sort of thinking about that differently over time, meaning, maybe it’ll back off a little bit from just investing in price no matter what we’re and it becomes a more holistic kind of way of thinking about value, or is investing in price still a huge part of kind of your everyday effort?

Gary Millerchip

Yes, it’s a great question, Ken. Thanks. I think we, I mentioned it earlier, but we assume that the food retail space will always be competitive. So our long range model continues to assume we need to be investing in value for the customer. So that’s very much part of our plan, and is fully contemplated in our long range guidance. I don’t know whether it’s a change in strategy. I think, we’ve evolved the way we describe our strategy for sure. And, I think we’ve always had the view that giving more value to the customer is really important. We’ve I think we’ve had this view as a company that all of our stakeholders are important, we need to be investing in our associates, we need to be investing in customers, and at the same time delivering that allows us to deliver a consistently strong return for our shareholders. And that’s the that’s really the framework that company uses.

I would say we do define value, though broader than just everyday price. We believe that from the way we listen to our customers, the way we see our customers behave and the way we use our data science capability at 8451 within the company, that our customers tell us, there’s certainly an element of the value equation is how they look at everyday pricing. But it’s important to remember that Kroger gives significant value back in some of the ways that Stuart described. So whether it’s fuel or rewards, coupons, personalized offers low customer mailings with additional coupons. So there’s a number of ways in which we get value to the customer, when you think about how they are maximizing their dollars and how we’re giving value to make sure we’re giving them great quality and stretching those dollars.

I think if you look at the current environment, we’re certainly seeing that even you think about the our brands products, that Stuart talked about Home Chef, but if you think about progress, simple truth private selection, we’re seeing customers in the current environment, increase the purchasing of those products, which I think demonstrates again, both great quality and value by that definition, but also at a great price.

So I think there’s a number of elements in the way our customers define value. And we’re going to market to make sure we’re delivering value for them. And I don’t think you can kind of say its one formula for every customer. That formula is different by customer. And it really comes down to the power of what Stuart’s team does to use our data to make sure that we’re channeling the value where it matters most to that individual customer at that point in time as well. Because you mentioned it earlier, Ken, the customer is evolving and changing and so you can’t be static with the way that you’re delivering that value. It needs to evolve as the customer’s mind set and priorities are changing as well. Stuart, anything you…

Stuart Aitken

My only build and just peeling that onion that Gary served up there is from a — it’s truly values in the eye of the beholder, right and the individual customer. Value is at fuel points, or is it an opening price point brand and across our brands portfolio we’ve just launched Smart Way which is a phenomenal brand for that customer who’s looking for that entry price point. But that lease price sensitive shopper, the affluent shopper, that Home Chef brand is value in terms of time saving.

And so understanding by consumer, what’s most important where the value is driven? Is it through coupons? Is it through fuel, we have so many levers to pull that others don’t. And that’s truly a big part of our advantage. And the data we have allows us to deliver even more value to customers.

Ken Goldman

Well, we can’t be in London and not talk about Ocado. Of course, you’ve had very, I think, very constructive commentary about how the sheds and how the hub and spoke system are performing. Can you walk us maybe through some of the key learnings that you’ve had, as you started down the path? And are there any? And are there any maybe, I don’t know call them pain points that you didn’t anticipate, at first, nothing dramatic, just sort of the usual process of trial and error. Not that there any errors. But you know, as you’ve gone through this.

Gary Millerchip

Yes, I think maybe talking about the positive surprises. First of all, maybe not a surprise, because we spent a lot of time as a company looking at why and who should we partner with to grow our digital business and accelerate the momentum that we were creating in digital at Kroger. And so not a surprise, but really pleasing to see we’ve talked about this, I think the last two or three earnings calls and we talked about it in at our investor day in March as well is we’ve been really pleased with the customer reaction to Ocado.

So if you look at the, I guess the way to sort of surface it is through the net promoter score that we look at. And they’ve been really positive off the charts positive and higher than we would have even expected them to be when we started the journey. And I think that’s a combination of all the elements of the experience coming together. If you think about what happened during COVID, we have to grow our digital business to 2x almost overnight, certainly within less than a month, with the way that customer changed their behavior. And as proud as we were as a team as how we did that and stood that up, it’s the experience could be better.

We want it to be an even stronger, more proposition that really drives even greater loyalty from the customer. And when you look at what we’ve been able to do with the Ocado solution, whether it’s the level of in stock that you can achieve, because you’re pulling all the product from one location rather than sourcing it from multiple different sources, for example, through the store, whether it’s the on time delivery, that the customer sees and the precision in which you can achieve that through using the smart platform that we have with Ocado. Whether it’s the sort of white glove experience, as we call it, where there’s a driver turning up that’s Kroger branded that is bringing product into the customer’s house this refrigerated if you might say, well, why is that a big deal? Well, if you’re in if you’re in Cincinnati in the middle of summer, and it’s 100 degrees and 100% humidity, the fact your ice cream arrives and it’s still ice cream or the fact your chocolate arrives is not liquid chocolate is actually a really big deal for the customer when you think about the alternatives.

So you combine all those things together. And we’ve been really pleased with the way the customer responds. And we’re certainly seeing similar kind of layering of loyalty and repeat usage that Ocado would talk about in the U.K.

The second thing would be is you know, you never take it for granted. It’s a huge undertaking. There’s a lot of technology involved. So the technology working in the way we expect it, the reliability, and the consistency and the delivery have been have been super strong. And something that we’ve been really pleased around, especially as we’re standing up a number of facilities one after the other.

I think the couple of things that I would say to the other side of your question around what will be the learnings? One would be I don’t think we ever expected to be doing this through a pandemic. So in a tight labor market, ramping up the labor and getting the amount, even though it’s less labor intensive than a store, you’re still having to bring a number of new associates together or move associates into one big facility. And I’d say, we took a little bit of time to make sure we adapted our strategy from what we probably thought pre pandemic to make sure that we’ve got the resources at the level they need to be, and how quickly you can ramp up the facility based on some of the unique dynamics in the labor market would be would be one thing.

And then the second thing I think would be as we were talking about this little bit earlier in the day, actually as well with some investors is how do you integrate the Ocado solution into our overall digital strategy? So, we had a $10 billion digital business before we opened an Ocado facility around the same time as we opened in Ocado facility.

So a lot of our customers know Kroger for digital today. And Ocado is an accelerator of that strategy, and helps us to accelerate an engagement with customers. So when we open the facility in Munroe, kind of optimizing, how do you optimize the use of Ocado to accelerate share growth and new customer growth, and where does it make sense to use the facility to be providing a sort of support for a store so you can free up capacity in the store where they’ve been picking all the orders? That’s been a journey to make sure we’re maximizing new growth, while also maximizing the use of the technology I would say.

Ken Goldman

Why don’t we take a quick pause? Are there any questions in the room about what we’ve talked about so far or anything else? And I think we have a microphone, if you don’t mind waiting for we do have one question so far. Thank you.

Unidentified Analyst

So, I mean, we all know that the staples, the food retailing sector is a low margin. We all know that we are also aware of the challenges that are still going on. But for me, just looking at numbers, and taking like a bunch of years, hopefully, I’m not comparing apples and pears. But why your margin has been particularly low compared to I don’t know, maybe Walmart or the last in the last three years. Maybe again, correct me if I’m, if I’m, if I’m not correct.

Gary Millerchip

Would you just clarify which margin you’re talking about?

Unidentified Analyst

Operating margin.

Gary Millerchip

Okay. Thank you. Yes, I think I’m not sure there’s one single answer depending on who you’re comparing us against. I think I would say a couple of things. One, if you look back over Kroger’s journey, back in 2017, we launched a strategy called restock Kroger, which was all about transforming the company making major investments in our digital business to stand up that $10 billion digital business, we’ve made a commitment to make investments in the customer, and make investments in our associates. So I think what you would have what you would have seen, if you kind of look back to 2017, through 2022, there was a major period of investment that we kind of called out and we’re very specific around.

Obviously, it’s difficult to compare to competitors. Because, some competitors have general merchandise at a much bigger level. So their margin structure is very different. But I think from our perspective, what we feel really good about is the strategy that we developed was really making the investments that obviously do create some short term paying around margin, because we felt like the important thing was to win customer loyalty to build that digital business so that we can grow margin longer term. And hopefully what you’ve seen, if you look at our results over the last two or three years, the expansion that we’ve been able to achieve has really been demonstrating that we’re leveraging those investments that we’re making. And it’s why I think you’ve seen us commit to the eight to 11% yet TSR over the next few years, because we believe that the investments that we’ve made have created the foundation for us to be able to grow sustainably over time as well.

Unidentified Analyst

Is it also a matter of scale? Geographic? I mean…

Gary Millerchip

Certainly, again, probably not getting into individual competitors. I mean, there are certainly, I think the if you look at the you mentioned, like Europe and America. I think there are differences in terms of your an American operating margins in grocery for sure. So there’s, I think there’s a different answer, depending on the competitor that you would compare to. But I think we feel pretty good about the level of scale that we have as a company and the efficiency we can create. We’ve been taking a billion dollars of cost out of our business in the last four years. So we’ve actually been doing a lot to improve margin, but it’s really that we’ve been investing those dollars to make sure that we’re set up for sustained future growth.

Stuart Aitken

My only add to that would be the go-to-market strategy that you’ve seen, we talked about at an investor meeting. And if you look at those moats fresh from a mix perspective, driving fresh changes the mix, from an Our Brands perspective and focus on Our Brands, changes the mix from a personalization standpoint and bringing in customers, you see that Gary and Rodney just talked about the fact that we are growing households, and growing loyal households at a faster rate than all households. All of those helped drive the mix for the business, including our focus on health and wellness stores as an asset, as well as some of our growth levers.

Unidentified Analyst

The 8451 data capability you mentioned is something you’ve been very good at for a long period of time. Are there still new learnings from that? And then the second question is on private label. Again, it’s been a phenomenal growth story for the company. Is there a limit to how much you want? And and I guess also just you’re touching on one of our consumer behaviors, does it has it changed much in the organics versus the value brands? Do you see much difference in behaviors of consumers across those private label brands?

Stuart Aitken

All right. There was I think two or three questions in there, so Gary is going to help me if I miss anything. So with respect to our brands, do we see a limit? No. In fact, if you look at our brands, the brands we do have are portable across economic cycles. We talk about our billion dollar brands so if you’ll indulge me for a minute, we have a Kroger brand. We have a simple truth, which is a natural organic brand. And in fact, the largest natural organic brand in America, we have private selection.

In London, the best equivalent might be finest Tesco finest. And then we have Home Chef, which we’ve talked about already, each one of those are billion dollar brands, each one of those will perform differently based on economic cycles. What we have done is created a brand and a brand strategy and a brand architecture. Now for each one of those that actually allowed those individual brands to play the role they were meant to play.

The best example I can give you there is Kroger brand. Kroger brand is a national brand equivalent, but we’ve asked it to play an OPP price point, opening price point. That’s why we brought in Smart Way. And Smart Way is going to allow Kroger brand to play the role it should play. And then how do we market to our customers in the same way as a CPG would market a billion dollar brand? So do we see opportunity in our brands? Absolutely. A massive opportunity.

Today, we’re going to call it 27% penetration there with huge potential upside there. However, I will tell you, it’s always going to be customer choice. We’re not going to force it. We are going to drive great quality and allow the customer to purchase. The first and your first question on 8451, is there opportunity for expansion there to without question. And where I’d tell you is, the expertise has always been in true personalization down to the one to one level. We send out 11 million pieces of direct mail every single period that sees participation rate in the 50% range, which is extraordinary. We are applying that to digital as well. And Gary may touch on that in a moment. But we’re applying it there.

But that data and science, the big application for us right now is applying that to how we go to market from a pricing standpoint, both regular and promotional standpoint. We are a promotional retailer. And our go-to-market strategy is based on how we promote where we promote, when we get cost from CPG increases, we don’t necessarily apply it to that individual item. We look across the portfolio, where’s the best opportunity to apply some of those costs increases such that we don’t alienate customers. That science, that data, that optimization is exactly how we’re using 8451 today, that’s much broader than what we were using them in the past.

Unidentified Analyst

I can see consumers are moving [Indiscernible].

Gary Millerchip

Yes, I think one thing I would say is that there isn’t like a average consumer right now, as you might imagine, and we tend to look at it as Stuart described very much on a individual customer level, and how do we make sure across their sensitivity to value and their product preferences and the channels they’re using? And how do we then deliver unique offers? And I think we’ve shared it publicly, we do over a trillion offers a year for customers that are all individualized.

But I think you’ve always kind of taken a step back. And just given a couple of macro trends. I think there’s certainly some in a very simplistic way to say some polarization with the consumer where what we see with a customer that’s on a tight budget and seeing that high inflation, they’re very much focused on how do I make sure my dollars stretch as far as they can go? Because I’m on a fixed budget in terms of my grocery shopping.

So from our perspective, a lot of focus in Stuart’s team and yes, of course his team goes into how do we make sure we’re serving up the right offers at the right time for the right size of product to because at different times of the month, the customer might be buying different products. There’s certainly a gravitation towards our branded products as customers discover the quality of the value of the product as well as the actual product quality being as good as if not better than some of the national branded products as well.

And so a lot of the focus goes there into how do we make sure we’re serving up the right solutions that allow the customer to manage their budget effectively. And efficiently on our brands, I think what we’ve seen in the past is when you’ve had kind of some of these unusual environments, whether it’s the 2008 financial crisis, and the recession that followed that there was a sort of step up in our brands. So we do think of the current time period as a great opportunity for us to make sure we’re kind of maximizing the fact that customers are searching for that combination of quality and value. And how do we make sure we’re seizing that opportunity to really deliver for the customer and create that next sort of step up if you like in terms of penetration.

And then on the other side of the sort of equation, you’ve got maybe a more affluent customer that may not technically need to manage the budget because they’re still fairly, financially in a strong position. But they’re still feeling like I want to be prudent with my dollars and all my pounds. And I want to make sure that I’m managing my budget and making sensible decisions. So what we’re seeing there is, we are seeing some customers sort of, maybe consolidate their shopping at Kroger because they may be shopping three or four different specialty stores. And they see that the value that Kroger offers, and we offer the choice, so bringing more of those dollars to one place. And a lot of the focus there is around similarly on our brands, but this time around private selection, the premium products that we offer. And then Stuart mentioned at some of the meal solutions through Home Chef to make sure that we’re giving customers great quality sort of restaurant quality type products that they can easily take home and can prepare very quickly at home to eat a meal with the family as well.

Rob Quast

We have another question in the audience. We’re just going to wait for the microphone.

Unidentified Analyst

Could you talk a little bit about how you approach kind of price negotiations with, I guess, suppliers CPG and so on. I guess, what are your objectives in those negotiations? What is it that you want to achieve? Is it vis-à-vis competition or your own brand called store? I mean, what are the puts and takes?

Gary Millerchip

Yes, I mean, I think in general terms, I would say, from our perspective, we want to partner long term with our CPG partners. The goal is that while our brands offer great value, and quality, CPG products are still very important to our customers. So Stuart will probably talk about in a minute, but we develop joint plans with our CPG partners, how can we grow successfully together. At the same time, of course, we are doing everything we can to minimize cost increases both in terms of protecting the customer from how we manage that inflation within the market, and also making sure that our profitability is sustainable as well.

So we as you might imagine, we have a lot of information at our disposal, whether it’s the 8451 data that Stuart talked about, and customer sensitivity there. We also look at with having our own products and manufacturing our own private label Our Brand products. We have unique insights into commodity prices, packaging prices, fuel cost, so we use a lot of that data to make sure that if there are price increases coming, that they’re valid, and that we’re working with our partners to minimize the impact.

So are there ways to redesign product forward by adjust the strategy around how we source the product to minimize the impact. But obviously, where there are real cost increases coming through, then we’re, as Stuart described earlier, we’re figuring out how to manage those in our business. And we’re finding offsets in other cost areas of the business to manage margin. And we’re also being very deliberate about using our data science to essentially provide value to customers where they need it most well, while managing those price increases.

So I think there’s kind of one priority, it’s really about how do we balance all those things to make sure that we’re doing it effectively.

Stuart Aitken

The only add I would have is, and this is something Rodney talks about all the time, which is, if those prices are just too much for the consumer to bear that the CPG is bringing, the alternative is the customer will buy our branded product, which is a huge benefit for us. And that switching process allows us to offer the customer truly unique quality at a great value. And we see that as an opportunity for us. So that’s part of the negotiation, we have to CPG as well.

Gary Millerchip

It’s a great. It’s part of a natural balancing mechanism, right, with the customer making the decision ultimately around where do they find the most value?

Ken Goldman

Keith, you’ve and Kroger, not just you has been a substantial ESG effort in recent years. I believe the new report out is called nurturing shared values. Is that correct? Would you mind highlighting some of the more notable points within the report? And I’m curious how you benchmark yourself as a company on key ESG factors and maybe where you see some of the largest opportunities ahead.

Keith Dailey

Thanks, Ken. Appreciate the opportunity to connect with you all on this topic. Maybe before talking through the highlights just to give a sort of quick view on how we think about ESG. At Kroger, ESG is really rooted in the company’s purpose which is to feed the human spirit and purpose for Kroger and corporate social responsibility they back to our founder. We have stories of Barney Kroger a century ago giving away day old bread to feed hungry families in the communities where his original stores were situated. So, so purpose and what’s more recently been codified, as ESG have really been imprinted in Kroger’s DNA for generations.

We also believe that Gary talked a bit about the changing consumer that our customers are increasingly making choices about where to shop based on a company’s purpose and commitment to ESG. And sort of their ability to tell a good ESG story that’s authentic and credible similar with our associates. And especially millennials and Gen Z, we see sustainability as a way to deepen loyalty among those customers and to deepen pride and engagement among our workforce.

So with that, as the context, our annual ESG report, like many companies is both a disclosure document as well as a progress update and strategy sort of narrative. And the way we think about our ESG strategy at Kroger is, our goal very simply is to drive positive impacts for people and the planet, and to do so in a way that also drives business value. So a couple of the key material topics that we focus most centrally on are climate impacts. We disclosed in our report just a couple of weeks ago that that we are making progress against our 2030 greenhouse gas reduction goal commitment. But even more importantly, we’ve made a commitment to establish science based targets.

So we’ll be resetting a more aggressive greenhouse gas reduction goal as a company on the 2030 timeline over the course of the next 12 months. And we’ll also be establishing a scope three are value chain commitment related to carbon emissions.

Packaging is another topic of importance. You heard a lot about our brands. We have a 2030 objective for packaging, that is to 100% recyclable, reusable, or compostable. The first step to us, for us to really achieve that 2030 goal was a packaging baseline analysis, which we just finished conducting this past year. And we found our baseline is that 40% of the Our Brands portfolio today is recyclable based on our definition of recyclability. So we’re in a decent starting position. And we’re working now to build a plan and roadmaps to hit that 2030 goal.

People. initiatives that we talk to talk about in the report include our investment and associates and the associate experience as Gary mentioned. Over the last four years, the company has invested 1.2 billion to raise associate wages, our average hourly rate now is $22 an hour with comprehensive benefits included, so that includes health care, and pensions. We feel good about that. And we also invest in the whole associate.

So in addition to retirement and health care, a lot of wellbeing initiatives. And most recently, we just announced a financial wellbeing initiative that enables our frontline workforce to take advantage of financial planning and training, which we think is a really critical skill for the workforce to develop. Lastly, Zero Hunger | Zero Waste, which is the centerpiece of our ESG strategy. It’s actually the five year anniversary this month of us launching Zero Hunger | Zero Waste. This is our ambition to create communities free of hunger, and also free of food waste.

And in the last five years, the company has donated 2.3 billion meals to feed hungry families across America. Our Chairman and Gary often challenged us to put 2.3 billion in contexts for people like what does that mean? That means every 12 seconds, or excuse me, 12 meals donated every second of every day for the last five years.

So it’s a pretty amazing scale and ability to impact lives all across the U.S. Included in that is about a billion dollars in giving both food and funds tied to alleviating hunger, and 500 million tons of food surplus that was unsellable that perfectly edible that we get out of the stores and into communities to feed families.

So, so we feel pretty good about that. In terms of benchmarking, we rely as many companies do with mature ESG portfolios on templates like the TCFD, SASB, and MSCI. And when you look at Kroger stacked up against our peers that we feel pretty good about where we are.

End of Q&A

Ken Goldman

That is a good place to wrap it up. So to all the investors in the room and ofcourse to the Kroger Company, thank you guys so much and all of you for joining us today. We really appreciate it.

Question-and-Answer Session

End of Q&A

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