Kroger is not backing away from its bet that ongoing and significant investments in digital and eCommerce capabilities will lead to success in the coming years. But for now, investors are skeptical, as they showed Thursday (March 7) when the grocery chain’s stock price took a slide after the release of Kroger’s fourth quarter 2018 financials.
Investors sent shares down more than 11 percent after Kroger reported a 10 percent year-over-year decline in revenue in Q4, along with earnings that came in lower than expectations, the first time that’s reportedly happened since October 2017. And investors on the post-earnings conference call and webcast expressed skepticism about how much Kroger’s digital investments will lead to future revenue gains and profits.
Digital Investments
Kroger said Thursday that it will spend up to $3.2 billion on capital investments including digital efforts, an amount that excludes mergers, acquisitions and purchases of leased facilities. That’s up from about $3 billion in 2018. Investors are worried that such spending — part of a digital and store overhaul rolled out last year that’s called Restock Kroger — will eat into profits and not grow revenue enough over the immediate term.
The plan comes amid general digital gains in the grocery space, and moves to adopt the latest retail technology to respond to the demands of consumers who are doing more via mobile commerce — and who are increasingly tempted by the grocery offerings of such companies as Amazon and Walmart. Kroger said that in 2018, its digital sales increased 58 percent (but it gave no dollar figures), and that its grocery pickup and delivery programs now reach 91 percent of the households within Kroger’s reach. “We will reach 100 percent of those households by the end of 2019,” CEO Rodney McMullen during that post-earnings call Thursday.
He also said the grocery chain’s digital run rate stood at $5 billion in 2018, and that Kroger was aiming to increase that to $9 billion. “We will continue to make significant investments to build an omnichannel platform,” he said.
Fulfillment and Meal Kits
Those investment efforts include fulfillment and even meal kits.
For instance, the grocery store chain has been working with Ocado, one of the world’s largest online grocery retailers, on two new Kroger customer fulfillment centers in the U.S. Indeed, Kroger has said it would build 20 high-tech customer fulfillment centers that feature automated, digital and robotic capabilities. Ocado entered into a deal with Kroger last year to become the retailer’s exclusive partner in the U.S., which would make its home delivery platform available in the country.
As well, Kroger a month ago said that Home Chef meal kits will now be available in 500 additional Kroger stores across the country. In addition, Home Chef also recently announced the launch of a customizable meal kit feature for online orders, so that customers can easily change and upgrade recipe ingredients. Last May, Kroger announced a merger with Home Chef, the country’s largest private meal kit company.
On Thursday, Kroger said that in 2018, it invested a combined $589 million in Ocado and Home Chef.
Despite those investments and Kroger’s commitment to its digital and omnichannel efforts — which executives confirmed on Thursday during the post-earnings conference call — more than a few investors on that call expressed the view that the market is not seeing enough progress. McMullen pushed back against such views. “We realized business transformations are hard,” he said in response. “But I want to emphasize we are on track to deliver on our Restock Kroger commitments.”
During the fourth quarter, Kroger reported net income of $259 million, which was down from $854 million from a year ago. Revenue declined 9.5 percent year over to about $28.1 billion — missing analyst expectations of about $28.3 billion, “mainly due to higher gas prices that discouraged customers from buying fuel,” according to one report. The new year will bring more digital moves and investments from Kroger, but it’s unclear how patient investors will be as 2019 progresses.
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