The year of the pandemic, 2020, had just wound down, and there was an air of relief mixed with apprehension. While mass vaccinations were underway across the globe, the economies of major countries were still facingsignificant headwinds. There was a lot of unease about the possibility that mutations of the COVID-19virus could once againbring everything to a grinding halt. The KrogerCo. was one of a handful of grocery companiesthat benefitted from a pandemic boom. With a large segment of the population forced to stay indoors and restaurants and food service businesses closed, people looked to grocery stores as their only choice for buying ingredients to prepare home-cooked meals. Kroger's sales in its third quarterof 2020 had grown by $1.9b, a growth of 11.3% over the same period in 2019. McMullen attributed some of these historic gains to the Restock Kroger initiative that he launched in October 2017. It promised to radically transform the customer experience for Kroger shoppers and elevate the company as a leader in ecommerce and digital business. The initiative was expected to cost $9b and generate $400m in incremental operating margin by 2020.2 However, by 2019 Kroger was already pulling back its digital overhaul after it announced its fifth consecutive quarterly decline in profits despite digitalsales increasing by 21%. The company was facing intensifying price competition at both the nationaland regional levels, and even the smaller players such as Aldi, Lidl, and Publix were increasing theirrevenues at a much faster clip than Kroger was able to deliver. The digital transformation initiative was scaled back to allow the company to regain its footing. Against that backdrop, the pandemic provided an unexpected boost to Kroger's fortunes. It remained to be seen whether the record performance of 2020 could be repeatedin 2021 and whether the Restock initiative would deliver the operating margin increases that were originally promised. As 2021 dawned, success was far from certain. Exhibits 3a and 3b provide a synopsis of key financial and operating statistics of firms in the industry.

 

Would Kroger be able to forge a path to sustained profitability while transforming its digital presence and simultaneously radically changing its physical stores? Would its digital transformation strategy provide enough of a foil against peer competitors such as Walmartand Amazon who had much deeper pocketsand grander visionsof omnichannel strategies? How would the promise of a superiorcustomer experience translate into profitability at a time when the pandemic was upending traditional customer preferences and the entire grocery industrylandscape? The very notion of superior customerservice had become a rapidly moving target.

 

The Transformation of Grocery Retailing

Towards the end of the pre-pandemic era, it was very clear that the grocery retailing industry was in the throes of a massive transformation. The industry had already witnessedsignificant changes, ranging from the rise of

hard discounters and limitedassortment stores, the increasing presenceof wholesale outletsand warehouse clubs, and the meteoric rise of online grocery companies, to the entrance of Amazon in fresh groceries through its acquisition of Whole Foods. Coupled with the fairly slow industry growth rate (~1% per annum), the impact of these changes was amplified. Traditional supermarkets accounted for barely a third of all food purchases in the U.S.,and the hold that traditional grocery stores had on U.S. households in terms of shopping space had declined from 90% three decades ago to 44% by 2019. As customers experienced far greatervariety in retailformats, they began demanding greaterlevels of customization to cater to their uniqueneeds.

 

From Food at Low Prices to Convenience and Experience

Although price and perception of value continued to play key roles in a buyer's purchasing decision, customers were attributing a lot more weight to issues such as health and safety, convenience, product quality, and a seamless customer experience. Customer expectations relating to product availability and speed of delivery had combined to exert renewed pressures on scalability of the digital models that retailers were experimenting. This trend was accentuated in the pandemic era when online grocery orders received grew by 151% in just four days between March 12 and March 15, 2020, when the virus lockdowns spread across the country. The dollar value of orders grew by an astounding 210% during that same period.3 While these spikes were largely the result of the pandemic, more fundamental shifts had preceded the pandemic as well. Customers were seeking new and meaningful shopping experiences and did not see grocery storesas mere places where they could buy food. They expected to be entertained and informed during their visits and appreciated in-store demos, sit-down cheese and wine bars, even indoor cafes where they could see and sample products. Prepared food, meal kits, expert forums, contact-less checkout systems, multiple delivery options to suit all tastes such as curbside pickups, personalized residential delivery, and even "in-fridge" deliveries were being tested.4 There was even talk of establishing display only grocerystores where customerswould be able to see and taste new productsthat they would then purchaseonline.

 

TheGrowth of OnlineShopping

Online grocery shopping had taken of in a very big way with companies such as Amazon leading the charge in home delivery after its acquisition of Whole Foods in 2017. Walmart had also established a leading position in the online segmentand looked to further increaseits online revenues.Although the numberswere still fairlysmall compared to revenues generated in stores, the proportion of online spending was increasing. It was expected to account for close to 10% of the overall market by 2025,5 but some analysts believed that the post- pandemic era might boost those numbers even higher to 21.5%.6 Most of the legacy retailers such as Albertsons, Kroger, and Walmart were offering online grocery shopping with offline delivery using combinations of drive- up services and residential deliveries to allow the customer a "touchless" shopping experience, a critical requirement that emerged during the COVID-19 crisis. Even smaller regional and local players were contracting with delivery service companies such as Instacart to retain customers who were reluctant to visit the grocery store.

 

Intelligent Aisles and Savvy Shoppers

The digital realm extended far beyond the boundaries of ecommerce and online shopping. Retailers were using sophisticated tracking technologies to dispense coupons for special offers that were personalized in real time as the shopper strolled through an aisle at the grocerystore. Some were using electronic price tags that not onlysaved labor costs required to change prices, but also allowed for innovative price offers when linked with advanced artificial intelligence algorithms that predicted customer preferences. The popularity of loyalty shopping cards had enabled retailers to deploy artificial intelligence (AI) and predictive analytics tools that helped craft personalized shoppingexperiences. Alibaba, the Chinese consumerconglomerate, had established a chain of grocery stores under the brand name Hema that portended the future of grocery shopping worldwide. These massive stores served as modern supermarkets that were totally focused on the customer experience while doubling as a warehouse that allowed pick and deliver operations. Hema stores also offered a food court that catered to multiple tastes and cuisines. The operation included robots that delivered food, smart price tags that doubled as repositories of product information, cashless payment systems,smartphone-centric transactions, and many more technology-mediated innovations.

 

Many of the larger U.S. grocery retailershad already started implementing digital strategies, althoughthe progress had been painfully slow in some cases.The gap between those who had already implemented carefully

laid out digital strategies and those that were lagging behind was clearly evidenced during the pandemic when customers were looking for speedier online operations that could provide a seamless store-to-door experience. Companies such as Amazon and Walmart particularly stood out. Both had made significant investments in their grocery business and were pioneering new ways to enhance the customer experience. While Amazon was leveraging its voice-enabled grocery shopping experience through Alexa, its own digital interface, Walmart had partnered with Google to provide a similar experience. It had spent $11.7b on technology investments in 2018 and hired thousands of engineers, data scientists, and product managersto re-engineer the digital experience for its customers. "It's no longeracceptable to have a non-digital experience when you go out there, and that means we have to be integrated across the board and not just in handheld devices but through customer shopping lists, pickup and more," said Jeremy King, Walmart's CTO. In contrast, Kroger had yet to build voice interface capabilities into its digitalstrategy.

 

Amazon's acquisition of Whole Foods in 2017 for $13.7billion had set of an arms race among groceryretailers. Given Amazon's remarkable prowess in digital platforms, personalization, and customer engagement, it was clear that the company was well down the path to becoming a major player. By 2019, grocery was Amazon's fastest-growing category, and it had already cornered roughly 30% of the online grocery market. It leveraged significant synergies by integrating its Prime membership services with Whole Foods to deliver fresh groceries within a two-hour window and used its scale advantage to reduce prices to make it a more attractive proposition to customers. Dunnhumby, a market intelligence company, ranked Amazon as #1 among U.S. grocery retailers in its annual Retailer Preference Survey for 2021, a first for Amazon.7 The report also ranked Amazon as the top choice in digital and the second-best choice in speed of delivery. Exhibit 4 provides a snapshotof industry competitors and their salient strategies.

 

Kroger's Digital Evolution

 

Founded in 1883, the Kroger Co., had grown from a small grocery businessin Cincinnati, OH to a behemoth that ranked among the top grocery retailers in the country. Much of its prowess originated in a carefully cultivated set of core competencies that focused on traditional areas of emphasis, such as cost control and management, supply chains and inventory management, and astute real estate management. The company manufactured between 30% to 40% of its store-label products in company plantswhile the rest were sourcedfrom suppliers. Reflecting its cost focus, the company had always used market prices as transfer prices to ensure that it made the right make v. buy decisions. By 2020, the company had over 2,700 stores across16 different brands, such as Fry's Food, Harris Teeter, City Market, and Kroger. It emerged as a dominant force in grocery retailing. Like many of its peers, the retailer had not paid much attention to enabling digital technologies in the pursuit of more customized offerings or even greater operational efficiencies. Much of its efforts were stutter- start moves designed to test the waters with a technology or two, only to reversecourse because the territory was unfamiliar or for reasons originating in the dominance of its analog culture. Senior management was much more familiar and comfortable with the linear business model that emphasized the traditional core areas of expertise, such as supplier and sourcing management, inventory control, product assortment, and national brands and operations management.

 

McMullen was a consummate insider at Kroger, having climbed the corporate ladder since he joined the company as a part-time store clerk and grocery baggerwhile still in college. Risingthrough the ranksas an analyst and later CFO of the company, he was elevatedto CEO in 2014. Armed with a head for numbers and a keen sense of the customer, he focused initially on Kroger's arch rival, Walmart. Introducing more store-label brands, reducing prices through more efficient logistics management, and customized salespromotions were pieces of the stock armory that McMullen had initially deployedto compete againstrivals in the grocery business.E-commerce and digitaltransformation were far from his mind at that time, although Krogerperiodically played at the fringes of those growth areas. McMullen had himself axed some key digital initiatives that were proposed in those early years in order to run a tight ship. It took the rude shock of Amazon's entry into the grocery business (August2017) for Kroger to pivot more seriously toward all thingsdigital. In October 2017, McMullen launched the "Restock Kroger" initiative that promised to transform the business.

 

 

Restock Kroger: A Digital Transformation Unfolds

 

The Restock Krogerinitiative was built on four key pillarsaccording to the company: "redefine the grocery customer experience, expandpartnerships to createcustomer value, developtalent, and live our purpose."10 The strategy was intended to transform the company from a traditional bricks-and-mortar player into a formidable leader in the world of digital retailing, but it was a transformation that was fraught with challenges. Others, such as Walmart, had tried this path earlier with mixed results, but McMullen was convinced the timewas right to make a bold move.His confidence was likely bolstered by key assetsthat Kroger alreadyhad in place. It had acquired most of the ownership interest in dunnhumby, a retail analytics company that wasoriginally a subsidiary of the U.K. retail giant Tesco. Tat acquisition, completed in 2015, becamethe core of 84.51°, an internal data analytics group that Kroger had subsequently established. Kroger had also made an initial foray into e-commerce with the acquisition of Vitacost, a Florida-based onlineretailer specializing in health and nutrition products.

 

Redefining the CustomerExperience: Retail grocers were evolving into omnichannel businesses as they adaptedto accommodate how customers wanted to buy their groceries. For example, more time-starved customers were shifting their grocery buying to online instead of spending time browsing the products on sale attheir local supermarket. Online sales were growing at a heady 40%, whilein-store sales had remained fat. Customers shoppingin physical storeswere looking for fresh foods and preparedfoods, and they were also willing to buy store brands with greater frequency than before. These fundamental shifts in consumer behavior created new opportunities for Kroger. Addressing these changes required the power of digital technologies to enrich and enhance the customer experience at every single point of interaction from the physical stores to the digital realm. "We're doing this by combining our knowledge of food and our ability to personalize through the use of data analytics; we're doubling down on digital, and we're leveraging new and ongoingpartnerships to deepenour connection with customers and drive revenue,"McMullen observed.11

 

Data and personalization became a central engine that would elevate the customer experience. Kroger's analytics division 84.51º played an instrumental role. By combining infrared and IoT technologies with video analytics, Kroger was able to track the time of day when customers entered each store and how long their shopping activity took. Artificial intelligence (AI) algorithms dynamically predicted and signaled where staff would be in areas of the store to help customers. Using similar technologies, Kroger was also able to monitortemperatures of their cold-storage units and warn store personnel of potential problems before they could occur. The company also monitored data collected from the aislesto determine sales of its own store brands and national brands to assess potential switching behaviors. Much of the emphasis at 84.51º was on "supervised learning," an AI approach that relied on training algorithms based on labeled data to derive predictions where data were incomplete or uncertain. When deployed in conjunction with Kroger's Scan, Bag, Go app, the amount of consumer shopping data collected was immensely valuable. Shoppers could register their loyalty cards through the app and use it to scan their in-storepurchases and also use the touchless paymentsystem to pay for their groceries. Tis eliminated the need to stand in line at a checkoutcounter. The data collected from the app was also used to personalize offerings for each individual shopper. Kroger reported that it served about 9 millioncustomers each day and captured97% of all the associated transactions through its customer loyaltyprograms, such as its frequent shopper cards.12 As the in-store shoppers walked across the aisle with the Kroger app open on their smartphones, smart-shelves technology was equipped to identify the shopper, sift through past shopping interests, and provide product recommendations, personal pricing, and digital coupons, all in real time. The companyused over 850 algorithms to analyze customer data and personalize couponsit sent out to over 12 million customers. For example, its analysts were able to identify incredibly nuanced personal consumption patterns such as whether a customer had started a new diet, or whether a family had downsized, or had newborn children. Exhibit 1 shows the range and types of data that formed part of Kroger's personalization database.

 

 

While these advances in digital technology, personalization, and predictive analytics were already reshapingthe customer experience, they had an equally powerful transformative impact in the backroom.For example, Kroger's consumer packagedgoods (CPG) supplierswere clamoring to be featuredin Kroger's onlinesites, apps, and in-store digital displays. Kroger also offered AI-driven Precision Marketing services to its CPG suppliers to provide extremely valuable data that helped them assess the household-level impact of their marketing programs, communications pitches, and couponing strategies. This allowed suppliers to becomemore efficient in targeting the right customersand also use Kroger's loyal customers as a test group to assess the likelihood of successful new product launches. Its consumer analytics division84.51º was also providing consulting services to 1,300 companies, including CPG giants such as Procter &Gamble, General Mills, and PepsiCo.

 

Kroger turnedto Microsoft to implement its Azure AI technology to enhance productivity in the store.This collaboration promised to deliver a "connected store" experience. Kroger and Microsoft established two pilot stores, each close to one of their two headquarters, to introduce and fine-tune some of theseefforts. The scope of innovations that were contemplated spread across a wide spectrum ranging from a pick to light system that would reduce picking time for curbside pickups, a shelving system using digital displays capable of providingpersonalized pricing and dietary information, and video analytics to head of stock-outs. McMullen saw partnerships beyond its 84.51º division as crucial pathways to help Kroger accomplish its lofty transformation goals.

 

Collaborating to Win: Standingon the Shoulders of Giants

 

Kroger and its competitor, Walmart, chose quite different pathways to transforming themselves digitally. Walmart largely attempted to embark on its digital journey using its own assets with a few bolt-on acquisitions. However,it already had some experience with the use of digitaltechnologies, especially in its supplychain operations. Krogerwas facing a different situation. The company had to build most of its digitaltechnology infrastructure from scratch. McMullen decided to bet on collaborations to accelerate transformation rather than the plodding path of building solutions in-house. Automating warehouses for online orderfulfillment was a challenge that required collaboration. Jody Kalmbach, VP-Digital Experience at Kroger, remarked, "E- commerce as a method of getting things to consumers' doorsteps has a fundamentally different economic model, with an additional layer of cost beyond what the traditional bricks-and-mortar grocer has to deal with."14 Kroger's pickup servicerequired a sizablestaff of in-storeemployees who pickedabout 60 items an hour, which translated to roughly $5.00-$7.00 to fulfill an order. Scaling this approach to achieve a national footprint was a tall order, and a very costly proposition at best. Kroger would have taken at least 5-10 years to build automated warehousing operations on its own. McMullen chose to collaborate with Ocado, a UK-based company specializing in warehouse automation, to cut that development time in half. Kroger owned 6% of Ocado. Voicing his faith in the ability of Ocado to execute a sound warehousing strategy, McMullen observed, "Ocado is significantly more efficient than the way we're doing it today, though it will be a couple of years before the warehouses contribute to the company's bottom line. We would typically expect a facility to be in year two or year three before it gets to proftability."15

 

Here too, Kroger deviatedfrom the established practice of its rival, Walmart,which wrote the book on super warehouses. Instead,Kroger envisioned warehouses that were smallerbut closer to densely populatedmarkets in order to optimize delivery time. Each warehouse was expected to cost in the region of $55 million. Extending well beyond warehousing efficiencies, Kroger also partnered with Nuro, a company that manufactured driverless delivery vehicles. The concept of delivering groceries to customers had been testedusing Nuro deliveryvehicles and technologies in Arizona and Texas,although there were no firm plans for expanding the program elsewherein the country.

 

Kroger's collaboration with Microsoft was yet anotherillustration of the value that the firm placed on partnerships. The two companies committed to jointly developing a set of digital tools that they would commercialize. Called Retail as a Service (RaaS), the suite of products was expected to include Kroger's Scan, Bag, and Go system which allowed contactless shoppingand payment within the in-storeenvironment. It

included dropdown shopping lists that could be populated by customers at home and activated upon entering the store. The app directedthe shopper to the items on the shopping lists,and even alertedthem to couponsand offers that were customized to their needs.It also allowed them to conveniently pay for theirpurchases through background payment systems that did not require any extra time in a cashier line before exitingthe store. The emphasis on digital convenience extended to the back of the store through products such as the Virtual Store Manager, and comprehensive inventory management system connectors that included both video- based AI to head of stockoutsituations, as well as traditional point-of-sale systems that helped manageinventory and supplier ordering systems. The companies had already started to commercialize their EDGE Shelf (Enhanced Display for Grocery Environment), a real-time display management system that was capable of providing just-in-time pricing information that balanced both online as well as in-store prices, allowed for personalized pricing and couponing, and also offereda conduit for carrying advertising as well as nutritional information to help shoppers.16

 

Driving Innovation: The Challenge of Change

Despite its torrid pace of digital innovation, Kroger fought hard to bring that same focus and energy to transformation of its physical stores. Beyond enriching a customer's experience through updated product offerings, a host of chef-prepared ready-to-go meals, sample tastingevents, in-store cafes and wine bars, the company also sought to expand its physical retail footprint through partnerships. It signed a deal with Walgreens, the national drug store chain that operated over 9,000 storesin the country, to offer a selection of fresh food and grocerieswithin Walgreens' stores. Walgreens hoped to benefit from the foot traffic that fresh groceries typically attracted, and Kroger would be able to expand its footprintwithout much capitalexpense. Along similar lines, Kroger partnered with companies such as Pricelineto expand its targeted offerings. Priceline Warehouse, an internet-based retail platform, allowedcustomers to bid for groceriesonline. Customers with winning bids had to pick up their groceries from Kroger stores. This collaboration expanded the traditional reach of Kroger's bricks-and-mortar stores into a new marketspace. It had also contracted with the Chineseonline retailer Alibabato sell Kroger-branded productsto a global audience.

 

McMullen had proven himself to be a champion of change. He engineered a truly massive shift in thinking at Kroger and helped ensure that customer experience would be a goal that every employee aspired to deliver. However, the changes were not easy and far from complete. The established culturewithin the companyhad shown signs of risk aversion. The Wall Street Journal reported that some would-be partners had walked away from Kroger after seeing its conservative culture.17 When it acquired Vitacost, an online retailer of natural foods and supplements, Kroger was very slow to integrate the new company, frustrating Vitacost veterans who felt that Kroger was reluctant to move into the world of digital commerce and was sticking to its roots in the traditional bricks-and-mortar business. Kroger also had a reputation for implementing strategy in fts and starts. For example, Kroger had considered partnering with or acquiring three digital startups that each had the potential to launch Kroger into the world of digital retailing: Shipt, an online grocery delivery company; Plated, a meal kit company; and Boxed.com, a bulk e-tailer. However, Kroger was unable to work with any of them; Shipt was snapped up by Target, Plated was acquired by grocery rival Albertsons, and Boxed walked away from the discussions with Kroger because it found the terms unattractive and therefore did not pursue a formal ofer.18

 

Despite the relative infancyof its digital transformation, Kroger witnessed the departure of several key senior executives. Some believed that this was because of the declining bonuses that were decimated by company performance. The bump in performance expected from the early stages of the Restock Kroger initiative had not materialized, although a fifth of the stores had been remodeledand upgraded. In explaining some of these setbacks, McMullen explained, "It took us too long to do it. We put too many things on our stores to execute."19 He seemed to counsel patience when he observed, "Online investment is still a headwind, but not as much as it was. It takes three tofive years for a customer shoppingonline to be as profitable as a customer shopping in a store."20 It was clear, however, that Kroger's investment in digital transformation was impacting the bricks-and-mortar business, leaving investors concerned. While the company had reported a very solid year at the end of 2020, mostly driven by the pandemic shoppers, investors worried whether the company could maintainthe momentum.

 

Although Kroger customers were becoming familiar with the digital conveniences that the company was counting on to maintain customer loyalty, much of the actions that it pursued appeared to be tightly locked in with the bricks-and-mortar stores. The companyreported that the retention rate for customerswho shopped

both online and in-store was 98%, underscoring the evolving hybrid nature of the business. As of 2020, Kroger reported that it had relationships with 60 millionhouseholds across the country and had engagedin over 1.3 billion interactions across its digital interfaces, a 30% increaseover 2019. Its personalization engine appeared to be clicking since the company reported that it had delivered over 11 million customized recommendations to its customerseach week. However, the perils of the emphasis on digital interactions became evident when Kroger suffered data breaches in February 2021, exposing some of its HR and pharmacy records. Tis came on the heels of another data breach in June of 2020 that exposed patient records belonging to over 11,000 customers from its in-store clinics.

 

Based on the case study above. Analyse Kroger's ability to react and utilize new digital technologies to remake the grocery business and answer the following questions

1. There are five domains (ie customers, competition, data, innovation and value) of strategy that digital is changing.  Discuss how Kroger deals with any of the two (2) domains of strategy as the grocery retailing goes through digital transformation. 
2. As a champion of change, evaluate the two (2) problems that McMullen is trying to solve when embarking on Kroger's digital transformation journey. 
3. 
   
4. Discuss any two (2) new digital technologies that were adopted by Kroger as part of the process of remaking the grocery retail business. Please give relevant examples from the article on how these technologies were deployed at Kroger. 
5. Based on the article, discuss the two (2) challenges of change faced by Kroger while driving innovation through its digital transformation process.                      
6. Did Kroger achieve success with its digital transformation? With relevant examples, discuss your answers within the context of its business model and customer experience.