Kroger exec expects strong '07 amid grocery industry change

The Associated Press
Monday, January 8, 2007

CINCINNATI
The head of the largest U.S. supermarket chain spent much of his holidays shopping — for groceries.

Back in his native Kansas, David B. Dillon, chairman and chief executive of Kroger Co., hit as many stores as he could, including seven or eight on Christmas Eve.

Dillon makes it a habit to pop in at the nearly 2,500 grocery stores run by Kroger, a $60.6 billion (€46.6 billion) business with 290,000 employees. His visits are unannounced; sometimes he meets with the manager or other workers; other times he blends in with shoppers. He also shops secretly in competitors' stores.

"I'm really looking for 'what's the shopping experience here?' " Dillon said in an interview. "Would I find the items I'm looking for, would I be satisfied with the cleanliness of the store, does the pricing look relevant to that particular market, what's the attitude of the employees in the store; how do customers feel about the store?"

Dillon, who became Kroger's president in 1995 and is in his fourth year as chief executive, has led during an era of sweeping change in competition and grocery shopping habits. During the year ahead, he faces looming labor negotiations and the British invasion by supermarket chain Tesco PLC, which plans to open U.S. stores this year.

Dillon, a young-looking 55, has been part of the grocery business since leaving college.

Some other long-established grocers have fallen by the wayside or been taken over — including his family's Dillon chain acquired by Kroger in 1983. Kroger has grown behind a strategy of keeping prices down amid Wal-Mart Stores Inc. and other grocery-selling discounters while improving service, store appearance and offering more variety in both products and store formats.

"Kroger appears to be reaping the benefit from the decision made several years ago to invest in lower prices in many of its markets and to identify the key nonprice factors that would make customers happy," Lehman Brothers analyst Meredith Adler wrote last month, saying it "has led to a strong and improving competitive position."

Kroger stock rose 5.2 percent, to close at $23.49, Dec. 5 after the company reported a 16 percent profit increase in its third quarter and raised its profit outlook for the year. It has been trading a little above that lately on the New York Stock Exchange after hitting a 52-week high of $24.48 Dec. 15, up from February's $18.05.

The company is sticking with its strategy of trying to keep prices low and shopping appeal high, Dillon said. Kroger has focused on areas such as faster checkouts, offering more natural foods and more-attractive stores.

"I believe that the steps we took in the last couple of years, to focus more attention on those elements important to the customers in our stores beyond the price element, had some real traction," he said. "We expect them to have even more traction in 2007, so I actually look forward to the year with great anticipation."

Asked whether Kroger is in the market for acquisitions, Dillon replied: "Actually, I want to get better. If bigger is one way to do that, I'm fine with that."

Kroger this year will negotiate new contracts with unions in seven states, including with locals representing 18,000 Kroger employees in southern California. Ralphs stores there locked out employees three years ago amid a strike and lockout at other grocery companies that disrupted business for nearly five months. Ralphs, a Kroger unit, agreed in federal court last year to pay$70 million (€53.8 million) in fines and restitution to settle charges it illegally hired hundreds of workers under fake names during the lockout.

Dillon said it is always a challenge to balance the company's need to follow its customer strategy with workers pay and benefits needs. "Southern California maybe more so because of the tensions from the last time," he said.

The United Food and Commercial Workers Union noted that Ralphs remains on federal probation entering the negotiations. Rick Icaza, president of Los Angeles-based UFCW Local 770, said in a statement Monday that 92 percent of Ralphs employees hired since the lockout still do not have employer-provided health insurance.

"That's not a tension, that's a fact," Icaza said.

Meanwhile, after adapting to Wal-Mart's entry into groceries two decades ago, Kroger now has London-based Tesco, another one of the world's largest retailers, ready to enter the U.S. market. Tesco this year plans to begin rolling out grocery stores in California, Arizona and Nevada, a move Dillon said was not a surprise from what he called "one of the world's better retailers."