Sunday, July 07, 2002

Lafley and Pichler go shopping


Kroger, P&G chiefs need each other, but also compete

By Cliff Peale cpeale@enquirer.com
The Cincinnati Enquirer

        They are CEOs of the country's biggest consumer-goods company and biggest grocery store chain. And here they are, at the Queen City Centre Kroger just off Interstate 75 and Mitchell Avenue, considering a sample platter of sushi.

        “I love it,” says A.G. Lafley of Procter & Gamble Co., ripping off a few words of Japanese.

[photo] Joe Pichler (left), chairman and chief executive officer of Kroger Co., and A.G. Lafley, his counterpart at Procter & Gamble, discuss marketing strategy as they walk through the Queen City Centre Kroger in Winton Place.
(Gary Landers photos)
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        His counterpart, Joe Pichler of Kroger Co., doesn't partake. But he isn't shy about emphasizing the value of store amenities like sushi, which is now in about 425 of his supermarkets.

        Whether at home in Cincinnati or on the road visiting parts of their far-flung operations, these CEOs make strolls down store aisles a regular event.

        Store visits, which Mr. Pichler and Mr. Lafley occasionally take together, are a way they can translate into real life the complex financial reports that they each review every morning.

        At a store, the executives can see how P&G's Tide and Crest fare with users of Kroger's loyalty card. And they can see the direct competition between P&G's Downy refill packages and a nearly identical Kroger store brand that sells for about half the price.

        A visit to this store on a recent Friday afternoon underscores how the two Cincinnati companies depend on each other even as they compete for shoppers. Neither will flourish without the other: P&G needs Kroger to sell its products, and Kroger needs P&G products like Pampers to draw customers.

        That makes any head-to-head competition a friendly affair.

        “P&G keeps us honest on quality, and we keep P&G honest on price,” Mr. Pichler says.

[photo] Than Myint, sushi chef at the Kroger store in Winton Place, offers bites of the delicacy to Mr. Lafley, who partook, and Mr. Pichler, who didn't.
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        Since Kroger operates 2,400 supermarkets and P&G has employees in more than 70 countries around the world, the complex relationship is managed by huge teams of marketing and production execs. But it's still based on the marketing insights that both CEOs get in the aisles of stores. Take this visit, arranged at the Enquirer's request.

        Mr. Pichler points out the furniture, coolers, swings and other general merchandise that are more visible in Kroger since its $13.5 billion acquisition of West Coast chain Fred Meyer Inc. in May 1999.

        “This would not have been here three years ago,” he says, pointing to a shelf of small appliances on Aisle 14. “We're selling stuff you just cannot believe.”

        Mr. Lafley pauses in front of the Crest display in the pharmacy section, where 18 toothpaste choices are offered. He admits it all could be a bit confusing to consumers trying to choose the right brand.

        “There's an opportunity for us to make it simpler,” he says. “I just don't think it's a quick read, and I have made mistakes.”

        The trip also shows both CEOs as consumers.

        Both say they shop for their households when they can. Mr. Lafley says he uses the U-Scan self-scanner when shopping at Kroger stores. And Mr. Pichler is a personal customer of Kroger's growing organic foods section.

        Gesturing toward the WestSoy Plus soy milk in the store's organic food section, Mr. Pichler says, “I drink this stuff every morning.”

Head-to-head

        At more than a dozen points throughout the store, the two CEOs see examples of head-to-head competition between P&G's branded products and Kroger's store brands.

        Now they're in Aisle 6, where P&G's Downy fabric softener refill is next to Kroger's Ultra Softener refill.

        The 40-ounce packages each have the same container, much like a small milk carton. Prices? Downy, $4.99, Kroger, $2.59.

        Pricing has been a sore point for many P&G brands, with prices on some simply too high to fend off lower-priced store brands.

        Bringing prices into line with value-conscious consumers has been a primary theme of Mr. Lafley's two-year tenure.

        But at the same time, Downy is a good example of a higher price bringing better value, he says.

        “This doesn't have all the ingredients that Downy has,” he says, peering at the back of the Kroger package. “At least it shouldn't.”

        Mr. Pichler acknowledges that Kroger intentionally packages its store brand in identical dimensions to the Downy brand.

        There is direct competition here, as Kroger tries to maximize the sales of its private labels and P&G tries to push its brands into greater prominence at big retailers like Kroger.

        But the two CEOs say they don't want confusion between P&G brands and store brands. They want to define their target markets.

        Mr. Lafley says research in paper towels, for example, shows that both P&G's Bounty and store brands are growing quickly.

        “Some people,” he explains, “will buy Bounty for the kitchen and private label for the garage.”

        “Where you have the retailer with a successful private label program, they're growing and we're growing,” he adds. “Where you get in trouble is in the middle.”

Selections from Fred

        For Mr. Pichler, a major theme on this trip is the variety brought through the Fred Meyer acquisition. Long known for its general merchandise sales, the Portland, Ore.-based chain also has contributed private-label brands such as Private Selections, which are showing up in Kroger stores in droves.

        Private Selection includes mostly food items now, and has quadrupled since the merger to more than 500 items available in most Kroger stores.

        The Fred Meyer influence is most obvious in Aisle 13, where Kroger sells chairs, grills, coolers, beach apparel, inflatable swimming pools and even furniture.

        Mr. Pichler pauses before a green patio chair on sale for $12.88. Because of Fred Meyer's general merchandise background, the deal gave Kroger access to a whole family of new products.

        “We could not have scored this quality of chair before the merger at this price,” he says.

        The extra merchandise helps P&G too, since it draws a wider variety of customers into the store, who might then pick up a box of Tide or a bottle of Sunny Delight.

        Another feature of 21st-century Kroger stores that many consumers don't see is the intricate behind-the-walls stocking and distribution.

        That computerization has increased the productivity of store workers. The number of individual items in a store has jumped more than 10 percent in the past decade, but the number of employees — about 300 — remains the same, Mr. Pichler says.

        “Keeping all of this stuff in stock used to be a human problem,” he says.

        With competition from giant Wal-Mart Stores growing every day, Kroger is using those kinds of technological innovations to cut costs. In December 2001, it announced plans to shave costs by $500 million during the next two years.

        The plan includes eliminating 1,500 jobs.

Around the horn

        Through the easy banter of the CEOs — “A.G., can you remember the Old Spice theme song?” — Mr. Pichler and Mr. Lafley see reminders in any store of their companies' winners and losers.

        In Aisle 6, Mr. Lafley sees the Swiffer WetJet, introduced with much fanfare several years ago at $50, before competition forced P&G to cut the price in half.

        “Twenty-five bucks, that's a hell of a buy,” he says.

        In Aisle 7, Mr. Pichler points to a shelf full of disposable plates, cups and bowls. This is one segment of the market where Kroger's private labels can compete on even terms with any brand.

        “We own these categories,” he says.

        At the end of Aisle 8, there's a special promotion for the Pringles Snack Stacks from P&G. Pringles was part of an aborted partnership with Coca-Cola Co., which would have increased distribution of serving-size portions.

        The Snack Stacks include eight small stacks of Pringles. So how are they doing?

        “This is a classic impulse buy,” Mr. Lafley says. “So far, so good.”

        Passing the store's eight U-scan self-scanning machines, an innovation that found Kroger on the leading edge, Mr. Pichler says in some stores, one-quarter of transactions will go through the U-Scan, which saves Kroger staffing costs.

        As the pair leaves the store — with no purchases — Mr. Lafley re-emphasizes the bottom line.

        “The store's crowded,” he says, “and Joe's happy.”
       
       

       



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