Kroger Exits Lucky's Investment; Shares Free Pickup Learnings

The Kroger Co. said it will divest the Lucky’s Market chain and revealed its free pickup promotion is getting new customers to use the service.

Kroger, which invested in natural foods chain Lucky’s Market in 2016, said as a result of a portfolio review, it will divest its interest in Lucky's Market and recognized a non-cash impairment charge of $238 million in the third quarter, and the portion of this charge attributable to Kroger is $131 million.

Lucky’s Market was started in 2003 by two chefs, Trish and Bo Sharon, when they bought a convenience store in Boulder, CO. Lucky’s Market now has 35 stores in 11 states.

“The amount of investment that it would take for Lucky's to be a meaningful contributor to Kroger overall, and the efforts that it would take, we just didn't think it created a good return for the investments that were needed to be made relative to that,” said chairman & CEO William McMullen.

“We do believe that there's still a role for the small format store,” continued SVP & CFO Gary Millerchip, but noted “it's hard to figure out that small format model and to make it work effectively.”

He also noted Kroger’s pilot with Walgreens continues to provide an opportunity to “learn how to continue to build a strategy that has a small format presence in there.”

Meanwhile, Kroger is focused on improving its digital offerings.

“Our data clearly shows that over time and after initial investments, the profitability of a digital customer is the same as an in-store customer,” said McMullen.

Kroger’s digital sales grew 21% in its third quarter 2019.

“We expect our digital sales growth to moderate year-over-year primarily due to the cycling of Home Chef and as a result of our disciplined focus on growing the Ship customer,” he continued.

The grocer has expanded its digital coverage so that 96% of its customers who shop Kroger in a brick-and-mortar store can also shop via pickup or delivery

“We continue to invest in digital platforms as this is where the customers are increasingly going to meet many of their needs,” he noted.

During the quarter, Kroger began offering customers free grocery pickup, which generally costs a $4.95 fee. The promotion runs through January 1, 2020.

Millerchip said that while the promotion test launched just a few weeks ago, it’s already seeing results.

“We're starting to see new customers experience the service and start to engage in Kroger pickup that haven't before,” he said. “We're also seeing existing Kroger pickup customers start to increase the frequency with which they use pickup service.”

Kroger will be using all of that data to “analyze and evaluate,” free grocery pickup.

McMullen noted that while the customer adoption has been a “little bit stronger” than what Kroger was expecting, “we really aren't to a point yet of deciding whether to continue it or not.”