At the Kroger Co., executives often learn the business from the ground up – starting as clerks or cashiers before getting the attention of middle or senior managers and ascending the corporate ladder. On Thursday, 36 years after he started as a stock boy, Rodney McMullen will be the face atop that ladder – presiding at his first annual meeting as the CEO of the $100 billion corporation.
Humble to a fault, McMullen's easy-going demeanor belies the critical roles he's played for years before becoming CEO on Jan. 1. He's been intimately involved in the strategy that has grown Kroger's sales every quarter for 10 ½ years – transforming shopping for American consumers who want a viable alternative to Wal-Mart.
The company, by the way, is kicking its Arkansas-based competitor's ass – something Wall Street has noticed. Kroger's stock hit an all-time high of $50.20 last week even as the rest of the grocery industry appears in peril."You would never know what a talent he was if you just knew him casually, he's not the type to brag, he's not aggressive," said Bill Sinkula, a mentor and Kroger's former chief financial officer. "He was a key player on every major decision after 1987 when he was just a kid."
Besides reshaping the U.S. supermarket industry, Kroger has also quietly helped sustain downtown Cincinnati's renaissance. The retailer co-founded the consumer insights firm dunnhumbyUSA, which now boasts 600 local workers and is building a new headquarters that will be part of the city's thriving marketing and branding intelligentsia. At the annual meeting, McMullen and predecessor board chairman David Dillon will recap a year where Kroger turned a $1.5 billion profit and the company closed on a $2.5 billion acquisition of Harris Teeter. The new CEO will likely affirm Kroger's Customer 1st strategy that countered Wal-Mart's strategy rather than trying to replicate it.
HUMBLE START LEADS TO BIGGER THINGS
McMullen's rise to the corner office coincides with Kroger's triumph amid unprecedented competition and turmoil in the supermarket industry in the 21st century. Born in Pineville, Kentucky, near the border of Tennessee and Virginia, McMullen grew up around the Bluegrass State and Southwest Ohio as his parents, William and Henrietta, moved to work at various factory jobs. "My parents had the kind of jobs where if the economy went soft, you got laid off," McMullen recalls. "You don't want anyone to have the fear I had growing up."
The McMullens accepted the ups and downs and didn't hide the realities from their only child. His parents coped with a frugal lifestyle but encouraged him to pursue an education and more stable future. "They thought college education would have more security," McMullen said. In what became a pattern, McMullen went a little further. He not only worked his way through college, but he got a master's degree – all in four years.
McMullen took his first job at Kroger in 1978 in Lexington, trying to become the first one in his family to ever go to college, and to maybe become a lawyer. His factory-worker parents saved for only one year's college for their son, but hoped it would work out. McMullen made it through the University of Kentucky by working nights as a stock boy and picking up every extra shift he could. "My parents figured if there's a will, there's a way," McMullen said. "I worked every job in that store, from the dairy to the deli."
At Kroger, McMullen became invaluable, working every job and shift in the store. He even came up with a way to sell more fruit baskets out of the produce section. Ironically, the only job he wasn't good at was cashier. Studying to become an accountant, he wasn't fast at punching in customers' orders into cash registers. Toward the end of his studies, the local vice president of operations asked him if he'd be interested in working for Kroger.
Planning on joining an accounting firm, McMullen instead ended up working in Kroger's Charlotte, North Carolina, division office as an accounting supervisor. McMullen quickly caught corporate's attention. His office acquired a personal computer and he helped train everyone in the office on it. Tasks that had taken a day were being done in 15 minutes; productivity surged. McMullen was made a financial analyst in 1986 and moved to Cincinnati where his numbers and computer savvy were soon put to a larger test.
HOLDING OFF THE BARBARIANS AT KROGER'S GATE
In 1988, McMullen played a critical role in Kroger's restructuring – beating off corporate raiders from Wall Street attempting to take over the company in a leveraged buyout. CEO Lyle Everingham, president Joe Pichler and CFO Sinkula pushed through a plan for Kroger to borrow more than $4 billion and distribute it to shareholders in a one-time dividend. McMullen crunched the numbers that predicted the future cash flow needed to pay off the debt.
The result was shareholders got a premium for their stock and Kroger stayed a public company. "He was so good at doing the calculations in record time," Pichler recalled. "He ran with the best on Wall Street." McMullen succeeded Sinkula as CFO from 1995 to 2000, then began moving into more operations. He became the executive vice president of strategy, planning and finance in 2000. He oversaw the integration of the $13 billion Fred Meyer acquisition in 1999 that made Kroger the nation's largest supermarket chain. But just as Kroger found its way to the top, the industry competition intensified as never before.
FACING THE BOOGEYMAN FROM BENTONVILLE
Toward the end of Pichler's tenure, Kroger's growth began to elude the retailer as nontraditional rivals – drugstores, dollar stores and discounters – discovered they could sell more groceries to drive traffic. "Sales had begun to flatten and our divisions said our prices were out of whack with Wal-Mart," Pichler recalled. McMullen was a key player on the team that figured out how much Kroger could grow sales if it cut prices. Then Kroger would use the additional money to cut prices further, spurring further growth, Pichler said.
For a time, Wall Street punished the stock because investors were worried the company was pursuing a smaller profit. They were right: Kroger's gross profit margin – the money left after paying for merchandise that's sold to customers but before operating expenses such as labor are paid – has dropped from 27.4 percent in 2002 to just 20.6 percent in 2013. But Kroger thrived by taking a smaller slice of a bigger pie, as sales doubled in the ensuing years from $50.1 billion in 2002 to $98.4 billion last year (excluding $4.7 billion at newly acquired Harris Teeter).
Kroger continued to refine its strategy to broaden its appeal beyond just price.When David Dillon became CEO in 2004, Kroger developed its "Customer 1st" strategy. The plan was not to beat Wal-Mart on price, but to be competitive on price and also offer more product variety, better service and a more inviting shopping experience. Informing the new strategy was a key investment: Kroger in 2003 founded a U.S. joint venture with London-based consumer insights firm dunnhumby. The joint venture became the brains behind Kroger's loyalty card program, offering customers bargains in exchange for tracking shopping patterns.
Kroger has used dunnhumby data to send coupons to customers for items they've purchased in the past. Kroger has also learned that parents packing lunches for their kids prefer juice boxes in the same aisle as crackers. As Kroger's strategy continued to gain it market share, the company paved the way for McMullen to succeed Dillon.
McMullen became president and chief operating officer – Kroger's No. 2 executive – in 2009. McMullen says he benefited from working with Everingham, Pichler and Dillon: "The last 25 years, I've worked with legends."
SHOWING UP AT STORES UNANNOUNCED
Kroger today runs 2,640 supermarkets in 34 states and the District of Columbia. It employs 375,000 workers. McMullen brushes aside questions about more potential acquisitions, saying Kroger is concentrating on getting the Harris Teeter integration right. It's also growing by pleasing existing Kroger shoppers as it expands and upgrades stores. Kroger gave McMullen the key to the Lexington store he started at when it was replaced by another location in the 1990s. He keeps it in his office.
In recent years, Kroger has ramped up construction of larger-format Marketplace stores as part of its $2.8 billion to $3 billion in forecasted capital expenditures this year. But Kroger isn't cloning Wal-Mart supercenters, keeping the emphasis on food.McMullen, who was paid $8.8 million last year, keeps a busy schedule and is on the road half the time. He tries to visit all 20 divisions three or four times a year.
Flying coach as much as the corporate jet, he meets with division officials and then they show up at local stores unannounced. He makes a point of talking with everyone, from department managers to checkers, to get a sense of what shoppers want and are responding to. McMullen, an Anderson Township resident, is a familiar presence at the local Marketplace store there, as well as the Newport Pavilion store. "It's important to see stores as the customer sees it," he said. ■