Rodney McMullen was born in Pineville, Kentucky, where his mom and dad were both blue-collar factory workers. Although they most often lived in the bluegrass state, downturns on the production line sometimes forced the family to move to parts of Southwest Ohio in search of employment opportunities. “My parents had the kind of jobs where if the economy was soft, you got laid off,” McMullen remembers. “You don’t want anyone to have the fear I had growing up.”
The McMullen’s eventually found themselves living on a ranch in Williamstown, KY. “Every summer in my youth consisted of performing different tasks on the farm,” he says, while also recalling the time he got paid 6 cents for each stick of tobacco he cut.
As a boy, Rodney was once tasked with negotiating the sale of a cow they owned. His grandparents were sitting in the house with his parents while he bartered outside and upon hearing the news, alarmingly asked them, “You’re not going out there with him?” To which his father rather calmly replied, “No, he knows what we have in it, and he knows what we’re willing to take for it.”
“My parents always treated me as an equal when it came to financial things. I would go to auctions and flea markets and garage sales with them, and I would buy stuff and sell stuff,” McMullen explains, pondering the sort of responsibility and trust his mom and dad put into him at such a young age. After selling the cow, he went back inside and said, “here’s what I got for it.” His father responded, “Oh, cool. I would have taken less.”
Barely hanging on through the ups and downs of America’s industrial heartland, his parents hardly ever attempted to hide the sobering realities from their only child. They coped with a frugal lifestyle and encouraged Rodney to pursue higher education and a more stable future.
College
Mom and dad managed to pull together about two semesters worth of college tuition for Rodney, the rest of his schooling, he’d have to pay for himself. Therefore, after graduating high school and moving to the Lexington area in order to attend the University of Kentucky, he got a part-time job at his neighborhood Kroger grocery store – the year was 1978.
McMullen’s adolescent career intentions had little to do with the shelves he was getting paid minimum wage to stock, as a matter of fact, he was the first person in his family to ever attend college, and early on, he had big wig ideas of becoming a lawyer.
Desperately trying to stay on top of his educational expenses, he constantly made himself available to cover co-workers’ shifts, which often meant long nights intermingled with learning how to function in new roles. “My parents always figured if there’s a will, there’s a way,” he explains. “I worked every job in that store, from the dairy to the deli.”
Some positions saw the young man flourish, like maintaining the produce section, where legend has it, he discovered a way to sell more fruit baskets to customers. The cashier’s counter was a different story though, he had a hard time quickly punching items into the register, which didn’t bode well for shoppers in a hurry. It’s alright, nobody can be great at everything!
Numbers would ultimately earn his utter fascination as, within a period of just three years, Rodney McMullen earned his B.S. in accounting and B.B.A. in finance in 1981. Then, rather impressively, he got his M.S. in accounting only a year later.
“I went to college on a Kroger scholarship,” he jokes. “I just had to work 32 hours a week to get it.”
Career
After completing a double major undergraduate and Master’s education over the course of four brilliantly productive years, Rodney McMullen planned on joining an accounting firm. That is until the local vice president of operations asked him to work for Kroger’s corporate team. He accepted the offer, and in due time, moved to Kroger’s Charlotte, North Carolina division office as an accounting supervisor.
“My personal story is so much like so many of the people at Kroger,” he shares. “You start out as a job, and it becomes a career. I always tell people if you like food and you like people, it’s a wonderful place to be. Because you get to feed people, help them have a little bit better day. What more could you ask for?”
When his office got its first personal computer, McMullen took it upon himself to help others learn how to use the machine. This, in turn, caused productivity to soar as tedious tasks that had taken human labor hours to do were now flawlessly finished by the electronic brain in a mere matter of minutes.
1988 Kroger Restructuring
Despite being in possession of 1,300 supermarkets across 20 states, 935 convenience stores, and 38 manufacturing units, Kroger was facing serious financial problems during the late 1980s. Profit margins were perilously slipping as a result of their inability to adapt to and create an effective tailored shopping experience for the diverse range of local communities they found themselves in.
Their struggles worsened as uniquely regional grocery stores started making a comeback – they had deeper social roots in the neighborhoods they serviced, and because they were smaller in size, could make supply chain changes nearly instantaneously, whereas Kroger stores would have to wait weeks (maybe months) to get a new trending product approved, shipped, and stocked.
A common consensus amongst industry analysts at the time all but guaranteed that the mega-chain supermarkets would shortly go extinct while, smaller, locally attuned, and more profitable operations were poised to flourish. After all, 1987 saw Kroger earn only $183.3 million on sales of $17.7 billion.
As the publicly-traded company drowned in their own inadequacies, sharks on wall street smelled blood in the water. Beyond their floundering business model, one more thing made them particularly vulnerable to a hostile takeover: there weren’t really any majority shareholders of the company; in other words, owners who would have invested interest in Kroger’s long-term well-being were non-existent. With this being said, little to no obstructions existed to stop someone from purchasing their own majority stake and imposing their own immediate will.
Divestiture was the idea. Although the whole business didn’t amount to anything terribly reliable at the time, short-sighted investors figured they could easily sell off underperforming Kroger assets – supermarkets, convenience stores, etc. – to regionally exclusive grocers for a pretty penny; essentially, it was a quick and easy buy then sell for profit type of flip.
Fending Off Sharks
A case in point is Safeway, reports one 1988 New York Times article. Since its acquisition in 1986, Safeway had withdrawn from eight markets, including Dallas and Southern California, and the number of its stores was slashed to 1,161, from 2,300. Making matters even more freakishly similar, Kohlberg, Kravis, Roberts & Company, the same buyout firm that acquired Safeway, had just offered to buy Kroger for $58 a share.
Then, in early September of that year, a Federal Trade Commission ruling allowed the Hafts to acquire at least $15 million worth of Kroger stock. The Hafts, who controlled Dart Group Corp. of Landover, Md., were corporate takeover strategists. If the Hafts were to take over Kroger, “it’s almost certain that they’ll start dismantling the company and selling off its assets,” said Gary M. Giblen, vice president at Rotan-Mosle, a Houston-based investment firm.
Now, twenty-something-year-old Rodney McMullen, the primary character in our article here, was made a financial analyst and sent to Kroger’s Cincinnati offices in 1986 – just before all of this began heating up, and thankfully for his superior executives, he’d play a pivotal role in determining the company’s destiny.
As documented by the Los Angeles Times, in the fall of 1988, Kroger announced a $3.77 billion restructuring plan involving substantial but unspecified bank loans, paying shareholders $48 in cash and securities per share, and allowing them to keep their stock. The one-time dividend ultimately encouraged those already invested to hang on to their shares and also sent the stock price soaring.
“This restructuring is not specifically tailored to the Haft situation,” Kroger spokesman Paul Bernish said. “We take it seriously. But ever since the market became competitive in 1985 or 1986, we’ve been pretty vigilant about this. We want to keep Kroger an independent and public company.”
Rodney McMullen Crunches the Numbers
Kroger bought time to get their bearings straight and planned on repaying the debt they incurred by using cash flow from operations, reducing expenses, and selling assets. Although he’s too humble to ever assume due credit, behind the scenes of all this, McMullen flexed his accounting prowess and played an immense role in predicting the future cash flow needed to make their loan payments.
“He was so good at doing the calculations in record time. He ran with the best on Wall Street,” Joe Pichler, former CEO of Kroger, reveals.
“I was part of a small team that got to be involved in something that was pretty special,” recalls McMullen. “What we ended up doing was a public LBO (leveraged buyout). We remained a public company, but we levered up exactly like an LBO would have done. I ended up being able to work with our CEO, our president, our CFO and our board on a very personal basis.”
In December 1989, Rodney McMullen was appointed vice president of planning and capital management. A few years later, in March of 1993, he’d become the vice president of control and financial services. Quickly scaling the executive ranks, he got appointed group vice president and chief financial officer in June 1995 and then senior vice president in October 1997.
Fred Meyer Acquisition
Albertson’s was on pace to eclipse Kroger as the nation’s largest supermarket chain through its $11.7 billion buyout of American Stores Co. That news was soon after overshadowed by Kroger’s $8 billion acquisition of Fred Meyer Inc. in 1998, a deal that would create a supermarket giant with $43 billion in annual revenue and 2,200 stores in 31 states.
At the time, Fred Meyer had more than 85,000 employees and estimated annual sales of $15 billion, per CNN Money. The company’s four main subsidiaries – Fred Meyer Stores, Smith’s Food & Drug Centers, Quality Food Centers, and Ralphs Grocery Co. – were operating more than 800 food and drug stores in 12 western states stretching from Alaska to Texas.
The two companies overlapped in just five states, with Arizona being the only state where they competed in the exact same markets. McMullen was given the monumental task of overseeing the smooth merging of these grocery giants, and as of January 2000, he earned a new title: executive vice president, strategy, planning, and finance.
“We will achieve economies of scale by leveraging purchasing, information technology, manufacturing, and distribution across a much larger store base,” Pichler said to the press. “Together, we will have the No. 1 or No. 2 market share in 33 of the nation’s largest markets.”
On the heels of a successful merger, Rodney McMullen was elected vice-chairman in 2003 and earned the company’s #2 top spot, chief operating officer, in August 2009.
Taking on Walmart
Walmart didn’t open a Wal-Mart Supercenter, which was the first store format to feature a fully stocked grocery offering, until 1988. Throughout the 1990s, the model flourished, and under the direction of CEO David Glass, they opened hundreds more all over America, ushering in the company’s most profitable phase ever recorded.
By 2001, Walmart became the largest food retailer in the United States as grocery sales climbed to $56 billion. A lot of that had to do with their Great Value food line. Initially launched in 1993, since 2011, it has been the largest food brand in the country by sales and volume and also functions as a key component in Walmart’s ability to price their items drastically cheaper than competitors.
2010 saw the company haul in an industry topping $188.3 billion in grocery sales, while Kroger came in second with $76.2 billion, followed by Safeway, with $41 billion. According to Business Insider, Walmart thrived during the 2008 recession because of its prices for food, pharmacy, and household goods and renovation made it more appealing to its customer base, households with under $70,000.
Driving Growth
The dramatic rise of Walmart brought on a race to the bottom in terms of pricing, whether neighborhood supermarket operators liked it or not, they had to provide a better bargain to customers. Although that means the average grocery shopper wins – ahh the beauty of free-market capitalism – from a business standpoint, already slim profit margins simultaneously fall.
In the early 2000s, Rodney McMullen was a key player on the team that figured out how Kroger could best go about slashing prices while also growing sales volume. The idea was to continue driving growth by using that additional money earned to cut prices even more – a cyclical strategy that could ensure their existence in a grocery market that now featured an all-encompassing superpower.
Over the course of the next decade, Kroger’s gross profit margin dropped from 27.4% in 2002 to 20.6% in 2013. However, Cincinatti.com documents that they ultimately 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 in 2013.
A 2004 “Customer 1st” initiative implemented by freshly appointed Kroger CEO David Dillon took aim at key areas that went beyond pricing, such as improved customer service, expanded product offerings with superior quality, and hiring friendly, helpful associates.
“Every day you have to earn customers’ trust and serve their needs and the second we stop doing that, we won’t like our results,” McMullen said. “If employees deliver the shopping experience customers are looking for, they will buy more, go away happy and come back soon.”
Supply Chain Changes
The Lexington Herald-Leader reports that between 2005 and 2015, Kroger invested $3.5 billion into cutting prices. Most of this was done by shortening the supply chain, so fresh products like bread and milk get to your home faster.
“We went back to our manufacturing plants and figured out what changes we can make to have the product in the plant one less day,” McMullen said. “I doubt … they [Walmart or Target] are trying to develop a strategy against Kroger. I know for us, everything starts and ends with our customers and associates.”
Walmart’s sheer operational capacity will prove difficult to overcome, a 2017 Barclays study found that they offered lower prices than Kroger on 74% of the items checked. Although Walmart did most notably well in the frozen foods category, Kroger walks away on top in the healthier “fresh” category, which includes proteins, dairy, and vegetables.
Organics alone is a segment that has surpassed $16 billion for Kroger. “It really shows you the power of having the right products,” says McMullen, during a rare interview with the Cincinnati Business Courier. “Like on Simple Truth, it’s a $1.5 billion brand for us. Our team just did a marvelous job identifying the opportunity and the need, making sure the customers understand what the brand stands for, and then delivering against that.”
Kroger Chief Executive
After a decade straight of record quarterly sales growth, Kroger CEO David Dillon, along with the board, determined it appropriate to name the company’s next chief executive, so it would be, that on January 1st, 2014, Rodney McMullen took over the reins of America’s largest supermarket chain.
“As Kroger implements its strategic growth initiatives, the time is right for the transition of leadership,” Dillon, who had been with Kroger for 37 years, said in a statement. “Rodney McMullen has played a leadership role in every major decision Kroger has made for the past 25 years…He is ready to be CEO.”
Shares of the grocer touched a new 52-week high of $41.14 in the wake of the news. McMullen commented, “I am excited to lead our efforts to build on Kroger’s market position and competitive advantages to drive value for our shareholders and to strengthen our deep connection with our great associates, our millions of customers and the communities we call home.”
New Competition
Kroger’s fight for a greater portion of the grocery market got even more difficult with the 2017 announcement that Amazon was buying Whole Foods in a blockbuster $13.4 billion deal. Their stock value plummeted from about $30 a share to nearly $20 per share.
“I was with our internal audit team,” McMullen says, reflecting on the moment he caught wind of the acquisition. “The average age is in their low 20s. One of our interns who is 20 years old, the very first question to the group is, ‘I thought bricks and mortar was dead? If it’s dead, why is Amazon buying Whole Foods?’ It didn’t surprise me at all. Several years ago, we decided that the customer wants a physical experience and an online experience.”
As CNBC points out, around the same time, the industry started facing the infiltration of European competitors Aldi and Lidl, discount grocers that are attacking traditional grocery stores on price. Not to mention, there has also been the steady rise of members-only wholesalers such as Costco and Sam’s Club (owned by Walmart), and lest we forget, those pesky Wal-Mart Supercenters.
“I worry about all of them. And I worry about restaurants,” McMullen disclosed to the Wall Street Journal. “We operate in an industry that is $1.5 trillion in terms of how much people spend on food. If people are eating a meal, we want to get our fair share of that meal. Anybody who is getting a meaningful part of that, we’d worry about.”
Still, in the face of increasingly diverse and strengthening competition, Kroger trudged on, into the uncertainty of an evolving grocery industry, adhering to a core set of values and their Customer 1st manifesto. According to Forbes, they’d hang onto their ranking as the nation’s No. 2 brick-and-mortar grocery seller, with a 9% share of the market in 2018, trailing only Walmart and its 26% share.
For more information on the future of Kroger, check out this September 2020 interview between Kroger CEO Rodney McMullen and CNBC’s Closing Bell team:
E-Commerce
Prior to the coronavirus pandemic, online purchases of groceries for in-store pickup and home delivery made up about 4% of the market, it rocketed past 10% once the shutdown started. With investments ranging from a self-driving grocery delivery robot to a partnership to sell goods in China through Alibaba, Kroger has spent hundreds of millions of dollars trying to find the solution to what could turn out to be an equation worth billions in profits: e-commerce.
In 2018, they partnered with Ocado, a United Kingdom-based company that has successfully built automated fulfillment centers that efficiently deliver online grocery orders at great scale. The $250 million deal giving Kroger a 6% stake in Ocado established plans to build some 20 warehouses of up to 300,000 square feet in the United States. As of November 2020, 10 of these “customer fulfillment centers” have been announced, with the first opening in Monroe, Ohio, in early 2021.
“In the long term, we know that winning online in grocery means having the best customer service, underpinned by the best operational economics,” commented Luke Jensen, CEO of Ocado Solutions, which has its U.S. headquarters in Tyson, Va. “In leveraging the wide range of Ocado fulfillment technologies, Kroger is accessing the best customer offering for online grocery in the world, proven in the U.K., one of most developed and competitive markets for grocery online.”
According to an August 2020 report from Coresight Research, Amazon and Walmart are the leaders in online grocery. Over the year studied (which partially includes pandemic era data), 62.6% of online grocery shoppers had ordered from Amazon before and 52.3% from Walmart. Meanwhile, only 13.9% had purchased from Kroger and 4.3% from Albertson’s.
That same month, TABS Analytics’ 8th Annual Food and Beverage Consumables Study found that Walmart garnered a 30% share of total online food and beverage retail transactions, down slightly from 30.4% in 2019 but enough to push the retail giant ahead of Amazon for the first time in the study.
At The Helm
Rodney McMullen and Kroger are navigating some choppy seas, however, thankfully, the person at the helm of America’s largest supermarket chain has steered the ship clear of perilous dangers before. He’s a humble man, tied to reality by the boy of modest means he once was, who probably won’t ever accept as much credit as he deserves.
Oh, and by the way, considering he sells the most vegetables in the country, he actually personally prefers the uglier looking ones. “I grew up on a farm,” he once said in an interview. “Last Sunday, I went out to see my parents and their garden, and I find the produce that looks the ugliest tastes the best.”