It should all have been rather different had things gone to plan. For grocery group Albertson’s that plan involved a $25 billion merger with rival Kroger’s, a scheme that was scuttled by regulators on competition and pricing grounds late last year after a lengthy investigation that had left the firm rather up in the air.

With a decision finally made and the combined future off the cards, the question for both retailers is what happens next in an increasingly tough US market where Walmart and CostCo are out to slit competitive throats? For Albertsons, it’s about legal action against its putative partner for its alleged conduct and also an urgent need to convince the markets that it has an independent long-term future.

CEO Vivek Sankaran, has four items on his corporate shopping list to secure that future – driving customer growth and engagement through digital connection, enhancing the customer value proposition, modernizing capabilities through technology, and driving transformational productivity. All four of those will need to be delivered through ongoing investment in digital platforms, he says, starting with Alberstons e-commerce proposition.

At just seven percent of total grocery sales, the group’s e-commerce contribution isn’t the most impressive in the market, although from a glass-half-full perspective that leaves a lot of opportunity for growth, if the firm gets it right. No surprises how Sankaran views it:

We run our e-commerce business out of our stores, so our inventory is close to our customers, and we can offer full access to our merchandise assortment. Our investments in e-commerce have driven sales penetration to over seven percent of grocery revenue, with our top-performing market over nine percent. This growth, which is higher in our first party versus our third-party business, has been driven by the development of new capabilities in our fully integrated mobile app and improvements in quality, speed, and convenience of DriveUp & Go and in-home delivery…From an economic standpoint, we’ve become better and better and better at our first party, both the cost of operating it, but importantly, at the speed at which we deliver it. We think speed matters. And we’ve maniacally focused at the speed at which the customer gets their products, and we’ve become really good at that.

But there’s a long way to go, he concedes:

While we have grown this business significantly and faster than the market, it is still under-penetrated compared to industry benchmarks and is one of our biggest growth customer acquisition and customer retention opportunities. To capture these opportunities, we are rolling out a store-based five-star certification program to ensure we are delivering a consistent and elevated level of customer service, as well as a series of targeted marketing initiatives to grow sales and penetration.

Knowing the customer

Getting the e-commerce strategy right is crucial for another reason, he adds:

It also gives us the data on the customer, right? And it gives us a chance to connect them to all the other platforms. So, I always tell people, if you want to know what our business is, open our app and you’ll see our entire business laid out. We want them to navigate all the pieces in the app and get engaged.

That dovetails neatly into the second digital platform focus which is around loyalty. Sankaran explains:

Our loyalty program is integrated into our mobile app and is a key engagement tool for our business. It is the entry point for digital and personalized marketing and a primary contributor of data to our retail media collective. In April of 2024, we launched a simplified and enriched program to make it easier for our customers to earn points and redeem coupons, fuel, and grocery rewards. For the first time, it also allows customers to simply redeem points for dollars off their grocery bill. Since the launch, we’ve seen more frequent engagement, higher retention and increased customer spend. Going forward, we expect to continue to see increased adoption and we will leverage strategic partnerships to provide our members with even more ways to get rewarded.

The opportunities on offer in the pharmacy and health business is the priority of the third digital push. Pharmacy sales penetration now accounts for over 11% of total annual revenue for Albertsons, Sankaran says:

This penetration has been driven by industry-leading core script growth, including GLP-1s, excellence in immunization, and best-in-class service. It has also been driven by the integration of pharmacy offerings into our mobile app through the launch of Sincerely Health. Sincerely Health is a high-engagement, value-added wellness and rewards platform with over 1 million lives.

And there are massive cross-sell opportunities, he notes:

Although the pharmacy business is financially dilutive, cross shoppers between grocery and pharmacy are exceptionally valuable customers, spending three times more and engaging across all service offerings. Going forward, we see Sincerely Health growing as a top loyalty driver and a catalyst for introducing immunization and pharmacist-administered treatments.

The fourth digital platform emphasis falls on integration of the mobile app for use in physical stores, an all-too-elusive omni-channel blending that escapes many retailers. Sankaran explains:

When our customers are in our stores, we want them to engage with us digitally. To enable this, we launched an in-store geo-located mobile feature that delivers real-time coupons, help shoppers locate products and plan meals, and assist customers with their shopping lists. By the end of 2025, we expect over 8 million of our customers to have used this in-store feature. Going forward, we expect to see continued increases in customer utilization of this future and are planning to launch additional capabilities to drive even deeper engagement over time.

Tech spend

All of this digital focus should come as no surprise, suggests Sankaran:

Our ‘North Star’ has been to use technology in everything we do. Over the last few years, we have invested strategically to make technology the key enabler of all major future growth and productivity initiatives. These investments include migration to the cloud, the launch of our end-to-end e-commerce capabilities, the digitization of pharmacy and health, state-of-the-art tools for pricing and promotion, the enablement of self-checkout, productivity tools to manage replenishment, shrink and labor, new supply chain systems and an industry-leading retail media platform. These investments have created long-term capabilities that will continue to allow us to accelerate the transformation of our operating model going forward. They also position us well to take advantage of the evolution of AI and machine learning to elevate our core business processes.

It  also supports efforts to drive transformational productivity as Sankaran pitches:

We have continued to develop our productivity engine, designed to systematically improve the efficiency of our business and improve costs. Over the next three years, we plan to deliver $1.5 billion in savings to invest in our customer value proposition and growth initiatives as well as to offset inflationary headwinds. To achieve this, we are leveraging our recent investments in technology and the latest innovations and business best practices to build industry-leading capabilities and reduce costs. The first of these initiatives is leveraging our consolidated scale to buy goods for resale. The next is transforming our ways of working, including rebalancing our onshore and offshore activities.

In our supply chain, we are continuing to make significant progress on automation and the rollout of our new Warehouse Management System. By the end of 2025, we expect 30% of our distribution volume to be automated and our WMS to be fully implemented company-wide. These supply chain initiatives improve in-stock conditions, differentiate our fresh quality, lower our cost to serve and improve our end-to-end data analytics capabilities.

And again, the physical store plays its part alongside the digital focus:

In store operations, we are leveraging a more robust technology platform to drive enhanced efficiency, improved customer experience and deeper associate engagement. For example, we’ve implemented AI technologies that provide a prompt for missed scans, which is reducing inventory shrinkage and improving the customer and associate experience. We’re also expanding the utilization of technology in our produce departments, which is driving increased sales, reduced inventory shrinkage, improved quality and enhanced labor productivity.

Overall, Sankaran summarises the post-Kroger merger strategy in simple terms:

The way I’d frame it is, I think we’re going to be leveraging our scale more. And we’re going to be leveraging our scale more and doing more for our suppliers, so that they can get the kind of growth that I think they can get with us. So, I think of it less as centralizing – I don’t want people to walk away with that because I think that creates mental models that are not productive – but we can find ways to leverage scale with data, technology and better decision-making.

My take

Our ‘Customers For Life’ strategy is working. We have added loyalty members, digitally-engaged customers, omni-channel households and increased transaction counts. Our stores are operating more effectively and efficiently as our new technologies take hold, and we are pro-actively managing our costs.

Will that be enough in the Wild West that is the US grocery retail space? The collapsed merger with Kroger was a costly business and it’s going to involve yet more money to try to recover some of that, and with no guarantee of success at the end of what is likely to be a lengthy legal battle.

 As well as all the digital investment highlighted above, the firm is also embarked on some hefty short-term belt-tightening, promising to deliver $1.5 billion in savings over the next three years to invest in “value proposition and growth initiatives, as well as to offset inflationary headwinds.” Meanwhile overall sales have declined sequentially as the US retail environment remains turbulent and uncertain. 

Against that backdrop, the digital spend and the pharmacy/health gambit look to be Albertsons two big bets. One to keep a close eye on in 2025.