Situation:

As she pensively walked down Aisle 5, CEO Roberta Culkin prepared herself for the upcoming first quarter earnings call of 2019 that was to occur in late March. Revenues had steadily been declining year after year, operating profit had fallen almost 40%, and the company had to start spinning off different parts of the business in 2018. Roberta knew the ground beneath her was moving, but she didn’t know how to fix it. The competitive landscape of the grocery industry was rapidly evolving. The entrance of Amazon into both the delivery and brick-and-mortar grocery business challenged Kramer’s and other grocers to think about their business model critically. Additionally, hard discounters such as Aldi started to make a serious push into the United States, which drew away many former Kramer’s customers. Roberta knew that if Kramer’s wanted to be competitive again, serious changes would have to be made. Roberta paused by the cashier lane as she was about to exit the store. She thought back to starting at Kramer’s almost thirty years ago as a high school cashier and felt motivated to return Kramer’s to its previous levels of success.

History

Founded in 1889, Kramer’s has always focused on offering affordable, safe, and delicious groceries to American consumers. Starting with one bakery in downtown Cleveland, Ohio, Kramer’s has since grown to almost 3,000 grocery locations domestically. In 1907, Kramer’s founder, Benjamin Kramer, decided to expand his product offerings so customers could purchase all their needs in one location. By 1916, Kramer’s had expanded to double-digit locations and had revenues that approached $50 Million USD when adjusted for inflation. During the 1920s, Kramer’s began to differentiate itself from its competitors by switching to self-service stores.

Previously, all items were kept behind a counter and store-clerks would fetch them at the customers’ request. Kramer’s also became the firstgrocery chain to monitor product quality and made the store accessible by offering increased parking for customers– a major perk considering the rise of automobiles.

Throughout the 50s and 60s, Kramer’s expanded West by acquiring a collection of almost 20 smaller regional grocers in Southern Washington state, which still operated under their previous name. After much success in Washington state, Kramer’s then acquired a portfolio of 35 grocery stores in Southern California and rebranded all West coast stores under the Kramer’s name. Now a mid-sized national grocer, Kramer’s differentiated itself during the 1970s and 1980s by pioneering technology. They were the first mover in the grocery industry to implement the barcode scanner and were able to move products through their supplychain more quickly. This also reduced the amount of time that customers waited at check-out.

During this time, they also made vast improvements in their ability to perform customer research. Essentially, they had a better understanding of customer needs and preferences than any of their competitors. In 1995, Barry Fry, the current longest-serving member of the C-Suite, was hired as a rising star from a large investment bank. At the time, Kramer’s was experiencing tremendous success across its locations nationwide. Barry’s first initiative was an investment in their supply chain.

Leadership

Chief Executive Officer - Roberta Culkin

Roberta started her career at Kramer’s almost thirty years ago as a cashier in high school. She has since risen up the ranks and was appointed as CEO about 5 years ago. Roberta is known for her open-mindedness and understands the need to pivot from Kramer’s traditional business model to evolve with changing customer preferences and technological advancements. Roberta believes that Kramer’s path to success is rooted in its ability to service its customers via new channels.

Chief Financial Officer - Barry Fry

Barry has been with Kramer’s for the past 25 years and runs a tight ship. The company has seen strong levels of profitability through his highly conservative approach to investing and financing the company’s assets. However, he is hesitant to take on debt or invest a significant amount of Kramer’s capital into new channel offerings, as he doesn’t believe the potential reward is worth the risk.

Chief Operating Officer - Michael D. Jones

Michael D. Jones was Senior VP at a national 3PL and is known for being charismatic and very well-liked. He was hired by Kramer’s with the intention of establishing infrastructure for a possible grocery delivery channel. Michael plans on leveraging his extensive network to help catapult Kramer’s into the rapidly expanding delivery offering.

Chief Technology Officer – Lucas Gutierrez

Lucas Gutierrez was previously a partner in an ERP implementation consulting practice and joined Kramer’s 8 years ago. Lucas wanted to get into the trenches and became tired of working on a project and then moving onto the next project just 6 months later. Lucas Gutierrez has a close relationship with Fry and can also be described as conservative. At his previous position, he had a reputation for resisting change and sees little need in changing something that is not broken.

Chief Strategy Officer – Susan Johnson

Susan Johnson was the newcomer to Kramer’s C-suite, having been hired just under a year ago. Susan was previously a junior partner at a large management consulting firm where she specialized in CPG clients. Her key responsibilities include setting the strategy that Kramer’s should take, overseeing the corporate M&A team along with Barry, and overseeing Kramer’s private label products

Potential Investments Kramer’s management team knew that investments would have to be made to start to turn around the company’s performance. Specifically, they wanted to explore investments in two key areas: customer experience improvement and online shopping/home delivery. Customer Experience Improvements In the current competitive landscape, Kramer’s management has realized that their instore experience was subpar. With Amazon Go’s RFID-enabled cashier-less shopping experience, Aldi and Lidl’s no-frills shopper experience, and the increasing rise of omnichannel grocery shopping, Kramer’s had to decide how to adapt to the changing grocery market. Kramer’s has a very typical in-store experience – shoppers walk in, take a complimentary cart, and browse the many aisles for their groceries. The most “high- 4 tech” aspect of the shopping experience comes at check-out, where shoppers choose between using a cashier or a self-checkout kiosk. These kiosks were implemented into all Kramer’s locations well over five years ago relatively successfully. Kramer’s was one of the slowest movers when it came to introducing self-checkout kiosks as many competitors had them in stores multiple years before Kramer’s. Roberta, Barry, Lucas, and Susan were at odds when it came to answering the impending technology investment question. Susan was eager to introduce many new technologies including an upgraded cloud-based CRM system to track customer trends and a Kramer’s app for shoppers to get more deals and rewards. Customers would also be able to place an order through the application and pick it up from the location of their choosing. Susan argues that most of Kramer’s major competitors have these technologies and they will be crucial platforms for Kramer’s future customer experience. However, both technologies would require a significant upfront investment from Kramer’s. Barry is hesitant to allow the company to make those capital expenditures and has not been sold on the risk/reward profiles of these investments. At Kramer’s, an investment like a new CRM or app would have to pass through the capital budgeting committee. Historically, the capital budgeting committee liked to pay for projects solely using cash on hand but would be open to using some debt in the future. Additionally, in the past, investments that get approved typically have discounted payback periods of 5-8 years with positive returns after breakeven. Ultimately, Barry ratifies any decision made by the capital budgeting committee, so selling him would be critical. It is highly unlikely that both the CRM and the app would get approval at the same time due to cash flow concerns. In between Susan and Barry, Roberta and Lucas found themselves torn between the risks involved with introducing new technologies and the potential lift these investments could give Kramer’s. The question of technology investment was also impacted by the shift of consumers from in-store shopping to online grocery shopping (either through delivery or in-store pickup). While Kramer’s management team expected in-store shopping to account for most of the grocery shopping for the next 15 years, the trend of consumers switching to a completely digital grocery experience was hard to ignore. The whole management team knew that inaction could result in the continued deterioration of Kramer’s competitive position.

Online Shopping & Home Delivery

With locations in both rural and urban areas, Roberta Culkin needed to better understand how customers in different demographics could be served with a home delivery offering. As such, Roberta, along with other members of upper management, attended a national conference in Los Angeles, California to learn more about the latest available technology. The keynote speaker was the co-founder of a West coast start-up that designs and manufactures drones specifically for delivery. Their drones have all launched successfully but have not yet been used specifically for grocery delivery. While at the conference, Culkin and Susan Johnson were introduced to the CEO of Delivr, a grocery delivery company that operates only in a few select urban areas. Both Johnson and Culkin were impressed with the business which uniquely adhered to the “Milk Man” model. That is, different neighborhoods had their groceries delivered on a specific day. According to the CEO, the reduced driving distance between orders increased the number of deliveries per hour from just over 10 on average to almost 15 across their entire demographic. However, the CEO of Delivr was interested in how his company could leverage drone delivery as well to further increase his margin relative to competitors. At dinner that night, Kramer’s C-Suite team were optimistic about their options to expand into grocery delivery. Johnson, during her break between the conference and dinner, met with a few managers on their M&A team and using some rough estimates, determined that Delivr could be feasibly purchased. Culkin was also impressed with the keynote speaker’s drones and has arranged for a meeting between both companies to begin the ideation process. Ultimately, the executive team’s decision to move forward with the delivery drones would only be possible in tandem with the purchase of Delivr. However, Delivr could be acquired as a standalone investment without implementing drone usage. Additionally, the capital budgeting committee would be willing to make these investments at the same time as an investment in a new CRM or app. Upon returning to Kramer’s HQ, Fry had concerns about the cash outlay to purchase Delivr and urged Susan Johnson and her team to perform a sensitivity analysis and take both best and worst scenarios into account. While Fry has a reputation for opposing major change, Fry agreed that all options should at least be considered.

Private Label

Another key strategic priority for Kramer’s was how to best manage their private label brand, Kramer’s Kravings (“KK” henceforth). Management knew that KK was underperforming its potential. Many studies have suggested that 20%-25% of all instore purchases industry-wide were private label products, whereas KK products only accounted for 10% of Kramer’s total sales. Amazon’s Solimo and Happy Belly products, Costco’s Kirkland Signature products, and name-brand Trader Joe’s products gave each of these players a competitive edge that Kramer’s did not have. Private label brands not only help improve top-line sales, but they also create significant brand loyalty. Major questions that needed to be answered to unlock KK’s full potential were expanding the brand’s product offerings, how to best incentivize buyers to purchase KK products, and how to position the brand in the most strategically enticing way. Currently, KK products lacked a cohesive strategy. Some products were marketed as “organic” and “premium”, whereas others were the clear value option with competitive low prices. The vast majority of KK’s current offerings were “shelf-stable” food products, meaning they did not have to be refrigerated in stores. There was also an opportunity to scale the production of current products and cut back on others. To be a winner in the private label game, Susan Johnson and the rest of the C-suite would have to put some serious thought into how the brand could succeed.

Conclusion

Roberta sat in the weekly C-suite meeting as they discussed how they would handle the upcoming earnings call. Investors and analysts needed to be impressed, otherwise, stock prices would deteriorate, and Kramer’s issues would worsen. Addressing the investments to be made to improve customer experience, the online and home delivery opportunity, and KK’s long-term strategy were top priority items to address. Roberta knew that a turnaround was possible, but making the right choices to steer Kramer’s in the right direction was entirely in her and the management team’s hands.

Required:

• Read the case and identify the core problem, - something that has to be addressed for Kramer to be successful; try to boil it down to the most important, high-level issue(s). It will be easy to list all the problems. Instead, push yourself to identify the core problems—the ones that will have the greatest impact. 3 paragraphs in total.