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Analysts see pros, cons in Kroger's digital plan

Kroger Co.'s plans to boost its use of data to revamp its physical stores and online offerings got mixed reviews from analysts Oct. 12, raising questions about whether the grocer will find success in a market made more competitive by Amazon.com Inc.'s purchase of Whole Foods Market Inc.

Speaking at a presentation for Wall Street analysts in New York on Oct. 11, the grocer's executives said they hope to add $400 million to Kroger's operating margin between its 2019 and 2021 fiscal years by implementing a plan to optimize space in its stores, increasing the number of self-checkout kiosks and making more personalized product recommendations to customers.

Analysts offered differing views on whether the plan, which executives referred to as "Restock Kroger," would work as executives expect.

UBS analyst Michael Lasser wrote in an Oct. 12 note that Kroger "showed that it's set to adapt in a changing environment," adding that the grocer's growing use of technology could give it an edge over rivals.

During their presentation, Kroger executives said they plan to use sales data to adjust product selections at individual stores, something that Lasser said could help cater to the tastes of customers in specific regions. The company said it plans to expand its store optimization approach to between 20% and 30% of its stores in 2018, up from between 5% to 10% in 2017.

At the same time, Lasser wrote, the grocer's plan to expand its self-checkout options could reduce the number of employees on the company's payroll. Kroger expects to have its Scan, Bag, Pay & Go system, which allows customers to ring up purchases themselves with a wireless device, in about 400 stores by the end of 2018, up from the 20 stores now using it.

Other analysts pointed to potential holes in Kroger's three-year plan, which is the most comprehensive presentation of the company's digital strategy since Amazon bought Whole Foods.

The company's plan to continue to charge for Clicklist, an online service that allows customers to pick up grocery orders at a Kroger store, could put it at a disadvantage against competitors, BMO Capital Markets analyst Kelly Bania wrote Oct. 12. At its own analyst day on Oct. 10, Wal-Mart Stores Inc. said it will keep its grocery pickup service free for customers.

Additionally, Kroger's "plans for e-commerce in non-perishable/grocery were very limited," Bania wrote, citing Costco Wholesale Corp.'s Oct. 5 decision to offer delivery on both fresh and dry groceries.

Meanwhile, Jefferies analyst Christopher Mandeville wrote in an Oct. 12 note that he was "not yet convinced" that Kroger's plan would boost earnings as the company's leadership anticipates, adding that the grocer's return on recent improvements has slowed since 2014.