W. Rodney McMullen
Chairman and Chief Executive Officer at Kroger
Thank you, Rob. Good morning, everyone, and thank you for joining us today. I'd first like to take a moment to welcome our Interim CFO, Todd Foley. Todd has been a meaningful contributor to Kroger for more than 20 years and we are excited he is serving in this leadership position.
Before we begin, I'd like to provide an outline of our discussion topics. This morning. I will start by sharing a recap of our 2023 performance, how the strength of our value creation model allowed us to deliver on our goals and how it positions us well to continue our momentum in 2024 and beyond. Then Todd will cover our financial results for the fourth quarter and full year 2023, as well as our financial guidance for 2024. Finally, I will conclude with an update on our proposed merger with Albertsons before we open it up for questions.
I'd like to start with Kroger's value creation model, which supports our optimism for the future. We are guided by our vision that when people think food, they think Kroger. To achieve this vision, we are delivering a best-in-class customer experience and investing in our associates. We know that when we take care of our customers and our associates, we generate attractive and sustainable returns for our shareholders.
Kroger's go-to-market strategy includes four focus areas, fresh, Our Brands, seamless, and personalization, that propels a customer experience that will grow sales and build loyalty. Our team of associates power Kroger's success by executing this strategy and delivering an outstanding customer experience. To attract, develop and retain our talented teams, we make holistic investments in our associates.
Our value creation model enables us to balance investments in our customers' experience and associates, while generating sustainable returns for our shareholders. We've made significant investments to strengthen this model and are now demonstrating how we can generate growth in more ways than ever.
By delivering fresh products and personalized offers through a unique, seamless shopping experience, our retail business creates traffic and loyalty that accelerates our growth opportunities in other areas such as alternative profit businesses. This generates sustainable net earnings growth and increases in cash flow, which supports capital investments to grow the business, which in turn creates more jobs for associates and more career opportunities and enables us to return excess capital to shareholders.
As part of our capital investment plans for 2024, we are excited to announce that we are building more new stores in a meaningful way that will support our long-term growth model. When we launched Restock Kroger several years ago, we knew that a strong omnichannel experience was the key to serving our customers in the future.
We are pleased with the progress we've made there and will continue to invest in digital as it remains an important part to our growth model. In addition, we believe a strong and growing store network is important. Many of the ways we go to market in digital still comes through the store channels. We know that our most profitable customers shop both in-store and online, so it's important to be there for our customers in a way they choose to shop with us. As a result, we expect new stores to be an important part of sales growth in our TSR model going forward.
Now, I would like to provide a brief recap of 2023. Last year, customers were affected by many factors which pressured their food-at-home spending, including reduced government benefits such as SNAP, higher interest rates, and the depletion of excess savings that many families accumulated during the pandemic. As a result, customers were looking for value to stretch their budgets. Kroger's commitment to lowering prices and executing our go-to-market strategy positioned us well to meet our customers' needs.
By delivering fresh products, enhancing Our Brands' quality and improving our digital experience, we grew loyal households in 2023 and our customers saved even more through our industry-leading personalization capabilities, including loyalty discounts, fuel rewards and personalized offers. By increasing customers' digital experience, we can more effectively deploy our data sciences and our AI to serve the right offers to customers at the right time.
In 2023, our customers clipped 4 billion coupons, which is 1 billion more coupons compared to 2022. We know these offers help customers stretch their budget and lead to deeper loyalty. During the fourth quarter, our effective promotions helped turn traffic positive. These trends position us well and give us optimism for 2024. We expect consumer sentiment to improve in 2024, but our customers will still have to manage many of the same macro pressures as last year.
Kroger will continue to provide customers with lower prices and exceptional value. We also know that customers expect a great shopping experience and we have robust plans to improve seamless shopping both in store and online, where customers can get the products they want without compromising on quality, selection and convenience. We are raising the bar on our full, fresh and friendly metrics and investing for growth.
As with Our Brands, which enables Kroger to offer innovative products at a great value, growing sales and improving margins, we create destination items that our customers love and can only find at Kroger. This year's addition of the Hispanic-Inspired Mercado line to Our Brands portfolio is an example of how Our Brands can innovate in categories that meet our customers' evolving needs and accelerate growth. In 2024, Our Brands expects to launch more than 800 new products. As part of the next phase of Kroger's brand architect work, the team is reimagining their Our Brands portfolio with a refreshed look, which is based on the insights and preferences collected from extensive customer feedback studies.
Next is fresh. Fresh is an important influence on where customers shop and we are continually trying to add days of freshness for our customers. With end-to-end fresh in more than 2,100 stores, we are seeing higher produce sales and improving share. Beyond adding days of freshness, we are expanding our assortment. Customers love our convenient in-store fresh cut fruit program and we will continue to expand the offering by introducing regional specialties and seasonal favorites.
Now, turning to seamless. Digital had strong results in 2023, delivering more than $12 billion in sales. Digital sales grew by 12% on a 52-week basis and we improved our cost to serve through increased volume and process enhancements, as well as technology to optimize associate pick routes for more efficient picking. Digital is an important growth accelerator in our business. And in 2024, we expect to deliver another year of double-digit sales growth.
As we grow volume, particularly in our Kroger Delivery network, we expect our unit economics to improve and become a tailwind to our long-term financial model. We have a clear path to improving our digital margins, closing the gap with our traditional brick-and-mortar business over time. Kroger is well positioned through our combination of stores and dedicated fulfillment centers, enabling us to serve all customer trips, including both immediate and next day. Customers value the ability to shop on their own terms with zero compromises and we are increasing the number of omnichannel households in our ecosystem. Customers who shop both in-store and online spend three to four times more compared to in-store-only shoppers.
Personalization is also driving digital engagement and remains one of the primary ways we deliver value for customers beyond low prices. By offering personalized savings, we can ensure customers get the right promotions at the right time, allowing us to get the most important return on our promotional spend while enhancing loyalty.
Moving promotions online allowed Kroger to take personalization to a new level, targeting customers more efficiently and increasing the breadth and depth of promotions. During the fourth quarter, this led to an 18% increase in digitally-engaged households. Our digitally-engaged households are extremely valuable to our long-term growth model as they spend more with us and help power our alternative profit businesses like Kroger Precision Marketing.
Operational excellence is essential to bringing our strategic pillars to life. Our full, fresh and friendly strategy is the roadmap to achieving a best-in-class customer experience. We were pleased to see the continued progress on these metrics in 2023, notably significant improvement in our in-stock rate as we achieved a new all-time high during the year. We will continue our momentum on in-stock rate in 2024 to further drive sales, as well as to improve our execution in these other key areas as well.
By delivering our retail strategy, including fuel, we are building customer loyalty and expanding opportunities for profitable growth, including alternative profit businesses and health and wellness. Alternative profit businesses achieved solid results in 2023, generating $1.3 billion in operating profit. We were pleased with the portfolio's performance in 2023, where our media business once again delivered strong results.
Looking ahead, we expect that the significant investments we've made in Kroger Precision Marketing last year will lead to more than 20% growth in our media business in 2024. The U.S. media landscape is evolving and retail media is one of the fastest growing channels. Systems built 20 years ago to power digital advertising, including third-party cookies, are losing effectiveness and ineffective ad spending is creating more opportunities for those who use first-party data to connect the right content to the right customers, while clearly measuring return on investment.
KPM is well positioned to excel in this space by offering brands a superior advertising experience. Our media business can utilize first-party data from our loyalty program to create relevant audiences and measure ad spend effectiveness based on customer purchases both in-store and online. To take the next step in this growth journey, KPM invested in enhanced advertiser functionality.
In 2023, KPM launched its own ad platform and introduced a new self-service solution on ad-buying platforms. The new ad platform makes it easier for clients to activate campaigns and gather data insights for advertising on Kroger-owned properties, and the new self-service solutions are responsible for offering more direct access to custom Kroger audiences on clients' existing ad-buying platforms. We expect these enhancements will be key catalysts for growth in 2024.
Kroger Personal Finance delivered mixed results in 2023, which led to relative flat year-over-year operating profit. Our credit card business experienced a challenging macroeconomic landscape, which led to an increase in customer bad debt. In money services, we delivered strong results by implementing more fraud controls that allowed us to process payments more quickly while reducing fraud.
Turning to health and wellness. Health and wellness delivered a better-than-expected performance in 2023 and we are excited about the momentum in this area of our business. As we find in other areas of our ecosystem, customers who are retail pharmacy patients are more loyal to Kroger than non-pharmacy customers.
The retail pharmacy industry is going through a period of transformation, which presents a significant opportunity for us. We plan to deliver growth by focusing on a few key priorities. First, cultivating an exceptional patient experience. We are incorporating new technologies and simplifying our team's work, which adds capacity in our pharmacies. Our pharmacy staff is using this capacity to provide better care and faster checkout for patients.
Next, we are attracting new patients by raising awareness to our non-pharmacy customers. Many of our customers are not familiar with Kroger's retail pharmacy operations. We are working to convert these customers by increasing our marketing and adding in-store engagement and utilizing our data sciences to help build awareness. Finally, we plan to build on our 2023 momentum in vaccines by accelerating share growth in 2024. By improving our outreach in store, expanding marketing campaigns and working with providers, we can grow vaccines and help customers live healthier lives.
I'd now like to take a moment to talk about our associates. We respect and appreciate our associates for all they do to take care of our customers every day, every time. We firmly believe that by investing in associates and being an employer of choice, we can facilitate an outstanding customer experience. At the core of our operational initiatives this year is delivering a consistent store experience. Team consistency is a key to that strategy. To support this strategy, we are taking a holistic approach to retention, which includes wage and benefit investments that Todd will talk on later, as well as investments in associate experience including training, technology and career development opportunities.
Investments in technology enable us to support our associates beyond the initial onboarding process. Our training app provides ongoing support and development during the flow of work, giving associates more confidence in executing their tasks and leading to a better customer experience. Importantly, associates are developing the skills for their next role with Kroger. We are pleased to see these efforts lead to strong improvements in retention this year. In 2024, we will remain focused on further enhancing training and development opportunities, solidifying Kroger as a place where associates come for a job and discover a career.
With that, I'll turn it over to Todd to take you through our financial results and guidance for 2024. Todd?
