Hi, everyone. I'm Brandon Fletcher, and we're pleased to have Albertsons with us today. Vivek Sankaran is going to go through, I think, a pretty powerful presentation to give us a sense of not only why the coming out party was well received, but some of the great opportunities that have been provided for their customers and their associates in an extremely difficult time with the pandemic. And then after we go that little bit of presentation, which should be coming up now, we'll do our normal fireside chat and questions and get into the nitty gritty of the opportunity for investors as they think through Albertsons. Thank you.
Go ahead, Vivek. Hey, Brendan. Hey, Brendan, thank you so much. Brendan, I was told that there might be investors in this particular call who may not be familiar with us. So I thought I'd use a few pages to just give people context about our company.
I'll keep it. I was advised also to keep it to less than 5 minutes. So I will do that. And Cody, thanks for moving to this page. I just want these are this presentation is also available to you, but I'll hit a few highlights here, the numbers on stores, etcetera.
But 2 things to point out. 1, we have 25,000,000 registered loyalty members, identifiable customers. That number grew substantially. It was 21,000,000 just about a few months before the pandemic. And the other thing I'll point to on this page is $15,000,000,000 in owned brands, which is 1,000 basis points higher margin than the national brands for us.
It's a portfolio that's 25 percent penetration growing. If you go to our website, you'll see that it's a very wide portfolio, not just about opening price points, but a lot of other things too. Our geographic presence on the next page, you'll see I put this page up because I want to emphasize 2 things here. 1, that we do have a national presence. We may not be in many parts of this country, but we have substantial scale with the presence we have across different markets.
But more importantly, we've got significant local density. In the markets that we operate, we are pretty dense, right? And that's great from a structural stand competitive and structural standpoint, but it's also really good when you have these locations in dense markets, near where people live for e commerce. And our e commerce strategy is built around the store. So it's important to just keep that in the background because that's why when you hear us talk about e commerce, you'll see that it's built around these stores.
We have assembled a very good team that comes with very many different backgrounds. You can see all our bios if you wanted to, but I'll point to the mix of experience. You'll see a different a whole wide range of names that all of us have come from. You'll also see a mix of grocery experience and experiences from outside grocery. And in the world that we live in, with so many different changes and a transformation that we are going through and the industry is going through, this background and experience has helped us a lot.
We are in the middle of a transformation. I will characterize it as maybe the 2nd or 3rd inning of a 9 inning transformation. And this is what we're focused on as a company. And we believe there's a lot of headroom with just this agenda and executing this agenda will create value while giving us opportunities to explore other things that can take us further in this whole world of food. Number 1 is driving growth through in store excellence.
We've been maniacal about elevating operations in store, push we've got a significant fresh portfolio. In fact, it's a bigger mix than most and it was 300 basis points higher in Q4 than the rest of the store. I talked about own brands, we launched 1200 own brands and we're going to expand that fresh equity that we have into meals as we go forward. Omnichannel was a significant focus for us last year. We were behind.
There's no question about it. The pandemic was an accelerant for us in omnichannel. We invested significantly. We went from about 400 DUG locations to 1400. We're going to get to 2,000 by the end of this year and we are investing in MFCs.
We have 2 running. We're going to expense to 7 more and we think that that's going to be the unlock for us in terms of productivity when it comes to e commerce. Speaking of productivity, we delivered $500,000,000 last year and we raised our target for $22,000,000,000 to $1,500,000,000 from $1,000,000,000 and I'm happy to talk about that more as we get into this conversation. And we continue to invest. We are so proud of our contributions to the community through last to the difficult period last year.
As Brendan said, we believe we made a difference in many ways, including a $260,000,000 contribution through food and cash donations to our communities. And I'll touch on our ESG strategy. We do a lot in that space and we're going to do more. In terms of all of this doesn't matter if we cannot do 2 things. 1 is grow our customer base and make a difference in the communities we operate in.
We think of our we are pivoting the company to think about customers first and the relationship and the stickiness and the lifetime value we have with customers rather than thinking stores first. And last year, we added 11,000,000 additional identified customers versus the prior year. It was a significant year and these are people who we can identify and that as you can imagine makes a difference to all of the things we can offer them. We can learn patterns about their shopping behaviors and so on. We also increased our omnichannel households by 3x.
So people who shop our stores and e commerce, they are significant value to us. They spend 20% more with us. So we've made significant progress on identifiable households. We believe deeply in this notion of building relationships with them. And we also believe deeply in the notion of making a difference in the communities we operate in.
You'll see on this page things that we do towards energy, waste recycling, all of the different things we do for our communities. We have committed to science based targets and we are, as we speak, going through a materiality assessment and we're focusing on 4 pillars: climate change, waste reduction and circularity, doubling down on our community impacts and DE and I. That's a quick synopsis of us. Brendan, with that, I'm going to turn it over back to you.
Perfect. Great. Thank you very much. Appreciate that. And as the slides come down, I want to remind everybody that questions will be entertained on pitch and hall for audience questions.
I'll be able to see those and flag them. And if I can't get to every individual 1, I can bundle some of those sentiments to share. But I've got a couple of things I wanted to start with. I want to go back to I think what was remarkable, which is, it was a little flat footed arguably on where you guys were positioned for omni channel, but a remarkable amount of effort by the team to get so many stores ready and running and doing exactly what customers need in the difficult time. So I just I'd love to hear kind of what are some of the things you guys did almost feel like you had to do that led to what you think are kind of innovation opportunities?
I always think about Southwest loading a plane on accident because they ran out of time with only 3 planes and suddenly innovation was created. I'd love some of that color.
Yes. Brandon, we were you're right. We were caught flat footed in the pandemic. Our leader, Chris Rupp, had joined us in December last year, and we were just starting to craft the strategy and the demand spiked. So we found things like this.
We found that our picking algorithms were way inadequate. They just could not keep up. We didn't have right slotting capacity algorithms. We didn't have enough people. We hired 30,000 people.
We hired people from hotels. We hired people from the food distributors, anybody. And so we reached out to different people to pull that in. But the big the couple of important things, we rewrote the picking software, we rewrote the slotting software, we added people, we made double down on a commitment to it, we opened up these DUG stores. We always wanted to ensure we have quality though, Brandon.
So it was a trial by fire and a lot of software and engineering work that help us accomplish
Right. That makes a lot of sense. And 1 of the things that's always interesting, whenever people think about a unionized shop, I think sometimes people forget that if you have good processes and systems, when you work with your partners, those become the way things are done. We used to joke inside of Walmart that sometimes the union would execute better than we would because those rules actually construct the behavior. And so I feel like when you guys get your DNA right, it's a little bit stickier.
Is that a fair characterization?
Yes, because you get more specialization. That's a good point. You get specialization with specialization, you get learning and you also have less turnover. You add those up, right? You go up the learning curve and as an institution, you stay there on the learning curve.
That's a fair point,
click and collect is that kind of in the panic and also just the practicality of having to narrow skews, I mean, everybody had to do that. That was okay because this is what people needed, right? I remember we were walking a Target store frankly before we realized how bad everything was and anything that was natural was not bought. The only cleaning products were the 1 that like pills every last germ with toxic bombs, right? And so you didn't need all those other SKUs.
Do you think as we come out of that, will that SKU range go back out or kind of how do we think about that? Does it become long tail stuff, you'll only click and collect and nobody needs to see in the stores? Love
any color on that. Yes, Brandon, I don't buy that at all. Here's why. It's let's talk about why the SKU range went broad in the 1st place, okay? There are a couple of big drivers.
1 is the diversity of America. We are a very, very diverse country and diverse by locale, diverse by taste. Some people like lemon, some people like spicy. So by definition, the customer need is quite diverse. So I don't see that going away.
I only see it becoming stronger. The second thing is innovation is lifeblood for a CPG company. You have to create excitement for your category, you have to create excitement for your own portfolio. And therefore, I think you'll find that we will we want innovation to come back. We don't want anybody to throttle innovation, okay?
And then think you also find that there is a rationale and there is a purpose for size changes, right? Some people, large households, small households, some people can pay $5 for an item, only $3 for an item. So size, so it will come back. It's what you're seeing is a phenomenon of supply constraints, right? And in a matter of time, people will pursue.
At the end of the day, we're all going for that extra little surplus that's available in the marketplace.
Makes sense. 1 of the things that we've seen when people have done exactly that, so they've seen this opportunity to think about layout, to think about category range, to think about item modular level substitution to dynamically customize a market, it starts people thinking about how remodels get done, right? And unfortunately, arguably in the history, I lived through Project Impact at Walmart, which was just abject disaster failure by almost every metric. In fact, I ran away in Pennsylvania, I was so ashamed for about 3 years. Project Restock at Kroger similarly, not the results people were looking for.
How do you guys think about when you're deploying capital for remodels to kind of solve that intersection? Because I think it's a chance to do really well and not a lot of folks have done it as well.
So you're touching on 2 topics and I'll pass them out, Brendan. 1 is remodels, right, which is the capital intensive side of things that we do to stores. And the second is assortment optimization, which actually many there is a history of, you're right, of many retailers getting it wrong. So let me talk about remodels. If you go back in history, we would all try to come up with that next new format.
And boy, that's going to be the winner and you roll it out. And the remodels were big, big item, big ticket items. I'm not a believer in that. I think the world changes too fast. And you can't do a 1,000 remodels and then realize that the world's changed and then do 1,000.
No, what we believe in is in a modular approach to remodels. So we think of the world, we break a store down into small modules and we try to be very contemporary with those modules, which can be executed quickly. And the more sure we are of the return, the faster we execute those. And so we're never putting the whole store at risk at any 1 point in time. The second thing on assortment, the data matters.
So I told you about the $25,000,000 identifiable households. So when we optimize assortment, we always care about those households that might buy 1 particular item. They're coming in for fish oil, okay? Yeah, you don't sell a whole bunch of it, but they come in and they spend a whole lot of stuff on other things. So keep that fish oil for that customer because you want to win the best, because we have identified the households, you're able to do that.
And so the assortment I think you'll find if people have that data, the assortment optimization will get smarter as we go forward.
Yes. And I think sometimes for folks who don't cover the sector or haven't worked in the space, they don't understand how much SKU variation there is geographically, right? So even if it's a highly dense market and there's 3 major grocery competitors and a savvy company like a Publix and a Walmart and a Target, there's still really substantial SKU variation between those stores. And I think that modular optimization is very, very clever. Do you think the analytics are there?
I mean, I know you got the data. Is the analytics kind of catching up or was that part of what was actually implemented?
Absolutely. No, the analytics is catching up. In fact, we've just developed a whole other just launched a whole new platform on that, that does the optimization of the assortment and then also creates the shelf. And then we're able to tailor it locally. I mean, let me give you an example of what I mean by local.
I'm here in Chicago today. I'm in Itasca and the stores around here are going to carry different assortment from downtown Chicago guaranteed and you should, right? It's not at the middle, not the 80%, the 20%. And that's where the granularity of the data helps us.
Yes. I think that leads really well to the other notion So they get a Wegmans or a high end format. But as you guys think about your kind of format variation and the means of customer retention and differentiation, what are other ways to think about differentiation that just isn't a butcher maker, candlestick maker in every store?
Yes. So when we we anchor everything we do around our fresh portfolio, okay? And when we say fresh, Brendan, you can walk into our stores and get a steak cut an inch and a half thick instead of an inch, and you can say, please give me the less marble stuff. You can do that. We've invested in that.
Our cut fruit is cut in our store. We've invested in that because it actually sells more and you end up with less shrink. So we want to make sure we anchor the differentiation around fresh. And that fresh assortment, I'll give you, I was in Seattle and I was visiting stores with the division president. We went into this 1 store and it had a predominance of red onions And I walked up to the produce the person working it and I said, hey, why do you have so many red onions?
He said, I don't know, but we sell a lot more red onions than white onions. And by the way, it was different than the other store. I stood around and said, Carl, what's going on here? He said, well, this is Microsoft land and there's a lot of Indian people who live here. A lot of Indian people eat red onions.
It wasn't orchestrated from the center. It was derived locally. And that's the beauty of having an approach where you can allow people to design things locally. You're providing the analytical support on top, but you still have that confirmation locally.
Yes, that makes a lot of sense. I mean, my experience, I lived in Chicago for a number of years and it was a Jewel Osco market and I grew up in Texas, which is Safeway market. And they serve very different roles and very different components inside of my just memory and experience of the stores growing up in college. Is it how do you want customers to think about the roles of banners? Like do you think you need to occupy every niche?
Is it essentially you want to be the best niche quote intersection of customer need demand in that geography? How do we think about the kind of use of banners as deployment?
Yes. So the banners, the first thing banners serve for us is there's a legacy, a history, Shaw stands for something in Boston and stands for nothing in Dallas. And TomTom stands for something in Dallas and nothing in Boston. I'm okay with that. It's their generations have shocked it.
But here's where the differences come. In Dallas, TomTom can carry an assortment that goes more premium than an Albertsons store. If you go and look at the wine assortments, you'll see that. Pavillions in LA will go much higher on the assortment than Avons in LA, right? So we are able to differentiate from an assortment standpoint, price standpoint, a premiumization standpoint, if you want to call it, across the banners.
And that serves us really well. And then the tailoring that's done locally is not so much banner centric, it's more about who's shopping there, right? That's the capable a lot of what we're doing behind the banners, Brendan, is common. It's a common technology architecture, even if it's the same app, the shell is different.
Yes, makes a lot of sense. Yes, it's the way we used to think about it, I mean, when I was at 1 where we had 58 banners at the time, it's even more now, that they give you permission to do certain things. And then inside of that permission, there's customization inside of there, which can in some cases be modular specific to that store as long as your supply chain can handle that variation. So that makes a lot of sense. 1 of the other things that comes up a fair bit is that kind of the classic margin mix construct.
A lot of people who don't know grocery very well think of things you lose money on food and you make money on other stuff. And for some stores like a Target, they're not terribly great at food, but they make so much money in clothes, it doesn't matter. And even some other grocers have much larger assortments, but you guys just make money on food. That sounds crazy.
Yes, I know, making money, it's an old fashioned concept, okay, really like it. You like it. Let me think about that. So 1 is, in our stores, yes, we carry GM and all of that, but it's not the vast proportion of it. But we do have a large fresh component.
And so the fresh component, if you have a tight supply chain, you know how to manage shrink, and you can increase units, you can make money in fresh, okay? But then let me just talk about mix. Here's the thing, when you have labor in a store, let's say we have chicken on sale, Brandon, okay, is brilliant. So these here's what the meat team will do. They'll put that chicken there and right next to that chicken, they'll have hand trimmed chicken, chicken breasts, okay, because we had a premium relative to what's on sale.
You know what we sell more of? The hand trimmed chicken breast, Okay? And watermelon, you can sell the whole watermelon for $5 or you can cut it up and make it 2 bowls and sell it for $10 And guess what, it doesn't cost $5 to cut a watermelon up and put it in 2 bowls. Okay, that's mix management if you have the capability in fresh and you can make money, but it requires tightness in operations and that big productivity agenda you saw there is driving more of that tightness in operations.
Yes. This is kind of related to that too. Is the margin mix construct not hyper local? I mean, you got to have a pricing construct that's rational to some degree. But is there a dynamic that 1 store or 1 set of stores may be able to get much higher margins on citrus because of the differences in local buys and geography.
And in another place, in Vermont, it's a premium and you're going to pay for that fruit because there's nothing close.
That's exactly right. Exactly right. So think of us from a pricing standpoint, think of us as having hundreds of pricing zones. And so we're going to optimize pricing for that particular zone, okay? And then there are certain things that we buy nationally and there are certain other things, especially when it comes to certain types of produce, you can buy it locally or you can buy it kind of quasi regionally or something like that, right?
So you can get some scale there. But those things affect it. And that does does the margin does balance it. So we expect our division leaders to manage the margin within the division and then we step back from it and manage the margins across the division, if that makes sense. So the portfolio works for us, right?
You start granularly and build up the portfolio.
Yes, that makes a lot of sense. 1 of the other things that has come up a fair bit is whether or not in that construct, why there isn't I should say this way. There are so many mom and pops left in this space that a lot of times investors come to this and they go, well, I could see there being 3 or 4 grocers and yet the status quo is 20,000 mom and pop boxes, right? So help us with this concept of how do those guys exist, because I think it's a critical thing for investors to understand why the grocery opportunity remains so large in our view, because all these guys, they were still most of them are still live pre COVID and COVID filled some coffers, but we'd love just that context of how do these guys still exist?
Yes. And I think grocers are supposed to have died for 40 straight years now. A couple of thoughts. 1 is location matters. The physical location matters.
If you have a good store, why would somebody drive past a good store to go to a marginally better store to pick up what you eat and consume every day, okay? So there's that. Now I think location matters for e commerce too. The stores are simply a point of inventory. That's it.
She happened to come and shop. Now we're going to shop it and get it to her. And it happens to be close to where you live, which is why everybody is pursuing great real estate for retail. And so I think there are some fundamentals that help them. Now, I think the challenge they'll have and it will never decline dramatically, it will decline slowly, which you're seeing that consolidation happen, Brandon, slowly and you're seeing it in certain markets.
The challenge they're going to have is technology, scale matters for technology. You want to have a great own brands program, bigger is better, Okay. You want to get more attention from a CPG, bigger is better. So it's going to be a challenge over time for the smaller grocers.
Yes, it's a powerful message, I think. It's amazing to me, especially when I talk to people around the world, because obviously, global investor base, that the default assumption is grocery is highly consolidated. And that's because in most of the world it is. But in the U. S, it's just unbelievably fragmented.
I tell there was a time I was working at a law firm and there was an FTC review of 2 bankrupt retailers that were merging and the reviewer would not allow Walmart Supercenters to be considered a grocery store for market store definition. That's how tight this market has been regulated. So I people underestimate just how fragmented this space really is. And I know you guys have done a little bit of M and A and I'm not a huge M and A guy, but I'd love any context of just as you think about industry structure long run, kind of wearing Mackenzie hat, is this does it become 10 players at some point? Is 30 still a really consolidated industry from relative to where we are?
What's the kind of where's the ceiling on that kind of consolidation?
I think it could. To me, even today, if you took a CPG's point of view, I think there's 10 players who are and you'd say, you take a point of view and bet on growth, it will come down to 10 names that you would prioritize and put it that on the top of that list. But I think the consolidation will happen. I think you what we like, we like these like the Kings and Baluchis that we did. We like it because these to my point on density, it increases our density in a particular market.
And we're able to immediately leverage because it's contiguous, we're able to leverage the distribution system and importantly the leadership talent, right, immediately. And you can add value very quickly to it. So those are the types of things I think you'll find all of us doing as we go forward. Certainly, we will.
That makes a lot of sense. I think this is a bit of an extension on just what you that I think is fascinating, which is a lot of times people dismiss how real the talent is in terms of field capabilities. And we've when I'm a stats guy by training and we used to have to build in a dummy variable regression for really great store manager, because we simply could not explain the variance any other way and just love color on what you guys have found in that way.
No question about it. No question about it. By the way, I have done that analysis many times in my lifetime and it is an important 1 of the most important variables. Our store managers, our store, we call them store directors, their turnover is very low and we love that, right, because to me that's such a pivotal role. Our store directors, we think of them as business leaders.
They are measured on growth and EBITDA, Brendan. They are bonus on EBITDA, okay. So they can articulate for you how they're going to get at it. And we want them to have that local freedom to do things in that store. We call it being locally great.
So go for it. I want you to understand what's happening around your market. We also call it being nationally strong. So I want to ask them, hey, what are you doing? How are you harnessing the rest of the company to give something better for this customer?
So we want to play that duality. And the entrepreneurship exists. What we've done in some of the programs that you saw is trying to find ways to bring an ability to leverage scale.
Makes sense. We used to I always had this notion of distributed analytics, which is if you empower the store manager and you give them information, there's decision that they can make that's better than you'd ever make from home office. But there's also a section of the store they can't possibly pay attention to and you need the systems to give them guardrails to get both.
That is correct.
And that's a really powerful model. And I think it's and again, I think from the base you started with, that creates a lot of upside opportunity, right, because those were managed and they're kind of not isolated, but they were managed with an eye towards local and you can improve that. But as some of the scale comes in without reducing their freedom too much, it's really interesting opportunity. Makes a lot of sense.
From a cultural standpoint, Brandon, what at least I inherited when I came to the company was a company that had a deep sense of entrepreneurship and ownership down at the frontline. That's really hard to build. So lucky we had that. What I was able to bring is the more national or scale perspectives.
Makes a lot of sense. And I think that leads to kind of this broader outlet component. What are as you go, this is a strategy conference, quarters and those details. So as you think about your opportunities and threats in that kind of broader 3 to 5 year horizon, What are some of those bigger opportunities and what are some of those bigger threats? And then 1 of the things about that as you look at those is, you're a talented guy, there are a lot of cool things in your career, you had a lot of places to go and I assume when you looked at that SWOT analysis, 1 of those things that is a good place for me to go personally.
But your 2 questions are connected. Listen, this sector, this industry is going through such a fantastic transformation, right? It's just it's like if you want to be a leader and you want an intellectual and management challenge, this is great. What a great place to be in. And so that's what attracted me and just the commitment of the Board to invest behind that transformation, the foundation of the company that already existed.
So now let me tell you what's exciting us about the possibilities in the future. There's always this notion that formats are converging. So you go into a convenience store, they're selling prepared food. You go into 1 of our stores and we're selling you single serve beverages, right? So there's that, you can see that happening in many parts of the market.
I think there's a bigger convergence happening, Brandon, which is that what we you can either think of us as operating in a $800,000,000,000 food and beverage retail market or you can think of us as operating in a $1,600,000,000,000 food and beverage market, which is meals. And so there's a convergence happening between the purchase of ingredients and the purchase of meals, right? And so I think we have a big opportunity to extend ourselves into that space, leveraging a lot of the fresh equities that we have. Okay, certainly, we are going to do that and we are doing that. There is a second big opportunity, which is the way consumers are shopping.
I firmly believe that food will continue to be an omnichannel experience, right, because the experience in a store when done right is hedonistic. I mean, you love the colors, the smells, the taste, I mean, you watch people on the right side of that store versus the left side of the store. It's slow and meandering and there's people are smiling and stopping. They're rushing to the left side of that store. So that experience still matters.
So whoever cracks the omnichannel experience in grocery, I think is going to do really well. And there are some of us who have the store base and are going left and some of us who don't have store base, but starting from the right left and going right, okay? But it's going to converge on that front. Both those are tremendously exciting
for us.
And then the last piece I'll tell you is just the adoption of technology and data to underpin the decisions you talked about, which we did kind of manually or with Excel spreadsheets for a long time, promotions as an example.
Yes. It's I sometimes didn't want anybody to know how decisions were made because it was like there's a lot of upside and at the same time, we're like, I don't know that I want people to know how we used to price. I'm not sure I want to make that too transparent. The 1 thing that I will say though is that people do see threats, right, and they kind of have this notion of what are the things that could go wrong or people miss or not get right. Are some of the threats that you guys kind of identify as you're doing work with the Board and with the team to make sure you're not caught on something scary that we didn't think was going to be as big of a deal?
If I was to take it to the very top, it's 2 buckets. 1 is that we are not keeping pace with how the consumer is changing behavior, right? And that could be around shopping behavior, expectations on product portfolio. Okay, let's take plant based food, okay? Where is that going, are we keeping up, etcetera, so the assortment side of things, are we removing friction fast enough for that customer?
I think it's an important question for us in this sector. The second 1 is really old fashioned, but always comes down to execution. Can we execute this agenda? Because it's a more complicated agenda than in the past, right? It has disciplines in it that we as retailers did not have to worry about 5 years ago, 10 years ago.
It's a new set of disciplines. Can we attract the right talent and execute against it? Those are I mean, those are really the 2 big ones. And then you and these dislocations will happen. I consider dislocations that happen as opportunities.
The pandemic was terrible for all of us, a tragedy for us as a big broad society, but it was an opportunity if you were a competitor in food, right, to move fast and do things that can get an advantage as we come out of this pandemic.
I think it's interesting. 1 just a sub follow-up. The talent, I used to compete with tech talent and I didn't have any trouble getting people to come out of Google because the impact of working for a retailer was so immediate as opposed to some of the other like, oh, you slightly tweaked our Google Friends algorithm. Are you guys able to compete in tech? Have you had a hard time as you guys have kind of built that stack out?
Are you able to get people to come and really say, wow, this is a great place to bring an analytical or technology skill set?
We are, Brandon. Nobody wants to join a grocer, but a lot of people want to a passion to change how people shop grocery, to change the industry, to transform it. And you find a lot of people want to do that. There's and so we've not had any challenges getting great talent to the company. And the other thing I'll tell you, this is again, when you get great talent, they attract great talent.
Yes. Yes. That's helpful. It's true. 1 of the things that's been helpful overall is that you guys and other grocers that have a high percentage union have had historically very good livable wages for all not every class roll, but tons of rolls inside of the store.
And so people have been worried about kind of, oh, well, the living wage is coming, that's not a problem for you guys. Do you think that actually helps you guys that the competitors may finally have to be paying a fairer share and that creates the stuff they haven't figured out how to solve, you already figured out through partnership inefficiencies years ago?
Yes, probably does because for us, we in some ways, our labor rates are very predictable. You have a 3 year contract or a 5 year contract with the union. This is around wages, health benefits, pensions that and we work that whole package. And so it's predictable. So for us, we have learned that our bigger opportunity to get efficiency is always about managing hours, right?
It's making the hours most productive. And so all of the systems and capabilities we have is about directed towards that. And to the extent companies have focused more on rate in the past and haven't had these capabilities, I'll give you an example. I talked to you about the cut fruit, Brandon. There is 1 way in our company to cut a watermelon.
And the way if you cut it that way, you'll save 12 seconds, okay? So I think that's the discipline we've had and we're putting more of it in place, and that helps on a relative basis.
I've always had the vision that if you when you know retail, if you take a worker and you make them as productive as they can be on their shift, they absolutely can justify a $40,000 or $45,000 annual salary. It's not hard. I mean, even cashier variation, some cashiers, if they were paid their marginal productivity of labor, not to make a Marxist comment, but okay, if they were paid their marginal productivity of labor, they'd make $60,000 a year, no exaggeration, because they're the most efficient cashier in the entire chain.
So
I think it's a misunderstood opportunity in terms of what I think you guys have. It's obviously the headline notion is other people have to raise wages and you don't, but it's richer than that because it enables productivity, which is a powerful idea. The other thing that's been happening is of all the things grocery usually is kind of a sleepy space in most cases. Usually the cool parts are about these productivity renovations or private label. But my kid had an allergic reaction yesterday to an old medicine, a reliable medicine he'd taken before.
I was surprised. I was scared. I couldn't sleep all night. And I figure you have to feel that every week from some crazy food disruption in the supply chain, where you're surprised and scared and can't sleep all night. How crazy is the food supply chain?
And is it really as bad as the media makes it out or you guys just have these little adjustments and you're okay?
It's not as bad as the media makes it out, just because I think there's a lot of exaggeration there, okay. So what I learned through this pandemic is that before the pandemic, America had 2 incredibly efficient food supply chains, 1 that comes to stores and another 1 that goes to restaurants and the 2 could not talk. And the 2 could not 1 couldn't migrate to the other, okay? So that took some time. And that the migration of the food from the restaurant supply chain, the way from home supply chain to the retail supply chain took time, but the demand was higher.
So you saw those shock scenarios where we could you walk in and find no protein in some stores. So that was 1. The second is you had these remember, about this time last year, we were going through a period where people had to shut down factories that were producing meat and so on, right? So you had all of those types of things that were other dislocations. Largely, all of that settled even through the second half of last year, certainly through the last quarter of last year.
And so it's I think it's there and you're going to find these disruptions every so often, but nobody in America should be worried that we're not going to get food.
Okay.
That's great.
That's helpful. I'm going to move a couple of questions that I have from audience that are similar to things I was going to get to. First is, if inflation is temporary, what forces prices back down? Does a competitor like Walmart have to lead with lower prices first? Or if costs just come down, do this just kind of automatically pass through in the normal course of operations?
I think that the instinct of the retailer is to pass it through. I think you'll find that none of us is in a mode of saying, let's find a way to extract surplus that way from a customer. I think you'll find that the natural tendency of all of us is if the costs truly do come down, we'll pass it through. Now we'll all find ways to add value and get the returns for that. But I don't see the sector holding on to that way, Brendan.
Yes. Okay. The other 1 that does similarly to that notion is whenever you have a dynamic where you're starting to do more and more private label, which you guys have always been good at, but you're working on tiers in those components. As you add those tiers, sometimes there's a temptation to use tiers at private label to respond to inflation, to respond to pressure. At some point, does that diversity get difficult to manage or usually you're going to see an opening price point in the store and the appropriate store brand for that geography and you might have a different store brand in your portfolio, but it's not going to overlap very often with the geography.
Help me with that context of managing what could be an overwhelming portfolio of private label, if not done through that.
Yes. So our private label philosophy is that you've got a set of brands that are opening price Yes. So our private label
philosophy is that you've
got a set of brands that are opening price point that and that same brand exists across the footprint. And then you've got a set of brands that are giving you, let me call it a lifestyle choice. It's all organic. And you can get a lot of things in our store with our all organic brand and feel very comfortable. It's a great high quality product that's organic, open nature, that's free from antibiotics and you can do that, right?
Or you can go to our seafood area and say and you'll get Waterfront Bistro, responsibly sourced seafood. And so there are I think if you segment these brands and these brands stand for a purpose, then you're okay, right? And that's how we play it. We've got these brands segmented and you'll find these same brands across the store. If that store we think can carry that brand and should carry that brand for the customers that brand is serving.
I don't see us there's a reason we've talked about 30% penetration, Brandon. 1, we put a number there and we are going to get to it. And but on the other hand, we're a house of brands. I want to be clear. You come into our store, you can finish your shop.
You can get our great own brands and you can get good A brands and B brands, maybe some C brands, but over time not D brands, okay. That's the philosophy.
Yes, makes a lot of sense. And when you guys talk about I'm going to bundle 2 questions from the audience. 1 is that private label in Europe usually includes produce and fresh. In America, we usually talk about private label as something else. So if you roll that in there, would your private label number be already 35?
Where would
you No, no, no. I'm including it in there. I'm including it. I'm including it. Yes, we have our own line of meat products.
We have our own line of semi prepared foods and all of that. I'm including all of it.
Okay, great. Perfect. And then the other 1 is this notion that some of the things that are coming out of Europe are on-site growing. So there are these containers and you can grow lettuce and all these kind of things inside of it. And so just thinking about those other notions of how far, so there's 2 ways we see private label, 1 is on-site and the other is way further upstream.
I mean Costco essentially puts a line out on a dock and catches the fish and puts it on the shelf. So help us with that kind of notion of the ways you guys are going in private label range and depth?
We do a lot that is of the other variety, which is going further back and working with the supply base and the agro to make sure that we can get the right products. All these things about growing it in store, we have those experiments going on. I think the challenge is how do you get to scale on all of that. It may take some time, Brandon, and I'm sure some of those will break through, but there are none of them is at a place where it's going to be substantial and material for a company our size yet.
Yes. No, it makes sense. And it takes a while, but I think what I like about this notion of if you think about local bias as a differentiation and on the appropriate product and the appropriate time and the appropriate use of all of your micro data may yield the ability to say we have this container and we do these 15 things in this product of this store, same container, other store, different 15 products. And that's sufficient for differentiation based on demand or whatever. That's what I think is reasonable in the future, but I'm with you.
It's the
way before that's worth messing with. I'd usually like the strategy questions because it's the strategic decisions conference, but I'll do a couple of the more boring ones. Although this 1 next is pretty important. We've seen a lot of retailers need more capital and the bear case on the sector is that omni channel takes fresh capital, but it will have lower returns than the old way of selling grocery. Therefore, grocery is not a great place to put capital to work.
What's your view on kind of that kind of capital dynamic and this notion of relative returns, omni channel versus the old days?
So that surprises me because if you here's the thing, if you go back, you can go 40 years and you can pick any industry you want. Automation and capital has always driven more productivity, right? I mean, capital drives productivity, especially low cost of capital, okay, and high cost of labor. It's a great combination. And so at the end of the day, we are all experimenting with means of automation for e commerce, okay.
I'll give you an it's not just what you see as MFCs. This company is working on how to robots that can pick many different types of products. All of that, yes, it's capital, but capital drive, I mean, this kind of automation drives productivity. So I think in the long run, we'll all crack the code on this. We'll crack the code on it because the technology cost will the technology cost and the technology output will continue to improve.
And at some point, it will become indifferent to the manual way of doing it.
And my corollary to that is, if you were in Europe, UK with 4 grocers and a German invasion and then everybody has to put the capital on the ground and you chop each other up because there's no share, okay, that's a problem. But it's the U. S, there's 22% of share to go share among all the powerful competitors who figure it out. And so to me, that's the unlock. Am I close to how you can do this innovation and still end up with an okay economic retracement?
Yes. And the evidence is that we are still most of the people are still shopping the store, Brandon. Let's be clear about that, okay? The vast majority of people still want to go to the store and shop the store. And while we saw this uptick in the pandemic, I think you're going to see a return to normal growth rates, okay, even if it's from a with a bit of a step change through the pandemic.
And so it's still majority store shoppers. And so I think we will transition it to a point. And in fact, I'll tell you this, I wanted to get to subscale. Subscale is the worst place to be because you really can't you can't invest the capital, you can't optimize labor. We wanted to get to some scale.
Right. That makes a lot of sense. And I think that's the whole point, right? What the private equity guys did got enough scale in order for it to be a base go forward, right? And if you were sitting there and it's a small little well defended micro market in 2 cities in Texas, you can't do it.
It just doesn't matter what you guys want to innovate. And I think we answered that 1. I'll cover that. The other kind of straightforward 1 is just kind of, again, generalist audience, kind of a reminder of long term margin targets and kind of where your allocation priorities go there, presumably those that help you get to those long run larger targets, but just any color you'd feel comfortable providing on that kind of notion of what should an investor expect you guys to do?
Yes. So when you think about our business, we don't want to grow the business or the bottom line through gross margin expansion. We want to make sure that we what the way we think of it is, we want to have a number of what we call gross margin tailwinds, shrink management, mix management, etcetera, that get you gross margin tailwinds. We want to invest those gross margin tailwinds back into the business to drive units and volume through our stores, because when you do that, you get a lot of leverage on that all the lines below the gross margin line, all of our SG and A lines. And that's what you saw in the pandemic in our P and L.
We had better flow throughs than anybody else because of that nice virtuous cycle that we got going. That's our philosophy. We're going to continue to do that. We keep finding more and more and more gross margin tailwinds, put it back in and keep it. And by the way, we're getting more productivity in the middle of that P and L, right, because of some of the labor productivity initiatives that I talked about.
And we continue to invest capital in growth. It's about in our stores, it's in digital, it's in continuing to evolve our own brands portfolio, finding ways to get into things like meals and such.
That's great. Well, I want everybody to have time to get to their next set of meetings and we appreciate your time. Fascinating coverage of the sector. I think it's a very interesting story. Last thing I'll leave for you to kind of let us go out is, you mentioned some of the opportunities that are available in some of the productivity.
That well is pretty deep in my perception, but you're up close to it. That's a long runway of productivity opportunity, yes?
Never ends. It never ends. Yes. It's just new S curves.
Well, thank you so much for the time. I greatly appreciate it. And thanks for everyone who dialed in and joined in. Anything we didn't get to, you can e mail me and I'll make sure we get answers to the questions. Thanks for the time.
Fabulous session. Cheers.