What Kroger’s Acquisition of Digital Coupouner YOU Technology Means for its Strategy

After barely letting the ink dry on the completion of its mega merger with Harris Teeter, Kroger (NYSE: KR  ) is at it again. The Cincinnati-based grocer struck a deal to acquire YOU Technology Brand Services, a digital-coupon marketing company with thousands of retailers on its platform. The price tag on the deal wasn't disclosed, but Jeff Talbot, Kroger's vice president of customer loyalty, took some time to discuss strategy with me.

"Paper coupons were strong for many years, especially in times of a down economy. Moving to digital coupons is a way to make it more convenient for customers in addition to saving money," Talbot told me.

It also doesn't hurt that digitally engaged customers are more loyal.

"Digitally engaged customers visit more often and spend more money with us," Talbot added. Kroger's goal is to make it easy for them. Shoppers can download digital coupons from the Kroger app or via Kroger's website onto their loyalty cards, and discounts are automatically applied at checkout.

Kroger covets customer loyalty as competition for grocers across the United States intensifies. That loyalty is largely the impetus behind the YOU tech deal. Kroger adopted a formal customer-first strategy a decade ago, which the chain said has propelled it to uninterrupted sales growth (excluding fuel sales) for the past 10 years at supermarkets open for at least one year. 

Digi-coupon landscape
Riding the rise of mobile technology and social media in the face of a sputtering economy, digital coupons are gaining unprecedented popularity. Kroger is well positioned to take advantage of that trend.

Kroger's is among the most popular apps in the App Store and Google Play and has registered among the top 2% of apps downloaded in the App Store. The purchase of YOU is an attempt to double down on that strength.

Kroger has been on the YOU Tech platform since 2009, soon after the high-tech coupon company was founded. That relationship helped Kroger to reach the milestone of 1 billion digital coupons downloaded in recent weeks. Talbot wouldn't disclose the number of customers, both loyal and newcomers, those downloads translate into except to say that Kroger's digital base is growing weekly.

For comparison, rival Safeway  (NYSE: SWY  ) , which is transitioning to private equity ownership, reported it was targeting 6 million loyalty members by year-end 2013. Meanwhile, Whole Foods Market (NASDAQ: WFM  )  recently launched a pilot customer loyalty program in a few states that it might expand.

And the digital theme seems to permeate throughout all of retail. eMarketer predicts that more than 50% of the U.S. adult population used digital coupons in 2013, and that momentum is only gathering steam. As a result, eMarketer upped its projections for 2014 more than twofold to expect an 11% jump in the number of digital coupons redeemed this year driven by mobile technology.

Hi-tech grocer
If the first rung to the ladder of Kroger's game plan is customer loyalty, the second is technology. Kroger may be 130 years old, but it aims to be a hip company. The maiden U.S. retailer to test speedy electronic-scanner technology, Kroger now wants exposure to Silicon Valley.  

"[YOU Tech is] out in the Bay area, where lots of technology is being incubated. They look at things from the start-up world. We look forward to [discovering] how we can infuse more of that mentality throughout Kroger," Talbot said. "We're looking to learn as much from YOU Tech as we can bring to them."

Nonetheless, Kroger did its due diligence, as competition among digital coupon companies is only heating up. Newly public Coupons.com  (NYSE: COUP  ) seems to go head to head with YOU Tech. Coupons.com has grocery, drug, and mass merchandise retailers on its platform as well as hundreds of consumer packaged goods companies, which are customers to digital coupon providers like YOU Tech and Coupons.com.

"We had conversations with different digital coupon providers over the years," said Talbot.

YOU Tech will continue to operate as an independent company and will even support some of Kroger's rivals on its platform. That wasn't a forgone conclusion, either.

"It was an important part of our decision process as we considered making the acquisition," said Talbot. "That is, do we want to make it exclusive to Kroger or do we want to broaden it out to allow other competing retailers to participate in the platform? The decision absolutely was we wanted it to be open and wanted to have as many other retailers participate on the platform as possible."

YOU Tech creates digital coupon experiences that are unique to each retailer. For instance, Kroger's focus is coupon relevance, so that each customer's digital coupon experience features brands that have proven to be useful to him or her. Besides, blocking other retailers wouldn't support Kroger's cause.

"We welcome other retailers on the platform to be part of those discussions as far as developing the platform so that it becomes the preeminent platform in the industry. It has the potential to go beyond grocery and into fast food, maybe into the quick-service restaurant segment, drugstores, office supply…. It could be much broader than it is today," Talbot said.

Conclusion
Bolstering its digital coupon portfolio may not be as sexy a move as say, purchasing a rising organic food star or developing local, niche supermarkets. Instead the company's fascination with technology and customer loyalty seems to take precedence over fads. Given its reliable sales growth, this approach seems to work for Kroger.

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