Kroger Overcomes Inflation Pressures – For Now
While its overall third-quarter earnings released last week were down slightly due to an inventory charge, Kroger Co. managed to beat Wall Street’s expectations and raise its full-year forecast. Even so, officials on the company’s conference call with analysts admitted that inflation in the economy has had a more negative effect than expected.
Facing higher food prices and a wobbly economy, consumers are buying fewer items and switching to smaller packages and store brand items, Kroger officials said. With costs rising six percent for the quarter on food and other items in its stores (excluding fuel), the company said it was able to increase its penny profit per item in the grocery category. Tonnage, however — the total amount of goods sold — was down slightly.
Kroger’s same-store sales grew an impressive five percent (excluding fuel), its 32nd straight comp increase. Reports lauded the supermarket giant for its increasing emphasis on low prices and loyalty programs. Its expansion of private label, which increased to 35 percent of the grocery department units sold versus 34 percent in the third quarter of 2010, appears to have worked as consumers are looking for cheaper items.
In the Q&A session, David Dillon, chairman and CEO of Kroger said that it helps that pricing overall is largely "rational," although several other publicly-held grocers are seeing notable declines in tonnage amid increased sales.
"It does help that the sales are positive for nearly every retailer, and even those that aren’t, they’re close to positive," Mr. Dillon said. "And that helps because that helps make ends meet. It helps you pay the bills. And as long as you can pay the bills, then you can continue to work down the path of rational operating behavior, which is what I think we have."
With basic commodities such as corn and wheat still well above the five-year moving average, Kroger said price stabilization would not likely arrive until at least the back half of 2012. Still, Mr. Dillon said the biggest impediment is the economy.
"I think that’s the biggest unknown is what that economy is going to look like. And so far, it’s going to stay soft for quite a while."
- Kroger Reports Third Quarter 2011 Results – Kroger
- The Kroger’s CEO Discusses Q3 2011 Results – Earnings Call Transcript – Seeking Alpha
- Kroger 3Q profit falls on charge but tops analysts’ expectations; boosts 2011 outlook – The Associated Press/The Washington Post
- Kroger boosts sales, profit forecasts as grocery outlook improves – Pork Network
Discussion Questions
Discussion Questions: How would you rate food retailers for managing inflation and the repercussions of an uncertain economy in the last few years? What do you see as the keys for them to continue managing effectively in the year(s) ahead?
Among the supermarket chains, Kroger appears to like a quarterback that wisely scampers when confronting inflation and a slow economy. Kroger has promoted aggressively, has a strong loyal program, has been able to increase their PL share of market and same store sales. All this in the face of commodity inflation and slipping tonnage. That indicates they have a shrewd pricing methodology with an assist from gas sales.
The keys for supermarkets in the near future is to study the current Kroger playbook.
Dave Dillon, Kroger CEO, comments are spot on. The Grocery Retail and Manufacturing side has done extraordinarily well in managing inflation over the past 24-36 months. This hasn’t been an easy process given the economy, the government’s inability to produce more accurate crop reports, and the deep uncertainty that the consumer is posturing.
Likely, it is not a matter of IF we will face deeper and broader inflation, it is a matter of WHEN. The actuarial scientists would tell us we should look at the late ’70s when the U.S. last experienced stagflation, and then hyper-inflation. This time, the debt loads are on the federal, state, and local governments. Those folks will behave poorly to cover their “spending sins” — the bond market will get goofy and some taxes will get changed around to fund the deficit.
What private enterprise will have to do is:
1. Retailers and Manufacturers will find it beneficial to collaboratively work closely together
2. Attention to “distribution” will take on a larger role in the marketing equation
3. Physical plants (stores) will have to become more efficient
4. Retailers will have to be disciplined in keeping the merchandising cycle aligned with product movement in a tight fashion — waste and spoilage has to be drilled out — inventories have to be in order
5. Retail managers will have to lead groups of associates and help them understand what is taking place, and why it needs to be done — and then, seek those associates’ help in controlling the INFLATION that is ringing about them
6. Understand that the consumer has figured out how to, and will, trade down. The consumer is still deleveraging
We’ll call it the “Best of Times and the Worst of Times.” The winners will be organizations, like Kroger who are maintaining discipline in their business.
The major economic swings in combination with volatility in commodity prices and inflation have made a competitive grocery industry in an extremely volatile situation. Those grocery retailers, like Kroger, that have been working to understand consumers better and work closely with suppliers have been better able to develop flexible processes that enable them to cope. This process requires great diligence and constant monitoring of data. The investments in this infrastructure are enabling the necessary flexibility now.
Many retailers, in the fast food industry, have been forced to absorb many of the increases in product costs due to a weak economy. Now, both Arby’s and Burger King are being forced to pass along certain cost increases or reduce the sizes of each products.
Once the fast food industry followed McDonald’s entry into the dollar menu it was a path the reduced profits and lower sales at the register without any increase in store traffic.
It reminds me of the old Wendy’s commercial where they wanted to know “where’s the beef?”
As a supermarket independent owner, handling the inflation problem is a never-ending battle. My greatest concern is fairness, and it is like a tree falling in the forest. None of the big players in the food business are providing me with the deal costs that the mega chains are getting (it’s not even close), and eventually it will bring about more store closings for the weaker stores.
I will eliminate slow sellers, starting in 2012, and focus on core deals from regional suppliers in order to provide value. Re-thinking how I run my business from staffing, to product assortment, to pricing will be scrutinized heavily in the first quarter, and hopefully cash flow will improve. Beyond that, my deli-bakery, meats, dairy, and catering will continue to grow, as it is my way of survival. Good luck to all in this crazy business today….