Kroger Playing for the Long Term

Grocery giant on solid ground despite Q4 comps dip

March 3, 2017, 11:26 am By Jim Dudlicek, EnsembleIQ

It’s a testament to The Kroger Co.’s prowess as a retailer that it took as long as it did, amid an ongoing deflationary period, for its 13-year streak of same-store sales growth to be broken.

And for a company always focused on the long haul rather than the short run, this blip after 52 consecutive quarters brings little need for the panic button.

Though comps slipped less than 1 percent in the fourth quarter while overall sales rose 5 percent or better for the quarter and the year, Kroger rightfully has, as CEO and Chairman Rodney McMullen said at Thursday’s earnings call, “a lot to be proud of,” namely 12 consecutive years of market share growth; record high unit share of its corporate brands portfolio, including a $1.7 billion year for its Simple Truth brand; mergers with specialty pharmacy leader ModernHealth and Murray’s Cheese; and the creation of 12,000 jobs.

“We are obviously disappointed with our identical supermarket sales number in the fourth quarter and our performance on several other KPIs, including FIFO operating margin and return on invested capital, which were driven by the deflationary environment,” McMullen said. “Kroger has always focused on executing against our long-term strategy. We are lowering costs to invest those savings in our people, our business and the technologies to position Kroger to deliver the value proposition customers are seeking today and in the future.”  

Not Letting Up

Kroger is not letting up on its investments to ensure its relevance against disruptors that are chipping away at traditional grocers’ market share. Kroger is aggressively expanding its click-and-collect services, adding more than 420 ClickList and ExpressLane locations in 2016, bringing its total online ordering locations to more than 640.

“We are also experimenting with ways to solve the ’last mile’ equation. We’re testing with Uber delivery in several locations with plans to expand in 2017 – where our customers can order through ClickList and choose to have their groceries delivered by a local Uber driver. We have a couple of other home delivery tests as well,” McMullen revealed. “We are building digital experiences today so that customers can engage and shop for anything, anytime, anywhere with us in the future. The excellent service they get from our associates in the store will carry over seamlessly to the digital platforms.”

Meanwhile, Kroger is staying on top of trends like health and wellness and fresh prepared foods, which will continue to be a significant focus.

To the former, Kroger anticipates continued growth in its Simple Truth and Simple Truth Organic lines, making its products available throughout the country online, where it is proving successful in markets like New York City, where the retailer has no brick-and-mortar presence.

Persistent deflation continues to hamper progress. “Looking at ID sales, deflation was the primary driver of our negative results for the quarter,” CFO Mike Schlotman said, noting that inflation-adjusted ID sales were positive in Q4. “We saw a decline in pharmacy inflation, an acceleration in produce deflation and a slowing in grocery deflation.”

Another headwind was Kroger’s capital program, noted Schlotman: “Over the last four quarters, we relocated or expanded 35 strong-performing stores, taking them out of our identical supermarket sales calculation.”

Kroger anticipates flat to minor growth for the year ahead. Still, McMullen said, “We’ve never been more determined about our future. We continue to focus on gaining a larger share of the $1.5 trillion U.S. food market.”

Because, in the words of Margaret Thatcher, now is no time to go wobbly.

“We could stop all of these investments, given the headwinds our industry is facing,” McMullen said. “That might make our results look better today, but we are playing for the long term, and that requires being deliberate and determined.”