FINANCE

Analysis: Kroger winning the battle against rival chains

Kroger has started its fiscal year on an optimistic note, with solid increases in both total and underlying sales. On the bottom line, the $1.8 billion gain on the sale of the convenience business has helped push net income past the $2 billion mark. Although the convenience store benefit is non-repeatable, Kroger’s operational improvements and efficiencies also contributed to the bottom line uplift and will provide an ongoing benefit to profit.

On the sales front, we are encouraged by the 1.9% increase in comparables. Although this came off the back of a weak performance in the prior year when the number dropped by 0.2%, the result suggests that Kroger’s investment in lower prices and its push on digital, where sales were up 66%, are both paying dividends.

We are particularly pleased by the uplift to forecasts for the year and think that the 2.0% to 2.5% comparable growth prediction is a respectable and attainable target.

Across Kroger’s various fascia, the emphasis on low prices is now more evident in terms of marketing, in-store messaging, and the reductions made across many parts of the range. From our data, this has stemmed the loss of customers and has improved shoppers’ perception of Kroger when it comes to price.

In our view, while further investments may be needed to maintain a competitive edge, Kroger is now on a much more stable footing than it was a year ago and is winning the battle against other rival chains like Albertsons.

The push of own brands has also been helpful both in protecting margins and in differentiating Kroger from rivals. Even so, the continued growth of discounters like Aldi, Lidl, and the dollar stores, may necessitate further price cuts and measures to fund them. In this regard, we are pleased that Kroger is looking to consolidate brands to generate greater efficiencies. We also believe that the development of new streams of revenue, such as marketing using Kroger’s customer data, are sensible.

As much as Kroger is managing the daily dynamics of the market, it also has one eye on the future. The recent partnership with Ocado and the Home Chef merger agreement both speak to the fact that Kroger is looking to stay one step ahead of the competition by gaining a toehold in rapidly-growing segments of the market.

On the Ocado deal, we believe that the technology will be beneficial for automating general warehouse operations. However, we are less certain that it will be effective in terms of home delivery. Ocado’s delivery model works in the U.K. because of the country’s high population density, which means the catchment area of one warehouse contains many households.

While the same logic applies to some urban areas of the US, there are many other locations where population density is too low to support profitable home delivery out of a central warehouse. The bottom line here is that grocery fulfillment is a necessity for driving sales, but even with Ocado’s technology we still believe it is damaging to profits.

We are more optimistic about the Home Chef deal. The meal kit market is growing rapidly and is taking share from both CPG firms and supermarkets. Kroger needed a response to that, and Home Chef is a good choice from a brand and commercial perspective. Over time, we think Kroger can use its channels and distribution to expand the business.

Overall, Kroger remains in a very pressured part of the retail market. However, we believe it is getting to grips with the challenges and is future-proofing its business.

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