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.
Toys “R” Us intellectual assets reportedly generate lots of interest
As Toys “R” Us continues to liquidate its U.S. stores, it appears likely that some part of it will live on.
The bankrupt retailer is looking to sell its intellectual property, which according to court documents have generated a lot of interest, reported the New York Business Journal.
The portfolio, which includes the Toys “R” Us, Babies “R” Us and Geoffrey character trademarks, has more than 115 potential bidders, and there has been “substantive communication with over 85 such parties,” the report said.
In light of all the interest, the auction date to sell its U.S. intellectual property has been pushed back to Aug. 6.
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NRF calls latest tariff threat ‘reckless escalation’
The National Retail Federation is asking the U.S. Congress to intervene in the escalating tariff dispute with China.
The association called for intervention following the news that the Trump Administration is considering tariffs on an additional $200 billion in Chinese goods if China does not yield to U.S. demands. The move is seen as retaliation for China’s decision to raise tariffs on $50 billion in U.S. goods, which followed the the similar tariffs on Chinese goods announced by the White House on Friday.
“This is just what we predicted – a tit-for-tat trade war has erupted and American families are caught in the middle,” Matthew Shay, president and CEO, NRF. “This reckless escalation is the latest reminder that Congress must step in and exert its authority on trade policy.”
A study conducted earlier this year for NRF and the Consumer Technology Association found that tariffs on $50 billion of Chinese imports, as announced last week, would reduce U.S. gross domestic product by nearly $3 billion and lead to the loss of 134,000 American jobs, with four jobs lost for every job gained.
Imposing tariffs on an additional $100 billion of Chinese imports would bring the total impact to a $49 billion reduction in GDP and the loss of 455,000 jobs, according to the NRF.