Kroger's competitive advantage

by Monica Watrous
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The success of Kroger's store brands have helped the company remain competitive in the retail marketplace. 
 

CINCINNATI — The Kroger Co. kicked off the fiscal year with a major milestone, having achieved 50 consecutive quarters of positive identical supermarket sales growth, excluding fuel. Net earnings attributable to The Kroger Co. in the first quarter of 2016 were $680 million, equal to 71 cents per share on the common stock, up 10 percent from $619 million, or 63 cents per share, in the prior-year period. The Cincinnati-based supermarket company’s net sales advanced to $34,604 million, up 4.7 percent from $33,051 million.

“Most companies can only aspire to achieve these results,” said Rodney McMullen, chairman and CEO, during a June 16 earnings call with financial analysts. “It says a lot about our consistently remarkable performance and our ability to grow in a balanced way with a long-term focus.”

Rodney
Rodney McMullen, chairman and CEO 

For Kroger, remaining competitive in the retail marketplace is much more than keeping prices low, McMullen said.

“As you know, if you look on an annual basis, we are investing $3.6 billion in price today versus when we started on the journey, so we would have every intention to continue to maintain our price position,” McMullen said. “But when you look at overall, the total customer, the way they look at value, it’s much more than just price. As you know, we stay focused on the total customer needs and fresh products are incredibly important. What’s the shopping experience? How long is a customer in line? How do they get treated by associates? All of those things are equally important.

“And we really are focused on continuing to improve all of those and we’ve made substantial improvements in all of those. A customer doesn’t make a decision to shop, where to shop based on only one dimension. We think some of those other things create a very large competitive advantage for us.”

Kroger’s corporate brands portfolio represents another important point of differentiation among its competition. These brands, which include Simple Truth, HemisFares and Private Selection, represented nearly eight percent of total units sold and about 26 percent of sales dollars in the first quarter, excluding fuel and pharmacy.

“For our corporate brands portfolio, we are off to an exciting start on the new innovations in 2016,” said Mike Schlotman, executive vice president and CFO. “We also continue to push the boundaries of culinary trends with new Private Selection spices, marinades, condiments and cooking sauces. Customers are savoring global flavors in our delicious Private Selection products such as Korean black garlic kalbi marinade and Peruvian Aji Amarillo hot sauce.”

During the quarter, Kroger announced a strategic investment in Lucky’s Market, a specialty grocery store chain with a focus on natural, organic and locally grown products currently operating in 22 locations.

“We invested in Lucky’s because of their great people and unique go-to-market strategy, which includes smaller-format stores that resemble an indoor farmers market, plus a culinary department that showcases amazingly restaurant-quality prepared foods,” McMullen said. “Lucky’s approach is very much aligned with our efforts to provide affordable, fresh, organic and natural foods as part of our customer-first strategy. We expect to learn a lot from each other.”

Mike
Mike Schlotman, executive vice-president and CFO 

Identical supermarket sales growth for the first quarter was 2.4 percent, without fuel. For the full year, the company continues to expect identical supermarket sales growth, excluding fuel, of approximately 2.5 percent to 3.5 percent. The company also expects to be at the low-end to mid-point of its net earnings guidance range of $2.19 to $2.28 per diluted share, based on current fuel margin trends.

“There are a lot of questions about the economy and the customer, inflation or lack thereof, consumer sentiment or competition,” McMullen said. “These are all issues that we’ve managed through, some several times over the last 50 quarters. Inflation for example, I’ve often said that a 2 percent to 3 percent inflation would be a great environment to operate in; however, you rarely get the perfect operating environment.

“What we know is that by focusing on our associates and our customers will be a winning formula in the future as it has been in the past.”

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