Kroger, Others Grapple With Pricing Strategies

CINCINNATI Kroger Co. here is beginning to balance its emphasis on low pricing with a variety of non-price elements at the same time other supermarket operators are emphasizing lower prices to draw customers. Speaking with analysts last week, Kroger executives made it clear that, while price will remain a primary element of the chain's strategy, it plans to invest more proportionately in other areas

CINCINNATI — Kroger Co. here is beginning to balance its emphasis on low pricing with a variety of non-price elements — at the same time other supermarket operators are emphasizing lower prices to draw customers.

Speaking with analysts last week, Kroger executives made it clear that, while price will remain a primary element of the chain's strategy, it plans to invest more proportionately in other areas as well, including the overall shopping experience, the quality and variety of the products offered and the quality of its employees.

“When we originally started down this path, nearly 100% of what we were investing in was price,” Rodney McMullen, vice chairman, said, “and we gradually added other elements. First it had more to do with service, and now it's adding some other dimensions.”

While Kroger attempts to balance price against those other offerings, other operators, like Stop & Shop and Giant-Landover, are moving toward an everyday-low-price positioning (see Page 6), and the Sweetbay division of Delhaize America is lowering pricing to improve customer perceptions.

Analysts told SN Kroger's reduced emphasis on price and the increased emphasis by other operators are part of the same equation.

“You've got to fix the price thing first — to face the threat before you can work on the opportunity,” Mark Husson, New York-based managing director for HSBC Securities, London, told SN. “Kroger has already faced down the threat, and it's now working on its opportunities, while other companies are at the point of trying to face down the threat — and part of that threat now comes from retailers like Kroger and Food Lion, who have moved gross margins downward and closed the pricing spread with discounters.”

Chuck Cerankosky, an analyst at FTN Midwest Research, Cleveland, said Kroger has become adept at analyzing markets to determine the level of pricing investment required. “If you go to any market, you are going to see the various competitors in some stage of whatever sales-growth strategy they are executing,” he said.

Gary Giblen, senior vice president and director of research for Brean Murray, Carret & Co., New York, said the pricing decisions by Kroger and others “is all part of a broad effort to find the delicate balance between the right combination of offerings.

3RD-QUARTER RESULTS

Qtr Ended 11/4/06 11/5/05
Sales $14.7 billion $14 billion
Change +4.8%
Comp-store $5.5% (excluding fuel)
Net Income (Loss) $214.7 million $185.4 million
Change +15.8%
Inc (Loss)/Share 30 cents 25 cents
39 Weeks 2006 2005
Sales $49.3 billion $45.8 billion
Change +7.5%
Comp-store Not Available
Net Income (Loss) $730.1 million $676.0 million
Change +8%
Inc (Loss)/Share $1.01 92 cents

“Even Wal-Mart tried to move away from a strict emphasis on price, though it went too far and is now retreating. So there's a convergence under way, with price operators going toward more service offerings and service-oriented chains going toward more price offers.”

Jonathan Ziegler, an analyst with Dutton Associates, El Dorado Hills, Calif., said Kroger is “de-emphasizing promotional activity at the same time other companies that are moving to EDLP are also moving away from promotions as they realize that promotions, historically, haven't accomplished a lot and aren't the best way to win customer loyalty — they only encourage cherry-picking.”

Kroger has been castigated by Wall Street for the past couple of years for “going crazy” on price, one analyst told SN.

David Dillon, chairman and chief executive officer, Kroger, said he is “comfortable enough” with its price position that “putting additional emphasis on the shopping experience, on the people in our stores, on the products we sell, and balancing the focus on those areas, can produce the sales we need.”

Kroger also said it anticipates identical-sales growth at supermarkets in the fourth quarter will exceed 5% (compared with 5.3% in the third quarter); it also raised earnings per share guidance for the year to 8% to 10% — compared with the 6%-8% previously forecast — and confirmed EPS guidance for fiscal 2007 of 6% to 8%, with expectations in both years at the upper end of those ranges.