Kroger, Safeway Post Strong Results in 2006

REPORTS OF THE DEATH of the traditional supermarket have been greatly exaggerated. Taking advantage of the transition of Albertsons, and executing on the strategies each concocted independently five years prior, Kroger and Safeway in 2006 each had a banner year for sales growth. Cincinnati-based Kroger, the largest traditional supermarket retailer in the U.S., reported quarterly identical-store sales

REPORTS OF THE DEATH of the traditional supermarket have been greatly exaggerated.

Taking advantage of the transition of Albertsons, and executing on the strategies each concocted independently five years prior, Kroger and Safeway in 2006 each had a banner year for sales growth.

Cincinnati-based Kroger, the largest traditional supermarket retailer in the U.S., reported quarterly identical-store sales growth, excluding fuel, of between 4.7% and 6% in each of the four quarters for which it reported results in 2006. Kroger attributed the growth to investments in service and price funded by a lower cost structure, cost leverage and a sophisticated loyalty program rewarding its most profitable shoppers.

So strong were Kroger's results, and so confident had the company become in producing them, that the retailer reintroduced a dividend payment for shareholders for the first time in 18 years in March. Kroger had suspended its dividends since a leveraged buyout staved off a hostile takeover attempt in 1988.

While skeptics had considered the explosive growth of Wal-Mart Supercenters in recent years as a threat to traditional operators like Kroger, David Dillon, Kroger's chief executive officer, acknowledged in March that Kroger was especially successful in markets where it competed with the Bentonville, Ark.-based mass merchant, specifically because it had picked up volume from smaller operators driven out of business when Wal-Mart opened nearby. “Over time, we're able to hold our own when Wal-Marts come to town,” he said.

Kroger also showed a commitment to price investments as a means to gain market share, even when it hurt margins, or disappointed stock analysts, in the short term. Identical-store sales, excluding fuel, leaped by 6% in Kroger's fiscal first quarter and by 5.6% in the second quarter. “The opportunity out there is enormous for us to grow sales,” Dillon told investors while reviewing second-quarter results in September, “and we want to keep trying to do that. But we're trying to be mindful of paying the bill as we do.”

By year-end, Kroger officials said they had begun balancing price investments with investments in service and product variety, suggesting to some analysts the program of squeezing overall margins was coming to an end about five years after it had started. “Kroger has already faced down the [pricing] threat, and it's now working on its opportunities,” Mark Husson, an analyst for HSBC Securities, New York, told SN this month. Third-quarter identical-store sales, excluding fuel, grew by 5.3% at Kroger — its 13th consecutive quarter of positive ID sales.

For Safeway, 2006 was also clearly a year of strong top-line momentum.

The Pleasanton, Calif.-based company credited the results of its chainwide lifestyle store renovation program for positive ID sales gains in each of its four quarters reported during the year. Like Kroger, it also reinstituted a quarterly dividend.

Safeway was considered to be the biggest beneficiary of the breakup and sale of Albertsons this year. It operated against Albertsons in four of the five markets spun off to private equity and real estate concerns, and in several others transitioning over the course of the year to Supervalu's ownership.

“There's nothing in the Supervalu-Albertsons deal that bothers us,” Steve Burd, chief executive officer, said in a conference call with analysts in February, adding, “there's a degree of uncertainty out there that's an opportunity in itself.”

Safeway posted ID sales of 1.5% in its fiscal first quarter and 4.2% in the second quarter, when it also boosted expectations for earnings performance for the year. Customer count and basket size were growing in completed lifestyle stores, which feature expanded perishable, prepared-food and private-brand items in an upgraded setting.

The three-year-old lifestyle store program had been applied to around 35% of all Safeway locations by the end of Safeway's third quarter in September. Burd said in October he was encouraged to see store makeovers completed two years ago continuing to gain sales by their third year, and that Safeway had plans to convert another 300 stores in 2007.

Positively Strong Sales

Identical-store sales, excluding fuel, increased in each of the last four quarters for traditional supermarket operators Kroger and Safeway.

COMPANY IDENTICAL-STORE SALES, (EXCLUDING FUEL)
Kroger (fiscal year-end Jan. 31)
4Q05 +4.7%
1Q06 +5.6%
2Q06 +6.0%
3Q06 +5.3%
Safeway (fiscal year-end Jan. 3)
4Q05 +3.7%
1Q06 +1.5%
2Q06 +4.2%
3Q06 +3.7%