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Kroger to Lidl: Bring it on

CFO ‘glad’ stores opened as test of preparedness begins

Kroger Co.’s CFO on Wednesday said he was glad to see Lidl’s stores finally kick off so that the retailer can determine how effective its preparation for its arrival has been.

Likening competition between them to a football game – specifically, the last Super Bowl – Mike Schlotman said if Kroger were leading at halftime, as the Atlanta Falcons were, “we have to make sure the Patriots don't adjust their game plan and win the game. And if we're the Patriots, hopefully, we'll be as successful as them if we have to change our game plan.”

Schlotman made that analogy during remarks at the Oppenheimer Consumer Conference Wednesday morning in Boston. Lidl, a hard-discount concept from Germany’s Schwarz Group, made the first of what’s expected to be several hundred new-store openings in the U.S. late last week.

“People have looked at me kind of funny when I've been saying this, but I'm glad their stores are now open, and we can stop talking about what we've been doing to get ready and see if what we've done to get ready [is adequate],” Schlotman said of Lidl. “We're going to work against them just like we would with any competitor that winds up opening. Even if it’s a new Safeway across the street, you do something to combat that competitive threat.”

While acknowledging Lidl’s arrival is coming at a “pivot point” for the industry, Schlotman framed Kroger’s competitive readiness in having faced limited assortment discounters like Aldi, Save-A-Lot and dollar stores for decades.

“We think we're well prepared, and … there's not a competitor out there that we don't know a lot about. When you think about Lidl coming in, the American consumer and all the markets we operate in has for a very long time had that kind of a shopping experience available to them. And they go about it a little bit differently, so anytime a new outlet opens people go see and check it out for sure,” Schlotman said. “But it's not as though our consumers haven't already had the opportunity to shop that way in virtually every market that we operate in.”

Schlotman said Lidl differed from Walmart’s expansion into grocery “because Walmart sells everything we sell. This is a more limited selection of product that's going to have attractive prices. So I feel good about what we've done. I can't think of anything else we should have done –  let me put it that way.”

Kroger is coming off a back-to-back stock hits in the last week: Falling on a revised earnings forecast Thursday and the Whole Foods-Amazon announcement Friday, the company lost roughly $7 billion in market capitalization in two days.

Schlotman declined to speculate on potential impacts of the latter deal but mentioned “they didn't buy Whole Foods to have a natural and organic grocer run the way it's always been run. So I think they have bigger plans down the road. We'll see what those wind up being.” Kroger, he was quick to mention, does about $16 billion annually in natural and organic sales, or more than Whole Foods entire annual sales. "It's a very healthy and strong business for us, and it's been in a very important category for us. And we've done a great job of exposing and keeping our core customers in our store to buy those products."

Kroger’s earnings forecast took a hit in part because the company said it needed to pay higher starting wages and add hours in service departments in certain markets. On that topic, Schlotman explained higher opening wages are expected to reduce turnover over time, while extra service hours will better prepare stores to serve customers during peak hours.

“It’s become a concern for some of our operators that they were behind on what the right wage rate was for some of those opening entry-level positions and they felt that was contributing in a large part to their turnover based on exit interviews. And so in some of those markets, we went in, raised our entry-level wages for the associates, and now … we've taken the wage differential off the table. If their retention doesn't get better, [operating divisions] can't blame it on wages today. It must be how they're treating their associates, so they better be running their stores the right way and doing the right things. They're interacting with their associates every day to help reduce the retention and there is, we just thought it was important to do to take that off the table."

Adding hours in service departments, he added, was “a tough call,” but “we just decided the shopping experience is too important a part of what we stand for, and we went ahead and added the hours in those departments.”

 

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