As Kroger Co. was pummeling the industry over the past decade, officials frequently emphasized that its results were never about low prices alone but about low prices in combination with other elements of the shopping experience ranging from freshness to selection to formats to checkout speed. This all-encompassing, consumer-centric approach was something of an exclusive recipe at Kroger, which not only delivered comparable-store sales results more consistently than anyone, but often, beat them decisively.
On Thursday, while reviewing a rare quarter in which ID sales not only fell but were worse than several competitors who’d reported their results over a similar period, Kroger officials made a familiar acknowledgement: Competitors had improved, and it wasn’t only about price.
“There is no doubt several competitors are improving and running better stores,” Rodney McMullen, Kroger’s CEO, said in response to an analyst’s question during the retailer’s conference call reviewing its fourth quarter financial results. “That is really clear when you go into their stores, and it's much broader than just Walmart.”
Walmart, riding the benefits of recent price and service initiatives, was among several of Kroger’s competitors — Publix Super Markets, Ahold Delhaize and Sprouts Farmers Markets were others — that posted comparable-store gains during this reporting period, while Kroger saw its non-fuel identical-stores decline by 0.7%. It marked the first quarter of comp declines for Kroger since the third quarter of fiscal 2003, 13 years ago, and the second straight quarter during which Walmart’s U.S. comps beat Kroger. That hadn’t happened since 2009.
Chris Mandeville, an analyst following Kroger for Jefferies, acknowledged these retailers to an extent have “gone to school” on Kroger and are realizing the benefits.
“It seems like Kroger has provided the roadmap to success, and you’re just now seeing other conventionals and mass merchandisers elevate their game, either in-store, or by sharpening their pencils on price,” Mandeville said.
“But after so many years of price investment, leveraging their industry leading data analytics to identify sales trends early and drive sales, it could really be that Kroger is just seeing its returns diminish somewhat,” he added. “And others that are in the earlier age of the cycle are realizing a greater lift.”
“I hate to say it but they’re kind of a victim of their own success,” added Diana Sheehan, director of insights at Kantar Retail. “A year ago they were significantly outperforming the competitors that are now outperforming them. That’s in part because as you have a killer quarter it’s hard to rebound and surpass that. But you saw Walmart address the issues its shoppers had with customer service. You’ve seen Aldi doing a pretty good job in fresh. It’s really an interesting dynamic. I don’t think Kroger needs to reinvent itself, but they need to look around and find out where is the next place they need to innovate.”
Kroger said a combination of factors played into results — chiefly, the effects of deflation, but officials also cited competition and internal factors. For example, the brisk pace of store renovations and relocations took 35 stores out of the base of at least one-year-old stores that are measured to calculate comps, resulting in a 70-basis point hit. Kroger did about twice as many store renovation projects in 2016 than it did two years ago, McMullen said.
Price competition was a concern “in some pockets,” McMullen acknowledged, but also said that was normal. He added that comp sales among Kroger’s loyal households gained slightly during the quarter, “so it's really the customer that’s very loyal to us is where we're seeing [effects of competition]. That would be [shoppers] more driven by value or on a budget, than mainstream customers that really value the experience and the freshness of our product and other aspects.”
Burt P. Flickinger III, managing director of Strategic Resource Group, New York, maintained that Kroger remained well positioned to regain its stride but did not have the benefit of industry events like the Haggen bankruptcy providing opportunity for share gain during the period. “They’re facing more All-Pro, A-level competition than they used to,” Flickinger told SN. “And less B, C, D, E and F.”