CINCINNATI — It may be too early to declare victory over the economy, but food retailing appears to be making a comeback.
In its first-quarter financial results last week, Kroger Co. here illustrated why this might be the case: Same-store sales were up, margin investment to generate those sales was down, and shoppers — at least some of them — splurged for wines, organics and other high-end products at a greater rate than they had for months.
“The numbers don't lie: They needed less gross-margin investment and got better sales productivity,” Andrew Wolf, an analyst at BB&T Capital Markets, Richmond, Va., told SN. “That, to me, is a sign that Kroger, and probably the rest of the industry, has bottomed. Demand is up. And so Kroger, and I suspect likely others as well, are going to be able to achieve better results going forward.”
Kroger officials in a conference call sounded pleased — but typically cautious — with the results. They credited investments in service, products and prices for improving the company's overall competitive position, noting that each of its 18 supermarket divisions experienced positive identical-store sales during the quarter, which ended May 22. Overall identical-store sales excluding fuel increased by 2.4%.
“Kroger had the courage in this challenging economy to invest in our stores to keep them fresh, to invest in soft-saving projects, and invest in improving our customer shopping experience,” David Dillon, chairman and chief executive officer, told analysts. “Our customers have noticed and are rewarding us with loyalty.”
Dillon said the chain experienced increases in total customers and a slight increase in the average basket size during the quarter. He also highlighted increased sales in discretionary categories including general merchandise, floral, Starbucks coffee, better deli meats and natural/organics, but emphasized that not all Kroger shoppers were participating. In fact, many shoppers remained strongly influenced by price.
“People are spending some discretionary money, [but] it is by segment where that happens,” Dillon said. “We're also seeing on the other side — a lot of week-to-week swings, much of which is driven by food stamps and other situations where people have money one week and do not have money the next. The consumer confidence in some of the upscale customers is stronger than the consumer confidence in some of the people more price sensitive, and that affects their behavior.”
Dillon estimated overall price inflation was up 0.9% during the quarter, excluding fuel, but noted that figure was influenced by increases in produce and milk and was offset by 1.8% price deflation in grocery. This, however, compares with 2.7% deflation in the same period last year.
Kroger officials took several questions about Wal-Mart and its recent, more aggressive price-rollback activity. Dillon likened Wal-Mart's behavior to that of a traditional supermarket competitor using heavily promoted prices to drive traffic, but balancing promotions with price increases elsewhere. He said Kroger would respond mainly by sticking to its own game plan.
“Our behavior in every market is based upon our plan, and what we believe to be consistent with our ‘customer first’ strategy,” Dillon said. “We can't do that with a blind eye to what the competition does, but we also can't let our competition dictate to us what we're going to do.”
Rodney McMullen, president and chief operating officer, said increases in private-brand penetration helped strengthen customer loyalty, noting that of the “millions of loyal households” Kroger serves, just 5,000 of them did not purchase at least one Kroger private-brand product during the quarter. The company offers around 20,000 private-label items, about 11,000 of which are typically offered.
Sales of $24.8 billion for the quarter were up by 8.7%. Net earnings of $373.7 million were down 14% from last year, although earnings per share exceeded analyst estimates.