How time flies. It seems like just yesterday that Kroger and Albertsons announced their merger agreement (in reality it was early October 2022). But here we are, with the Federal Trade Commission expected to make their initial ruling on the proposed merger in the coming months and Q1 2024 anticipated as the closing date. During Kroger's Q3 2023 earnings call last week, CEO Rodney McMullen sounded very confident that the deal would close after the two chains previously announced they would divest 413 stores, 8 distribution centers, and 5 private label brands to C&S Wholesale Grocers.
As to the quarterly results for the period ended Nov. 4, Kroger's underlying comps increased +1% driven by inflation, digital sales (up +12% year-over-year), and contribution from GLP-1 sales at Kroger pharmacies. Given that inflation was less than prior quarters and an improvement in the 2- and 3-year comp CAGRs, underlying volumes, market share, and household growth improved.
McMullen painted the less-affluent household as under deep pressure with no relief, with the tone implying a less robust Halloween season. However, McMullen was highly enthusiastic about Kroger winning more affluent households. Earlier in the year, we noted that most grocers have seen a decline in captured market median household income as consumers are "trialing" more banners as they seek out value. Based on Placer data, the captured market household income for the past six months was $84.4K, a 1% decline compared to $85.3K during the same period in 2022. However, because most national chains have seen a 3%-4% decline in captured market household income due to trialing compared to the 1% decline for Kroger, the chain appears to be seeing higher visits from higher income households.
It also appears that Kroger's consumer fulfillment centers (CFCs, or sheds) are also producing the increase in higher household income customers. Below we show visit trendlines for three of the CFCs using our data, and an estimate of their contribution to the Kroger Banner on a transactions and sales basis. Double-digit growth on 12.5% of revenue is a meaningful enhancement to the average household income of the Kroger-banner business. McMullen was also enthusiastic about curbside which would also have a similar effect of enhancing the mix.
Another hot topic to the industry is GLP-1s given their rapid growth and Walmart’s earlier statement that it was seeing an impact (recall that GLP-1s are about a 100 basis points or more to comps). McMullen added, “For now, we have not seen any major macro shifts in customer eating habits or spending behaviors.”
On the topic of inflation, Kroger expects inflation to be just positive for Q4 and in 2023. CFO Gary Millerchip said, “Encouragingly, units have shown signs of improvement as inflation has decelerated...However, unit growth rates have lagged the rate of inflation decline and have not improved at the pace we would have expected. As a team, we are laser-focused on returning to unit growth and expect improvement in volumes to continue for the balance of the year. “Have not” means that the price elasticity response has been muted, as it was when prices went up. This suggests that prices will need to decline to actually move volume. McMullen also noted that, “CPG is not being satisfied with their tonnage so they're increasing the amount of [promotions]. The other thing for everyone is the supply chain constraints that would have been in place a year ago and two years ago is real getting back to normal. So people are beginning to feel comfortable on promoting again...”
