On its Q4 2002 update, Kroger CEO Rodney McMullen shared that they look forward to coming together with Albertsons and that an early 2024 closing date for the proposed transaction remains on track.
On food inflation, McMullen noted, “Providing affordable food is even more essential at a time when inflation is affecting so many of our customers' lives. We do this by delivering fresh products at a great value, trusted Our Brands items, and personalized promotions.” However, management made no explicit, or implicit, comments about pushing back on additional supplier price increases, which surprised us. Additionally, management said that packaged food price inflation remains “stubborn.” They shared that while consumers were trading into their Our Brands, they weren’t seeing any significant trade-down within their stores. However, they did say that they were “not satisfied” with share losses in packaged food with less affluent households.
Comparable store sales for Q4 2022 were +6.2%, less than the +15% reported by both Walmart (grocery only) and Grocery Outlet. It is mostly less affluent households that are switching to value formats – as shown by Placer.ai. While Kroger generates far more revenue, profits, and value from their affluent and loyal customers, as food inflation anniversaries, driving revenue and profits will become more of a challenge should customer defections continue, something that management is mindful about. Kroger noted that it expects higher sales growth in 1H 2023 than 2H 2023, with 2H 2023 comparable sales expected to be “below 3%”. The company's outlook for food-at-home inflation is for it to end the year in the +4 range. That range would leave the year at around 8%. (The USDA’s latest forecast is +8.6%.)
- Kroger expects to hold 2023 profits even with 2022, which was to be expected given that they are seeking Federal approval for their Albertsons merger. One notable headwind to profit growth in 2023 is Kroger’s plan for +$770M in additional wage investments for associates. Assuming that the dollars are spread evenly over Kroger’s 465K employees, that would increase its average hourly wage of $18 per hour by $0.83, or +6 annualized.
- Another highlight from the earnings call was management’s repeated reference to the importance of Kroger fuel points benefits to its customers and loyalty. Fuel points programs has been a frequent topic of discussion among our grocery and gas station industry contacts, and we recently explored how elevated food prices can negatively impact visits at grocery-affiliated gas stations.
- On another topic, Korger is slowing the roll-out of Ocado (largely automated fulfillment centers that facilitate home deliveries from online orders) until they learn more, a possible development that we previously discussed. McMullen noted, “we need to work on profitability and efficiency.” In contrast, 2-hr delivery, curbside, and pick-up collectively appear to be ahead of plan. This topic was called out by them and highlighted in the slide from their presentation shown below.