This week, Kroger reported in-line sales and reiterated their guide for the year. Comparable sales of +0.5% were led by a +17% increase in digital/delivery sales and a modest increase in store sales. Kroger's store comparable sales include pharmacy, and assuming that Kroger and Albertsons have similar pharmacy businesses (which is up a lot from GLP-1s), that would imply that brick-based Kroger grocery comparable sales were down about -2.5%. Given that food-at-home inflation (CPI) was +1.1% for the period, that implies that comparable volumes was down -3.6%. However, as comps increased, following declines in the prior two quarters, underlying volume improved around 150 bps quarter-over-quarter. For the quarter, gross margin was stable, with increased private brand sales (which are accretive to gross margins) being offset by increased targeted promotions to secure customer visits via the Kroger app--“digitally engaged” households increased +9%. (Increased usage of app-based discounts in the grocery channel to secure household loyalty is also a frequent topic of the Anchor--See our stories on 99 Cents Only, Albertsons, and essentials-based retail.) For Kroger, “digital clipped coupons" were up +18%. Separately, Kroger shared that fuel profitability was below expectations this quarter, with per gallon fuel margin down low single digits compared to last year. We take this as an indicator of the growing competitive intensity between grocery brands and the clubs as all are investing in lower fuel profits to drive store visits.
Looking at year-over-year visit trends for Kroger’s largest or distinct banners in the chart below, we observe the following: (1) Collectively, these banners experienced a +3.8% increase in visits for the quarter, which when combined with an assumed comparable volume decrease of -3.6%, implies an -8% decline in volume per visit. As we’ve written, the high-single-digit decline in volume per visit (i.e., basket size and units per transaction) is the result of consumers shifting to value-oriented chains (Walmart, Costco, Aldi), consumers shopping multiple banners to pick each banner’s best offering, and consumers shopping multiple banners to cherry-pick hotly promoted items; (2) The shift to value brands is also true for Kroger’s City Market and Food 4 Less. by contrast, Mariano’s and Fred Meyer are lagging; (3) The disruption from the earlier Easter is visible, we estimate that this cost the industry about 2% for the month; and (4) The traffic trend in May was stronger than pre-Easter.
We suspect that the acceleration in May was due to greater price investment by Kroger to gain share-of-stomach, an acceleration in cross-banner shopping, and share-of-stomach gains from restaurants and out-of-home. Industrywide, per the Census monthly retail sales report (see above), sales for the grocery channel in May were about +110 basis points more robust than February/March. By contrast, restaurant sales of +3.8% were at a 240-basis-point slower pace. Excluding inflation, restaurant “volume” was down -0.5% as CPI was +4.3%. The Battle Royale is no longer just between mass merchants and grocers, it’s now between at-home and away-from-home, with the retailers gunning for away-from-home’s share.
On delivery, Kroger CEO Rodney McMullen said, “Our customers love the Kroger delivery experience with refrigerated products delivered directly to their doorstep. As a result, the Kroger delivery network has experienced remarkable growth with sales nearly doubling this quarter versus last year. As we focus on providing an incredible customer experience, we are learning and adjusting the delivery network. A good example of this is our decision in the first quarter to close three spoke locations to reallocate capacity closer to our automated fulfillment centers where we have higher customer density and better order level profitability.” Closing the spoke locations is an interesting adjustment to Kroger’s strategy and we are reminded that Walmart shared that its store-based delivery business, now exceeds its curbside business. Store-centered delivery is also the path that Amazon, Target, and Costco are pursuing. As such, it’s looking more and more like fulfillment centers for grocery, especially perishables, may not be the category's natural end-state solution. (Shelf-stable, dry grocery items are another matter and Amazon has a big share in that segment.)
Kroger CFO Todd Foley noted that GLP-1s are "a high retail ring but an extremely low margin, and so that puts pressure on our margins. And coming into the year, if you recall, the latter part of last year, we had supply constraints on GLP-1. Some of those restraints were relieved in the first quarter. And frankly, our team did a really nice job with suppliers getting out there to get product to meet demand in our stores. And so, our sales exceeded what we expected to see in the first quarter, and that put a little bit of that unexpected pressure on margins. And then the second, there's another category of drugs as well where we saw some regulatory restrictions that were unexpected that drove up the cost on those meds and put some pressure on the margins.” (For Albertsons and Walmart, pharmacy sales increased mid-teens, driven by GLP-1s.)
On the proposed Albertsons merger, McMullen said, “Since we announced the proposed merger back in October of 2022, our associates have done an exceptional job preparing for the integration with Albertsons while never once taking their eye off the ball of serving our customers, advancing our strategy, operating our business and driving results. Because of their efforts, we will be prepared to hit the ground running as a combined company, ready to serve more customers from Day 1. As a more general merger update, in April, we announced an expanded divestiture plan with CNS, which directly responds to the concerns raised by Federal and state antitrust regulators regarding the original agreement. We believe the package, which includes a modified and expanded store set and more non-store assets, bolsters Kroger's position and regulatory challenges to the proposed merger, including our upcoming court proceedings. It also positions CNS to be a strong and successful competitor. We are prepared to defend our merger because it will produce meaningful and measurable benefits for customers, for associates, and for communities across the country.”
