Dillon Says Kroger Strategy Delivers in Recession, Will Keep Paying

Kroger’s approach to the market, honed in competition with Wal-Mart, is seeing it through the recession, and the company will continue to deliberately pursue the initiatives that have kept it strong, including tamping down prices and pushing private label.

Just released first quarter results put Kroger’s net income at 66 cents per share, up from 58 cents per share in the period last year and above the average 61-cent estimate of analysts polled by Reuters. Identical store sales – those in stores open at least a year and leaving out remodels and relocations – were up 3.1 percent without fuel.

Meat, deli/bakery, grocery and pharmacy sales did better than average. In the first two cases, David Dillon, Kroger CEO, attributed success to more folks eating at home. Private label sales gains and the company’s low cost generic prescription drug plan certainly weighed in on the latter pair.

Kroger’s expanding private label product line has been a critical asset in the recession. Dillon said in the conference call, “Our corporate brands enjoyed another quarter of double digit growth in both unit and dollar sales.”

In the grocery department, the corporate brands now represent over 25 percent of sales dollars and 35 percent of units sold. Beyond the everyday numbers, Dillon said, Kroger likes to look comprehensively at the products moving through the store in a tonnage measure, one that takes into consideration everything sold, whether tracked by units or weight, to get a big picture view of operations, That’s looking good, he said, noting:

Our overall tonnage growth in grocery was driven by corporate brands. National brand grocery unit sales declined slightly but at a slower rate of decline than we saw in the third and fourth quarters last year. Based on these results, it’s clear to us that the customers continue to look to our own high-quality store brands and the value that they offer, and. while this shift affects Kroger’s identical sales results since our stores brands typically carry retail prices significantly lower than the national brand equivalent, some as much as 50 percent lower, it is a tradeoff we’re happy to make for the long-term growth of our business.

The success in meat and deli/bakery is partly driven by the recession, Dillon admitted, but he also asserted that Kroger has been doing a better job in perishables and prepared food and that the customer is responding. He said the improvements Kroger has made and trends of frugality and enjoying family life at home that the recession is reinforcing would continue to influence customer behavior as the economy improves, to the ongoing benefit of the company. “I’m pretty bullish,” he said.

By that way of thinking, keeping prices under strict control will remain important for Kroger. A critical strategy emerged as the supermarket chain honed operations to compete with Wal-Mart earlier in the decade, one based on establishing a designated price range pegged to that of its supercenter competitor that allows Kroger to offer more service profitably and attract those consumers who are price conscious but prefer a more traditional grocery shopping experience.

In adopting that position, Kroger found it could plow through the food retailing market shoulder-to-shoulder with the supercenter operator and basically clear out a large place for itself in the fat middle where most everyday food shopping happens. The success of the strategy can be see in Kroger’s results and in the migration to more upscale and/or gourmet selling strategies by other major supermarket and supercenter chains including Safeway, Supervalu, Delhaize, A&P, Meijer and Target.

Besides using its second-biggest-food-retailer heft to get the best deals from suppliers, Kroger continues to look for ways to internally finance prices that keep it close to Wal-Mart. Rodney McMullen, Kroger’s vice chairman, noted:

We continue to make investments in lower prices for customers, as reflected by our supermarket selling gross margin, which declined 48 basis points compared to the same period last year. Improvement in shrink, advertising and warehousing costs as a rate of sales, as well as lower diesel fuel costs, funded Kroger’s investment in lower prices.