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Are Conventional Grocers 'Doing Just Fine'?

Written by Tom Ryan

According to Mike Schlotman, Kroger Co.'s CFO, the "full-service grocery industry in the United States is very healthy."

Speaking in early April at a Morgan Stanley investor conference, Mr. Schlotman was addressing perceptions around conventional supermarkets on Wall Street and elsewhere. Specifically, he was asked, after 37 straight quarters of comp-store gains, had the "gap closed enough to Walmart" to enable Kroger to ease up on the pricing investments that continually compress gross margins.

The CFO answered that while Wall Street focuses on gross margin rate, Kroger focuses on "gross margin dollar generation." He said Kroger is going to have a "permanently lower gross margin rate." However, as long as comps are improving enough, it serves Kroger's goal of lifting gross margin dollars.

And he claims the formula works. Wall Street's perception that the traditional supermarket "industry is dying" is partly due to publicly held companies that are struggling or have left the marketplace. On the private side, however, "Publix, H.E.B, Hy-Vee, Wegmans, WinCo, all of these companies are great full-service grocery operators doing just fine like we are."

He noted the low-end isn't the "automatic ticket for a success," pointing to the struggles at Save-A-Lot. Conversely, the high-end isn't always a winner, pointing to Wild Oat's sale to Whole Foods. Mr. Schlotman added, "The fact of the matter is, the high end is doing just fine, the low end is doing just fine and where we operate is doing just fine."

The "formula for success," across each channel positioning, is pleasing customers each time they walk through the door to make sure they come back. As such, Kroger isn't responding directly with lower prices to Walmart, but to shoppers' needs.

"I think where people have fallen by the wayside is they focus on numeric results rather than satisfying the customer," said Mr. Schlotman. "If you have a whole bunch of satisfied customers, the numeric results will follow."

Around the similar theme, Safeway's stock lost 12.2 percent last week after first-quarter earnings missed expectations due to higher-than-expected gross margin erosion. Price inflation was lower than expected and rival traditional supermarkets or discounters didn't pass on those costs. Said Steven Burd, Safeway's CEO, on a conference call, "You have to react."

But Mr. Burd believes the overall competitive landscape has been "pretty rational" over the last 20 years, and downplayed any signs of it heating up.

"What I would say is, relative to the fourth quarter, it's like the temperature in your living room. In the fourth quarter, it was 70, and in the first quarter it was 71," he said.

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