Conquering Food Inflation
By all indications, rising food prices are, for the most part, being passed on to consumers. But grocers claim to still be finding ways to provide the value customers are increasingly demanding.
On Kroger’s second-quarter conference call with analysts on Friday, Rodney McMullen, Kroger’s president and chief operating officer, said that, since the first quarter, customers had become "even more value conscious when they shop," buying smaller baskets and selecting some lower cost items, including its private label items.
Added David Dillon, chairman and CEO, "Customers tell us their expectation for the economy are more pessimistic now than at any time this year. And for the first time, customers list instability of the financial markets as one of the top economic concerns. These examples illustrate how consumer sentiment changed during the quarter and are important because most discretionary spending is based on what people feel or perceive about the economy."
At the same time, product cost inflation, excluding fuel, was approximately 5.2 percent for the quarter. Along with higher fuel prices, that caused Kroger’s gross margins to fall for the fifth straight quarter.
Kroger indicated it continues to pass along product cost increases from suppliers and the overall competitive retail environment is rational. Said Mr. Dillon, "Our price checks show that most competitors are passing higher costs on to consumers, particularly in the center of the store."
Exceptions for Kroger included produce, where prices did not rise at the same pace as costs because of shortages due to a late growing season. Perishables are also more price sensitive than dry goods with consumers shifting "what they buy in a nanosecond." Mr. Dillon elaborated, "If bananas happen to be high this week, you start switching and say, ‘I think I’ll buy apples this week.’"
Regardless, with same-store sales ahead 5.3 percent in the quarter, Mr. Dillon said Kroger’s market share continued to grow due to efforts to lower prices. Kroger estimates that it has lowered its customers’ shopping bills by $2.1 billion per year, partly through its store brands.
At Goldman Sachs’ retail conference last week, several grocery retail executives agreed on the importance of retaining a value perception, according to coverage from Dow Jones Newswire.
Safeway’s Chief Executive Steven Burd said that it is critical to keep up with competitors’ discounts "because if people try in the short-term to take market share, and you don’t react, they will continue to pick away at you."
Whole Foods is pushing back more at vendors on the reasons behind price increases while at the same time being more creative with promotional dollars. Its CEO, Walter Robb, said, "It’s not about how many items you have on sale, it’s about which items and how compelling is the discount on the promotion."
Supervalu CFO Sherry Smith said the company is becoming "much better at how we’re driving our ads and driving our mark-down spend, doing it much more efficiently and effectively, and that helps us to invest in price."
- Kroger’s First Quarter Conference Call – Seeking Alpha
- Grocers Balance Higher Costs With Consumers Looking For Deals – Dow Jones Newswire/The Wall Street Journal
- Kroger: Cost Pressures Worry Investors – Barrons
Discussion Questions: How good a job are grocery retailers at communicating value to consumers in the current inflationary environment? Do you agree with the assessment that failing to respond to a competitor’s bid for market share in the short-term will lead to greater problems over the long haul?