Key Points:
- As we’ve seen and written about from Albertsons, moving forward, Kroger intends to put forth a more focused and straightforward consumer proposition: more EDLP and fewer promotions. More focused means doing less of the non-material; that results in a sizable reduction in corporate headcount and likely fewer banners in the years ahead.
- In addition to deeper and more EDLP, expect an enhanced perishables offering, more prepared foods, more flavors / localization, and more delivery. This evolution will challenge both grocery-anchored shopping centers and traditional packaged food suppliers (Big-Food).
Kroger’s investor day had three pieces of incremental information; it was also a high-profile event to demonstrate that CEO Greg Foran is well in control of the business and its future potential. (No surprise.) In terms of new information:
- Kroger is to find savings of $5B to invest into lower EDLPs. At 3.4% of non-fuel sales, the $5B figure is meaningful. $1B of the 5 is fewer promotions (less high-low).
- Foran’s targets for “success” are +3% comps, higher margins, and higher returns. The comp growth is to come from larger basket sizes, more households, and improved frequency. The figure compares to the industry’s average from 2014-2019 of +2.8% (CAGR), but it’s beneath the food-at-home CAGR of +3.5%. (Share loss to mass, club, and specialty.) Loyal readers will know that the larger basket size (UPT) will be the biggest challenge. Improving margins / returns is to come from efficiencies in e-commerce ($500M), greater savings / efficiencies in the legacy business ($500M), and more from retail media. Non-core businesses are to be divested.
- As part of the above, Kroger is proposing meaningful shifts in how it sources products, runs stores, manages costs, and invests in price. This is also true of Albertsons Inc., which in tandem, will make the environment even more challenging for national brand suppliers.
- Foran expects e-commerce to reach 30% of sales over time; hitting that milestone changes the characteristics of a grocery-anchored shopping center, and it creates a headwind to traffic for co-tenants. All things equal, over time this should increase the demand and leverage of limited-service operators over landlords. That in turn should also increase the share-of-stomach for away-from-home, from at-home. As a balance, expect grocers to continue to lean into enhancing their prepared-food offering and variety, and shelving more flavors / localization. (Food halls?)
Our stories on Kroger and Albertsons typically focus on traffic, particularly mid-week traffic, and units in the basket (UPT). Frequency and household growth haven’t been center because of the shift to 3P delivery (which messes up our data on these figures) and because a lot of household growth and visits have been “borrowed” by the retailers using hot promotions to goose the figures. (That’s why we center on UPT). Looking forward, the 340bps of price investment (Albertsons too) is going to suppress the comp-sales, and so, comp-volume will become more in focus. We also expect some market exits, where stores can’t contribute meaningfully to the targeted figures. Kroger intends to focus on the bigger opportunities and exit distractions.
The chart below plots visits to visits-growth (2-yr CAGR). Of the 2296 locations plotted, 452 delivered less than 200K visits during Q3 and were not growing. This includes 30 Ralph stores and 31 that are smaller banners. Last year, Kroger announced 60 closures over the next 18 months. 40 of these have been named and the closures are concentrated in the legacy Kroger banner in the South and Midwest, especially Houston and Atlanta. Harris Teeter is shedding stores in the dense DC and North Carolina markets, and Pick ‘n Save in Milwaukee. Per the chart suggests, there are more than 60 to consider. (Also, as a reminder, Kroger is also adding new stores, ~110 new stores by 2029.)
Compared to Albertsons Inc, Kroger’s growth-to-visits trendline is positively sloped vs. negatively. Kroger’s mean and upside standard deviation line are far above Albertsons’. Per bottom-left performers, Kroger’s 452 (20%) is above Albertsons’ 355 (18%). We suspect that Albertsons’ mean traffic CARG is higher because they’ve relied more heavily on hotly promoted items, which has driven more traffic, but a weaker UPT figure and comp-sales (Kroger’s 2-yr CAGR is +1.8%, and above Albertsons’ +0.7%).
