Key Points:
- New-ish CEO Greg Foran is after “making Kroger America’s favorite grocery,” and the results and data show some progress, despite the industry environment becoming more competitive and challenging.
- FQ2 sales results were soft as expected, and management lowered its sales guidance for the 2H. We estimate that basket size (items) declined 3.5% YoY, sequentially worse QoQ. (Kroger’s disclosures are limited.)
- Advan data shows that store performance is becoming more consistent, a key objective of Foran’s.
As previewed, Kroger’s comp-sales results were soft (+0.2%) despite positive traffic, e-Commerce +20%, and a boost from pharmacy. (Advan’s observed traffic was +2.3%.) National brands, lettuce (Cyclospora), and other blind spots were down, pulling the average number of items in the basket (UPT) lower. Management shared that unit growth was worse in the quarter due to higher gas prices and other worsening economic pressure on customers. House-brands outpaced national brands by +250bps. For example, its brand Private Selection sales increased 14%+ in the quarter. CEO Greg Foran said, “We also have an opportunity to become stronger merchants. Whether it's fresh foods or prepared meals, we can do a better job helping customers answer what's for dinner and creating excitement around great products in our stores.” “Opportunity” is a euphemism for the merchandise not being at the level that it needs to be.
If we assume +2.0% from higher prices (less than inflation’s +2.4%*), +70bps from pharmacy, and +2.3% traffic, that implies a 4-5% decline in UPT (that seems aggressive so we’d put it more in the 3-4% range). The decline is because monthly budgetary pressures are pushing customers to keep the basket size down (say under $55), but then hypothetically they come more frequently (which we don’t see in our data), and because of deal hunting and coupon clipping (same household spend $-wise, but spread over more retailers). Our data suggests it’s more the latter. As we saw with the dollar stores, the run-up in gas prices in May and July increased the relative attractiveness of retailers closer to home, which likely boosted Kroger’s traffic relative to big-box discounters. Late July and early August were the strongest period of Kroger’s traffic growth.
Foran has been in the job since early February with the goal of “making Kroger America’s favorite grocery” by improving store standards, service levels, merchandise value and consistency, etc. Club stores have been gobbling up market share since 2023. Kroger demonstrated progress on the club threat in CQ2 as cross-stopping to club stores (i.e. a Kroger customer also visiting a Costco, Sam’s, or BJs in the quarter) declined on a QoQ and YoY basis). When Foran started, he highlighted that there was a large dispersion between Kroger’s best stores and the not so good ones. Progress has been made (traffic) as shown in the following chart, where the CoV has consistently dropped since February. (July / August is likely distorted due to the spike in gas prices.)
In our preview, we shared that our focus was on mid-week trips vs. the total, because if Kroger’s convenience attributes begin to have less hold on households, watch out below. Moreover, this is the purchase occasion that Amazon same-day perishables, Walmart delivery, Costco delivery, etc. are after. On the surface, there was slippage. However, we’ve more thoroughly reviewed the data, and it appears that this quarter’s slippage was largely due to an outsized move in July. The weaker July may have been due to the timing of the 4th of July, which moved stock-up trips to Friday this year vs. being on Thursday last year. Our mid-week trip is defined as Tuesday, Wednesday, and Friday.
‘*FAH – Bureau of Economic Analysis PCE Food-at-Home
See our recent stories on the results of Kroger, Costco, Walmart, and Albertsons.
