Tuesday, September 17, 2013

Kroger’s Prospects Hinge on Price Leadership



It’s been as predictable as fall following summer.

Kroger’s long run of financial success in recent years, especially its record string of quarters with positive identical-sales growth, is a phenomenon that many observers have come to count on.


Each year, when financial analysts gather in SN’s New York offices for our annual roundtable, they remark on Kroger’s strong positioning. This year was no different.

 
“There’s no question Kroger has found the holy grail — that delicate balance between sales and margins,” said Gary Giblen, managing director of GMG Capital.


There were plenty more good things said about Kroger by the analysts, including about its strong ability to adjust selection to demand in each market.

However, the roundtable participants also pointed to some potential clouds on the horizon, and it’s worth taking a closer look. In particular, they noted Kroger’s strong price position could be vulnerable if competitors show continued seriousness about investing more in price.

Here’s an excerpt from that part of the conversation:

• Giblen: “What if Safeway were to take the money it got from Canada and put it into some real pricing? That could alter the environment for Kroger.”

• Andrew Wolf (managing director, BB&T Capital Markets): “That is the risk because that’s what’s happening at Delhaize and Ahold.”

• Scott Mushkin (managing director, Wolfe Research): “But Supervalu is doing it too. … We have everybody investing in price.”

• Wolf: “[Kroger’s] big point of differentiation has been that it’s only 10% above Wal-Mart while the next guy is 20% higher. However, if that next guy is only 12% higher and he’s right down the street from you, Kroger could have a problem."

Worrying about price differentials may not be keeping Kroger executives up at night. One analyst pointed out that Kroger probably spends the majority of its time thinking about privately held competitors, like Hy-Vee, H-E-B and Wegmans, over Wal-Mart.

But no company, not even Kroger, is assured its leadership position indefinitely.

Here’s what Giblen told me after the roundtable: “Kroger has to make sure it isn’t complacent. If they see Safeway or Supervalu closing a gap, they’ll need to reopen it.”

Price leadership is crucial to what produced Kroger’s success over the past few years. This bears close watching because the scenarios discussed here are possible.


Read More: http://supermarketnews.com/blog/kroger-s-prospects-hinge-price-leadership#ixzz2f9ez0BAc

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