NEW YORK -- Kroger Co. isn't sure how much impact inflation will have on its ability to raise prices, Michael Schlotman, senior vice president and chief financial officer, told a Lehman Bros. investors' conference here last week.
"It's been so long since we've seen any inflation, it's like a new animal to us, and we're not necessarily counting on it right now," he said. "Overall inflation would be good for food operators, but the inflation we're seeing now is mostly commodity-based and rather sudden, and it's hard to pass that along."
Schlotman said it's been especially difficult to pass along milk inflation, "and when the price goes up 50 cents on Saturday, it will be even tougher. But we'll wait and see what the competition does before we decide."
Kroger's goal this year is to continue to build on its previous momentum by making additional investments to sharpen pricing and reduce operating costs, Schlotman said. Doing so should enable the Cincinnati-based chain to close the price gap with Wal-Mart and other discounters, he added.
"Controlling costs while increasing sales per store is a huge part of the effort to close that gap," he said.
Controlling costs is particularly difficult in markets where Kroger employees are unionized, he noted, "but we think we've done a successful job getting the cost structure to operate effectively going forward."
"In the long run we see things we can do to control costs and invest in pricing to maintain the gap with conventional competitors while staying close to alternative formats," he said. "The rest comes at the bargaining table, where we need to get the unions to understand this is a situation both of us are in, and we believe we are on the right track in that regard."
Schlotman said he was unable to pinpoint how much Kroger will invest in price. "We want to continue to be more efficient operators and to turn some of that efficiency into being more competitive. But our responsibility to shareholders is to grow earnings, and at some point we must be able to turn that [negative] trend around.
He said Kroger is not providing earnings guidance for the year because of uncertainties resulting from the extended labor dispute in Southern California that ended in early March.
Kroger plans to invest $1.8 billion to $2 billion in capital expenditures this year, "which is about $200 million less than our original allocation," Schlotman said.
The company plans to open 100 to 110 new or expanded stores, complete 150 to 180 remodelings and add 70 to 80 fuel centers, for a square footage increase of 2% to 3%, he pointed out.
In response to a question, Schlotman said capital spending this year will be about the same as the 2003 allocation, "but that's less than we originally planned to spend for a variety of reasons. For example, our acquisition in Las Vegas of 18 stores from Raley's means we don't have to spend money over the next three to five years to open as many new stores there, which means we're able to focus on remodeling instead of new-store construction."
Schlotman said Kroger has no plans for any major acquisitions, "though we look at every opportunity that comes up, and if it's a good geographic fit, it may be of interest. But there are a lot of assets in our existing markets that would make nice incremental fill-ins -- not entire chains but parts of chains."
