Kroger Co. does not expect the synergies from the merger of Safeway and Albertsons to have much short-term impact once the deal is completed late this year, J. Michael Schlotman, Kroger CFO, told an investor audience Tuesday.
“There are a lot of things that happen in the [next] year that will help everybody understand exactly what the landscape is going to wind up being like,” he told the Bank of America Merrill Lynch Consumer and Retailer Conference in New York.
“Sure, it will generate a lot of synergies, but there’s going to be a fair amount of interest expense to cover, so it remains to be seen how much net synergy dollars they have left to invest in competitive activities versus giving a return to the equity investors, along with the debt load they will carry, plus interest on the debt.”
In other comments:
• Schlotman said adjusting shelf allocations to meet changing consumer needs often requires cooperation from teams in different departments of the store.
“In our produce departments, for example, we’ve determined the best way to run them is to actually have a little bit less produce on the floor, even when sales are strong, and to bring it up from the back cooler more regularly because it stays fresher in the back room. That winds up freeing up some refrigerated space in the produce department, and some stores are moving orange juice out of the dairy section into the produce section, which frees up incremental space for a category like yogurt, where we are under-allocated.
“Now one of the battles you encounter in moving orange juice, a grocery item, into produce, which has its own fresh-squeezed orange juice, is that you get people in a little bit of a turf war because the produce guy doesn’t want to give up space to the grocery guy. But when you explain that they have Kroger stock options, not produce stock options or grocery stock options, they get it pretty quickly. So when everybody steps back, everybody realizes what’s good for the customer is good for us overall.”
• Although the economic downturn has reduced the basket size on each trip, Schlotman said the fact people shop more frequently means they end up spending more per month.
“Through our loyalty card program, we know our households are spending more with us on a monthly basis even though each trip is a little bit smaller. We probably would have done some silly things trying to reverse a trend that really wasn’t a trend that needed reversing because it was just a shift in shopping habits.
“Instead of doing a stock-up trip and putting things in the freezer, customers are stopping in for a couple or three days’ worth of fresh product, keeping it in the refrigerator and then using it closer to the purchase date.
• Dunnhumby is in the background of all decisions, Schlotman said. “They help us understand what the customer wants, whether it’s a pricing initiative in a certain part of the store or when we’re trying to upgrade our message with a few new pricing offerings as well. Dunnhumby helps us understand to what depth and breadth we need to make price investments and what price points drive the most optimal customer penetration in a category.
“You can go too low on some categories and you wind up investing in price that really doesn’t drive incremental operating profit dollars. Dunnhumby really helps us optimize every one of the programs.”
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