Kroger: '09 Was Big Surprise

JON SPRINGER

DALLAS — If Kroger could do 2009 all over again — not that it would want to — it would do things differently.

Specifically, the Cincinnati-based retailer acknowledged that having made all of its planned price investments for the year during the first quarter left it unusually vulnerable when competitors increased their price investments later in the year. Keeping up with their investments in the end hurt the bottom line for Kroger Co., which revealed earnings and gross margin declines during the second half of the fiscal year, which ended Jan. 30.

“In hindsight, if we had to do it all over again we would have put our pricing investments at a more ratable basis to allow us … to be able to have the money to react to another competitive environment,” Michael Schlotman, chief financial officer of Kroger, said during the Morgan Stanley Retail Field Trip here last week.

Schlotman's remarks reiterated the stance of company officials during their review of fourth-quarter results earlier this month. He said Kroger was surprised not only by the worsening of economic conditions last year but by how the competitive environment intensified as retailers chased a diminishing supply of grocery dollars.

“The biggest issue we had in 2009 is we didn't keep our powder dry after the first quarter to allow for reaction to competitive changes and the macroeconomic things that persisted throughout the year,” Schlotman said. “There was a stronger reaction to a lot of our pricing programs than we had experienced in the last four or five years.”

Not keeping up with competitive reaction risked sending the wrong message to Kroger shoppers, Schlotman said. “It's difficult to get a positive [price] perception. It's very easy to change it to a negative perception in a hurry.”

Schlotman, however, insisted the company had performed “exceptionally well in a number of areas,” earning high marks from customers in terms of service, product quality, shopping experience and price — four keys of the company's “customer first” strategy. These improvements led to increases in the number of loyal shoppers, overall tonnage and market share during the fiscal year, Schlotman said.

Schlotman declined to comment specifically on reports last week indicating that Wal-Mart would take a more aggressive price position, noting that analysts had some “conflicting reports” about the strategy. “We continue to be happy with where we are on a relative price basis to the lower-price operators in our markets,” he said.