Kroger Sees Value in Suppliers' Promotional Strategies

ELLIOT ZWIEBACH

SCOTTSDALE, Ariz. — Kroger Co. is comfortable with the way CPG vendors are handing price declines, Michael Schlotman, senior vice president and chief financial officer, said here last week.

“We've seen a few moves toward saner pricing in promotional allowance activity, if not in list-cost reductions,” he said. “We understand that a company wouldn't want to lower list prices and then raise them if they crept back up, so we're comfortable with what they're doing.

“Besides, our operators can't tell if the list price came down or whether a product came in on promotion. It hits the stores at a reduced price either way, so we're indifferent at the end of the day.”

The issue of manufacturer pricing has been a thorny one for retailers, many of which have voiced concerns about product costs as commodity inflation has waned.

Schlotman, speaking at an Arizona field trip sponsored by Morgan Stanley, New York, also said Kroger is No. 1 or No. 2 in 39 of the 42 markets in which it operates, due in part to its use of customer loyalty cards and the data mining it does in partnership with Dunnhumby, the United Kingdom-based technology company. “That data is important to have at a time when customer behaviors are shifting so rapidly,” he noted.

Besides allowing Kroger to design each store for its customers' specific needs, the data also enables it to do targeted mailings to 10 million customers several times a year “based on actual purchasing history,” Schlotman said. “As a result, 90% of each mailing is directed to specific household purchasing patterns — a level of personalization no other U.S. retailer can claim.”

In a written report last week following a meeting with Kroger executives, Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., said one differentiating factor in Kroger's relationships with CPG vendors is the product and consumer insights that evolve from the chain's partnership with Dunnhumby. “While private label is gaining market share vs. brands, Kroger views CPG companies as partners with which it collaborates closely,” he said. “Our channel checks indicate the sentiment is shared.”

Wolf also said Kroger believes the macro-economies in many of the markets in which it operates are more solid than is portrayed by the press for the country as a whole.

“Certainly, markets such as Michigan and Las Vegas are very tough for Kroger,” he noted, “but for many of its mid-American markets, the company believes the macro-economy is not nearly as severe.”

In his presentation, Schlotman said Kroger doesn't see anything too unusual in terms of the competitive climate. “There's always a market or two that's hotter or cooler than the others, but we haven't seen anything approaching a price war situation, as we did 10 years ago. The worst thing we face is in markets where a regional player is struggling, because, like a wounded animal, it can get irrational right before it files for Chapter 11.”

Schlotman said corporate brands account for 35% of units sold at Kroger, “but it would take a very dramatic shift for gross-margin rates to go up. That's not part of our long-term business strategy.”

In his written report, Wolf said Kroger looks at nearly all acquisition opportunities that come up, but is most interested in store locations in markets where it already operates.

For example, he said, Kroger has purchased some strip centers from real estate investment trusts, “where it will take over an optimal location from a vacating tenant upon lease expiration.”

He did not indicate where those REITs are, and Kroger officials could not be reached for comment.