Kroger fresh, digital, own-brand strategies gain momentum in Q3

In announcing strong fiscal 2022 third-quarter results, executives at The Kroger Co. on Thursday said the supermarket giant is making strides with its “Lead with Fresh, Accelerate with Digital” growth strategy.

Cincinnati-based Kroger reported that, for the quarter ended Nov. 5, sales climbed 7.3% to nearly $34.2 billion from $31.86 billion a year earlier. Excluding fuel, which has seen elevated but relaxed pricing in recent months, sales were up 6.4% year over year. That compared with a net sales gain of 7.2% (2.9% excluding fuel) in the fiscal 2021 quarter.

“We have momentum entering the fourth quarter, and we are continuing to consistently deliver a full fresh and friendly experience for our customers throughout the busy holiday season. It is clear that inflation remains top-of-mind for our customers and for our company. We are laser-focused on helping our customers by providing fresh and affordable food,” Kroger Chairman and CEO Rodney McMullen told analysts in a conference call Thursday morning.

Source: The Kroger Co.

Albertsons merger update

McMullen said he had no material updates on the pending $24.6 billion merger deal with Albertsons Cos., which was announced Oct. 14. However, he commented on his appearance Tuesday with Albertsons CEO Vivek Sankaran at a Senate Judiciary subcommittee hearing on the planned transaction.

“I had the opportunity, and Vivek did as well, to testify before the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights this week," he told analysts. "I shared with the senators that our merger will lower prices for customers starting day one, continue investments in our associates and stores and customer experience, and do even more in our communities than either company can do alone. We believe this merger will allow us to fulfill these commitments to our customers, our associates and our communities well into the future.

“We are making early progress on our integration planning as expected, and we continue to engage with all of our stakeholders and regulators,” McMullen added. “We are advancing our road map to close the transaction in early 2024. We look forward to working with the regulators as they review the transaction and do not have a substantial update at this time.”

At the Senate hearing, McMullen said Kroger and Albertsons are "advancing our road map to close the transaction in early 2024." / Photo: U.S. Senate

Shoppers eye food-at-home savings

In Q3, the ongoing food-at-home trend from the pandemic remained a catalyst for sales and shopper engagement, McMullen noted. Kroger customers, too, are cashing in on savings offers via promotions and the company’s loyalty program, as the retailer grew loyal households by 2.5% through personalized offers.

“Research shows cooking at home is still three to four times less expensive than dining out, and we are seeing more customers engage with Our Brands [private label] as a way to stretch their food budgets without compromising on quality. During the quarter, we continue to see many of the same shopping trends we observed throughout the year,” he explained. “In addition, customers are downloading and redeeming digital coupons and continuing to showcase their cooking-at-home skills learned during the pandemic. Our breadth of choices, quality of fresh products and the value of our personalized promotions are helping customers navigate the current environment, and our customer-focused approach is working.”

Digital coupon downloads grew 32% from a year ago, McMullen reported. “We continue to use our leading data-science capabilities to develop unique customer insights and offer targeted promotions on the products we know they love,” he said. “We anticipate these interactions will continue through the holidays, with customers expected to realize more than $200 million in savings from our highly personalized digital offers.”

Customers also have been turning to Kroger’s Fuel Points program for savings, according to Chief Financial Officer Gary Millerchip.

“Fuel is an important part of our overall value proposition, and our fuel rewards program remains a key differentiator to help customers stretch their dollars during a period of high inflation,” Millerchip said in the call. “Fuel rewards engagement remained high during the third quarter and led to gallon sales that outpaced the market. The average retail fuel price was $3.84 this quarter, versus $3.24 in the same quarter last year. And our cents-per-gallon fuel margin was 50 cents compared to 42 cents in the same quarter in 2021.”

Kroger has been adding Our Brand products each quarter, including 147 new items in Q3. / Photo: The Kroger Co.

Private-label expansion, fresh initiative spur ID sales

Third-quarter identical sales advanced 6.9% excluding fuel, building on a 3.1% uptick in the prior-year period. Millerchip cited double-digit ID growth in the Our Brands private-label portfolio as a key contributor.

“Our Brands continue to resonate deeply with customers, as sales grew 10.4%. The outstanding quality and value offered by these exclusive to Kroger products is an important differentiator in our go-to-market strategy, and this is especially true during periods of high inflation,” he said. “As we shared at our Investor Day in March, Our Brands products are margin accretive and represent a key pillar in our strategy to grow profitability while also delivering greater value for customers.”

Kroger launched 147 new own-brand items in Q3, including holiday season products and plant-based, ready-to-cook meals under the Home Chef meal kit label. McMullen said Our Brands pet food products saw “tremendous growth” during the quarter, and the company is expanding its new Smart Way value brand.

“We continue to expand and diversify Our Brands portfolio at every price point. After launching Smart Way as our opening price-point brand last quarter, we introduced several new Smart Way products this quarter and plan to roll out additional products next quarter,” he said. “These products are meeting the needs of our customers on a budget, and we’ve already seen 2 million households to purchase Smart Way products.”

Kroger’s End-to-End Fresh Produce initiative has been a sales driver as well. Through the program, Kroger leverages data, science and partner collaboration to sharpen produce distribution, reduce the time from farm to table and ensure supply-chain stakeholders are working together to lower the age of product, minimize dwell time in the distribution network and maintain the cold chain. In stores, the retailer is boosting vendor accountability by updating technology that provides real-time data to suppliers to deliver more days of freshness.

The End-to-End Fresh Produce effort has rolled out steadily to Kroger Co. stores, from 355 stores certified at the end of Q1 to 864 in Q2 and 1,252 in Q3.

“Fresh remains important in today’s environment, and we are committed to bringing the freshest products to our customers' tables. Our ‘Fresh for Everyone’ strategy is grounded in keeping products fresher, longer. Our End-to-End Fresh initiative is transforming these efforts,” McMullen told analysts. “At these locations, we see higher fresh sales and identical-store sales. With these impressive results, we continue to roll out the initiative nationwide. A part of our End-to-End Fresh initiative is our supply chain, where we continue to invest and enhance operations. We are improving productivity and maximizing our fleet by controlling more product movement across our network. Most importantly, we are using our data and science to maximize freshness for our customers.”

The fresh optimization program, in part, reflects that fresh offerings are the No. 1 determinant of consumer store choice. / Photo: The Kroger Co.

Enhancements in digital, retail media

E-commerce sales jumped 10% in the third quarter, fueled by 34% growth in delivery sales, including Kroger Delivery service from stores and Ocado-powered fulfillment facilities and from the Kroger Delivery Now convenience service with Instacart.

“Our industry-leading Net Promoter Scores in Kroger Delivery are driving new customer engagement and best-in-class retention rates,” Millerchip said.

The third quarter also included the launch of Kroger’s first in-app flash sales, which enable customers to clip digital offers directly from their cart.

“Improving the customer experience is always top of mind for us, and Kroger Pickup now offers three-hour lead times at all stores in our network, with as little as one-hour lead time in some areas,” McMullen added. “We’re investing in digital growth initiatives, including expanding our Kroger Delivery network in new and existing geographies. We are also growing Boost, our one-of-a-kind membership program. This is the industry’s most affordable membership program, and it is foundational to growing our delivery service. We are incredibly pleased with our customer response to Boost as we rolled out the program nationwide earlier this year.”

A new digital enhancement also debuted last month in the Kroger Precision Marketing (KPM) retail media business: CPG partner advertising via Snapchat. “Advertisers are now able to use Kroger’s proprietary capabilities to optimize Snapchat’s immersive ad formats,” said Millerchip. “We are constantly innovating to expand our reach, and KPM recently increased its programmatic advertising marketplace capabilities to include video and one of the fastest-growing digital media sectors, Connected TV. These new frontiers will provide exciting future growth opportunities for KPM.”

Earnings top Wall Street’s estimate

At the bottom line in the third quarter, Kroger posted net income of $398 million, or 55 cents per diluted share, compared with $483 million, or 64 cents per diluted share, a year earlier. Excluding adjustments for investment losses and legal and merger-related costs, adjusted net earnings were $643 million, or 88 cents per diluted share, versus $589 million, or 78 cents per diluted share, in the year-ago period.

Analysts, on average, had forecast adjusted EPS of 82 cents, with projections ranging from 75 cents to 95 cents, according to Refinitiv.

Looking ahead, Kroger now expects full-year 2022 ID sales growth of 5.1% to 5.3% (versus 4% to 4.5% in previous guidance) and adjusted EPS of $4.05 to $4.15 (versus $3.95 to $4.05 previously). Before Kroger’s Q3 report, Wall Street’s consensus forecast was for fiscal 2022 adjusted EPS of $4.08, with estimates running from $3.97 to $4.38, according to Refinitiv.

“Our go-to-market strategy continues to build momentum in our business and gives us the confidence to again raise our full year guidance,” Millerchip said in the call. “Our third quarter and year-to-date results highlight the strength of Kroger's value creation model, which has proven to be resilient in different operating environments,” he added.

Kroger faces a murky economic and consumer climate going forward, according to CFRA Research analyst Arun Sundaram.

“We believe it will be difficult for Kroger to generate operating leverage in 2023, with food inflation now moderating but wage pressures continuing. In addition, EPS growth will be harder to realize now that share repurchases have been paused due to the pending Albertsons merger,” Sundaram said in a research note on Thursday. “Kroger doesn’t seem to be worried about the competitive environment over the near term, but we think promotional activity will intensify next year now that food disinflation has begun and consumers are trading down to private label. Weakening fuel margins will also likely be a headwind next year.”

*Editor's Note: Article updated with analyst comment.