Kroger's results suggest a bumpy road ahead for the company
- Kroger’s decision to cut its earnings forecast last week signals that significant pricing competition and financial challenges are ahead for the retailer, according to Forbes’ contributor Neil Stern.
- Discounters Aldi and Lidl, as well as Walmart, will put significant pricing pressure on Kroger in the months and years ahead, writes Stern. Amazon’s purchase of Whole Foods also could blunt Kroger’s momentum in natural and organic foods as the e-commerce giant leverages its significant funds and expertise to boost the Austin, Texas-based retailer.
- However, Stern believes Kroger is taking the right steps, including expanding its e-commerce platform and focusing on labor efficiencies. He said the retailer eventually should regain its footing.
While Kroger’s top-line results were respectable, competitive pressures spurred the company to cut its profit outlook by 10% on the year, from a range of between $2.21 to $2.25 per share to $2 to $2.05. It's stock price plunged 19% on Thursday as a result, then fell another 13% on Friday following the news that Amazon was buying Whole Foods for $13.7 billion.
Kroger could have kept its original forecast intact, considering its earnings were in line with expectations and key measures such as comp-store sales were up. But the company is choosing to invest in wages, price cuts and promotions to protect its market share as new and old competitors turn up the heat on the Cincinnati-based chain.
As Kroger’s chief financial officer Michael Schlotman told CNBC, it’s more expensive for the company to lose its customers and then have to win them back. Kroger has been particularly price competitive on staples like milk and eggs during the current deflationary period, company officials said, while broader initiatives are starting to roll out. Last month, the chain announced price cuts on more than 3,000 store items in its Columbus division.
"We have no intention of giving up the momentum we've gained on low prices," Rodney McMullen, Kroger's CEO, said during last week’s earnings call. "Many of the things we are doing to pull costs out of the business today set us up for savings in the future. We will only further intensify our process improvement efforts."
Kroger is a savvy retailer that has succeeded to this point through forward-looking strategy. But considering the pricing threats the company faces from Wal-Mart and discounters Aldi and Lidl, many analysts are doubtful that Kroger can continue to stay ahead of the headwinds impacting traditional retailers.
Taking a macro view, Kroger’s poor results signal ever-darkening clouds for traditional retailers. If the best among them is struggling, that certainly doesn’t bode well for the others, many of whom also have invested in pricing and fresh-focused promotions.
But as Forbes’ contributor Stern notes, don’t count Kroger out — the company is well-positioned in key areas such as e-commerce, digital pricing, fuel center growth and private label that are areas of growth within the industry.
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