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Kroger Just Sneezed-What Does It Mean For Supermarkets?

Kroger just announced its first quarter results. On the surface, they weren’t terrible, with same store sales dropping just 0.2%. The stock cratered, however, on a downbeat forecast that lowered full year earnings significantly from prior forecasts as the company suggests intensifying price competition and wage pressure will lead to tougher times ahead.

Despite this, Kroger remains one of the industry’s better performers and suggests full year comps will remain positive, even as its 13 quarter comp streak ends.  But, Kroger has clearly sneezed and it is likely that the entire industry is catching a cold.  Other publicly traded food retailers took stock hits as well.

It is an untimely coincidence that Kroger’s quarterly earnings came on the same day that German discounter Lidl opened its first 10 stores to great fanfare in the U.S., and the day before Amazon announced their purchase of Whole Foods.  Supermarket operators are facing an unprecedented series of events that are putting pressure on growth and profit:

  • After the news of Kroger pursuing a potential acquisition of Whole Foods, the stunning news of Amazon’s purchase of Whole Foods and how this will impact the industry overall is a show stopper. Kroger has become a major player in the natural and organic foods segment in recent years and that is about to change. Amazon’s impact will greatly increase its influence and importance in the food retail arena. Branding an on-line fresh service with Whole Foods brand and perishables know-how could be a game changer.
  • Intensifying competition from other channels, including the rise of discounters like Aldi and Lidl who are growing explosively at the same time the traditional channel is retrenching. Price pressure is intensifying.
  • Growth in e-commerce, which is stealing trips away from the center store. Grocery e-commerce has traditionally lagged well behind the rest of retail but efforts from Amazon, Jet.com (Walmart) and others is driving a far greater rate of growth.
  • Deflation reached nearly a 50 year high, with downward pressure on meat and dairy products depressing dollar sales at supermarkets. While deflation shows some signs of moderating, there is still no natural inflationary help.

Taken together, I expect that supermarkets will continue to face tough times ahead as market share will continue to come under pressure. Kroger is taking the right steps to combat these pressures. They are aggressively expanding order on-line, pick-up in store, investing in pricing and CRM and working on labor efficiencies. All the right things strategically but will likely lead to short to intermediate term profit pressures.

Neil Stern for Forbes

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