United States-Retail price war good for shoppers bad for farmers.
UNITED STATES-RETAIL PRICE WAR.
KrogerCo. Chief Executive David Dillon dismissed the notion of a "pricing war" going on between grocers and food makers, stating the supermarket chain allocates space to national brands and private-label products based on what customers buy.
"I don’t see this as a tug of war," Mr. Dillon told analysts on Tuesday, after announcing fourth-quarter financial results that were largely in line with expectations.
Grocers have complained about high prices sought by national food manufactures in recent months, even as fuel and ingredient costs have fallen. Food makers counter by saying they can’t pass along cost savings because they locked in contracts for commodities such as corn and soybeans last summer when prices were high.
Meanwhile, supermarkets including Kroger have showcased their own line of products, which net lower sales but produce higher margins. Cash-strapped consumers during the economic downturn have increasingly switched to private-label products. Other grocery chains have stated they plan to use stronger sales of private-label goods as leverage with food companies to negotiate lower prices.
As commodity costs fall, Mr. Dillon said he expects food makers to offer discounts through heavier promotion rather than cutting prices. He also said that as Kroger’s private-label commodity costs decline, the company wouldn’t necessarily lower product prices and widen the price gap with national brands.
"If we see some products that don’t improve on sales by lowering the price, we would argue that we have to keep that margin" and use the savings to invest elsewhere in operations, he said.
For Kroger’s fiscal fourth quarter ended Jan. 31, private-label products accounted for 27% of overall sales and 35% of total unit sales. "All in all, it is a Kroger brand story," Mr. Dillon said, adding that trend will continue as price differences exist between private-label and national brands.
Still, Mr. Dillon said shelf space and product selection are constantly adjusted based on sales performance, and he emphasized that it is for customers to decide between private-label and national-brand products.
The Cincinnati-based food retailer’s net income rose 8.1%, to $349.2 million, or 52 cents a share, from $322.9 million, or 48 cents a share, in the year-earlier quarter. Revenue rose only 0.1% to $17.26 billion, reflecting lower gasoline prices as well as private-label gains.
Analysts had predicted earnings of 52 cents a share and revenue of $18.33 billion, according to a Thomson Reuters survey.
Excluding fuel, sales at stores open five full quarters rose 3.8%. Including Kroger’s retail fuel operations, gross margin rose to 24.4% from 23.6%; margins would have fallen 0.08 percentage point excluding fuel.
The company projected earnings for the new year at $2 to $2.05 a share, compared with analysts’ mean estimate of $2.06, according to Thomson Reuters. Same-store sales, excluding fuel, are expected to rise 3% to 4%.
The retailer, which operates its namesake stores and others such as Smith’s, Fry’s and Ralphs, about six years ago began cutting its prices to compete better with discounter Wal-Mart Stores Inc., and that move is paying off, analysts say.
