The news
Kroger is cutting shelf prices while its gross margin is thinner than a year ago and diesel sits at a record $5.97 a gallon. The money is coming from suppliers and its own plants instead.
“Sourcing and savings came in ahead of plan this quarter,” CEO Greg Foran said on the fiscal second-quarter call. Every dollar taken out of cost goes back into price, he said, market by market.
Identical sales excluding fuel rose 0.2%. Kroger cut its full-year forecast for that measure to 0.2% to 0.8%, from 1% to 2%, per its release. So the price cuts have not moved sales yet, but Foran is funding them anyway.
What changed
Suppliers selling into Kroger now have to justify a cost increase before its merchants accept it. Increases that hold up get worked through. The rest get refused.
“What we do not want to get in, is a situation where people can just turn up and put prices up and not have full justification for that sort of increase,” Foran said.
Smart Way: the opening-price-point store brand Kroger folded 16 older labels into grows from about 130 items to 1,000 over the next year or so. Some are already on shelves.
Our Brands: store-brand penetration rose about 50 basis points in the quarter. Our Brands grew faster than national brands.
Own plants: Kroger makes store brands in 35 of its own plants.
Tariff refunds: “pretty modest,” CFO David Kennerley said, and they went straight into price too.
How it works
A merchant can only refuse a cost increase if the shelf still has something to sell at the old price. Smart Way is built for exactly that. When a national brand’s staple comes in with an increase the supplier cannot justify, the store-brand version at the lowest tier is the alternative on the same shelf.
Kroger makes those store brands itself. “We control the costs and quality in a way most retailers cannot,” Foran said. A grocer that buys its store brand from a co-packer has the same shelf alternative but less control over what it costs.
That is the precondition. Asked how Kroger handles supplier inflation, Foran pointed to Our Brands and the Smart Way expansion. The refusal and the store brand are the same tool.
Foran also named where else the cost is coming from after his first weeks in the job: unknown shrink, out of stocks, goods not for resale and the cost of imported goods. All four, he said, were “bigger than what I thought.”
The counter
The savings have not reached the margin line. Gross margin was 22.4% of sales, from 22.5% a year earlier. Kennerley named higher shrink and higher transportation costs among the reasons.
The shrink was “mainly in fresh.” Part of it came from the Cyclospora outbreak traced to iceberg lettuce, where customers pulled back from produce well beyond the recalled items.
Diesel is the bigger one. That $5.97 is the highest weekly average the Energy Information Administration has recorded, up about $2.20 in a year. Kroger runs its own fleet, so it pays that price directly.
Kennerley has already spent part of the savings on it. “We have assumed that we will get some incremental headwinds from diesel and freight costs through the balance of the year,” he said. He still expects FIFO gross margin to rise for the full year. So the first claim on the sourcing savings is the fuel line. The shelf gets what is left.
Walmart is running the same play with more scale. Its US business ran more than 11,000 rollbacks in its latest quarter, up from 7,200 the quarter before. CEO John Furner said its price gaps to conventional grocers “continue to widen.” Kroger’s shelf prices improved against competitors this quarter, Foran said, but from behind.
What’s next
Foran sets out the full plan at an investor update in October: how Kroger grows sales and how cost savings fund the customer experience. The test for this quarter’s claim is whether FIFO gross margin rises for the year with diesel where it is. If it does, the supplier rule and the plants are covering both the fuel and the price cuts.
