Kroger (NYSE:KR) had a stunning first quarter. Same-store sales (excluding fuel) rose by 19%, digital sales climbed by 92%, and earnings per share improved to $1.52, up from $0.95 in the year-ago period.
The company was ready for the conditions caused by the coronavirus pandemic, according to CEO Rodney McMullen’s remarks in the Q1 earnings release.
“Under Restock Kroger [the chain’s three-year plan to lower costs], we have made significant investments over the last several years to establish a seamless digital ecosystem, strengthen Our Brands and our personalization capabilities, and to enhance product freshness and quality,” he said. “These investments helped Kroger deliver improved results in 2019, a strong start to the quarter, and very much came to the forefront as we provided our customers with the fresh food and essentials they have needed during the pandemic.”
Kroger, of course, was not planning for this type of national crisis. It was, however, ready because it had been investing in delivery, curbside pickup, and digital.
Cloudy skies ahead
The pandemic has improved Kroger’s performance, but a major danger looms when the coronavirus passes. Walmart (NYSE:WMT), Target (NYSE:TGT), and Amazon (NASDAQ:AMZN) each supercharged their grocery business during the pandemic. As a result, customers have learned all the different ways they can shop at the low-cost grocery options, including delivery and curbside pickup.
Kroger, of course, may have shown more consumers how to use its various grocery options, but ultimately it’s going to struggle with price compared to its biggest rivals. Right now, consumers are getting their groceries wherever they can, sometimes from multiple providers. With some items in limited stock, people have been forced to use multiple stores just to finish their normal weekly shopping.
Amazon, Walmart, Target, and even Costco (NASDAQ:COST) have all added customers during the pandemic. Some of those customers are likely also Kroger shoppers. When the pandemic ends, it’s possible that a mix of low prices and convenience could keep them from going back to the traditional grocery store.
Walmart, Amazon, Target, and Costco can afford to make less money on groceries in order to win market share. Costco has made keeping prices low its core company mission, and that could be very appealing to shoppers in a post-pandemic, pre-recovery environment.
Kroger admits that it can’t make accurate predictions for the future. That’s not uncommon — many companies have pulled their future guidance — but in this case, it might be a little more dire than the company is letting on.
Can Kroger succeed?
Kroger was doing just OK before the pandemic, and now its four biggest competitors have seen explosive growth in their grocery business. That’s acceptable in a market where people aren’t eating out much and are consuming supplies quickly because they’re largely stuck in their homes. Reality may be very different when conditions return to normal and people can curtail some of their grocery shopping.
Amazon, Walmart, Target, and Costco don’t fully break out their grocery sales, but all four have seen sales spike during the pandemic, driven at least partly by groceries. That’s potentially very scary for Kroger, because three of those players have very advanced technology that the grocery chain largely lacks.
The biggest positive for Kroger is that its pandemic profits can be poured into modernizing its business. That’s something the company has clearly done, but much work remains, and the competitiveness of its pricing is still a weakness.
“Kroger’s capital allocation strategy is to use its adjusted free cash flow to invest in the business and drive profitable growth while also maintaining its current investment grade debt rating and returning capital to shareholders,” the company noted in its earnings release.
That’s good news for shareholders, but the grocery chain faces a tough road forward. It’s facing some very formidable foes that can lower prices and even lose money to win market share. That’s not an enviable position to be in, and it could see Kroger lose market share post-pandemic.