QuickWit Weekly (12/6) : Last Week’s Top Retail News & Kroger Crushes Q3

This past week Kroger surprised ‘the street’ with results that far surpassed expectations. Kroger’s CEO Rodney McMullen said on the investor call that new cooking skills & bigger holiday gatherings are lifting grocery sales.

While analysts have largely bet that habits would reverse this year and people would eagerly return to dining out Kroger’s CEO disagrees and called consumers’ penchant to eat at home a “structural” change as opposed to a temporary one.

If trends continue, according to CNBC, the country’s largest supermarket operator is on pace for its best yearly performance on Wall Street since 2014.

Q3 Financial Highlights:

Sales: $31.86B (+7.2% YOY) – beat expectations of $31.23
ID Sales: +3.1% (+14% 2 year stack) – beat expectations of 0.9%
Digital Sales: -4.7% (+103% 2-year stack)
EPS: $0.78 (+9.9% YOY) – beat expectations of $0.66
Alternative profit business delivered record third quarter operating profit

Key Takeaways:

Shopper Trends

Customers are demonstrating more “back to normal” behaviors and these trends are becoming “structural, and not temporary
They are eating more food at home because “it is more affordable, convenient, and healthier than other options plus you can do it as a family.”
Americans have gained new cooking skills and are having larger holiday gatherings, which means they need more groceries.

Our Brands (private brand)

Cost savings & premiumization are driving consumers to buy private brands
Home Chef became the newest billion-dollar brand
Our Brands launched 216 new items during the quarter
Plans to launch several innovative and unique products focused on helping customers enjoy the holiday season
Announced plans, with Kipster Farms, to bring the world’s first carbon-neutral, cage-free eggs to retail shelves under the Simple Truth brand
A new leader of Our Brands was announced

National Brands

National brand SKUs at Kroger have continued to decrease as the pandemic and supply chain disruptions have dragged on. Meanwhile, the company’s own brands have continued to grow SKUs and sales.

"Some of the national players have not reintroduced as much variety as they offered before COVID, so we have introduced some of that variety in our owned brands," 
- CEO Rodney McMullen

Associates

Hired 64,000 new associates during the third quarter
Average hourly wage will be greater than $16 by the end of 2021.
405,000 associates have completed diversity and inclusion training

“Our agility, and the commitment from our amazing associates, is allowing us to navigate current labor and supply chain conditions and provide the freshest food at affordable prices across our store and digital ecosystem.”
- CEO Rodney McMullen.

Challenges

Inflation could be a headwind – Challenges are ahead for Kroger next year, according to Edward Kelly, a retail analyst for Wells Fargo Securities. He said some of the lift in Kroger’s sales is coming from inflated prices.
Inflation is having an impact on Kroger customers, with 82% of consumers saying they are feeling the impact of inflation and one in four consumers saying they are not confident in their finances right now.

"We are leveraging our data and personalization to enable our customers to stretch their food dollars, we are delivering value with personalized promotions, big packs and dynamic holiday offerings. Our brands also offer our customers flexibility within their spending without compromising thanks to the wide variety of incredibly high quality and innovative products at various price points."
- CEO Rodney McMullen.

Kroger made a number of big moves in Q3:

Corporate

eCommerce

Our Brands

Partnerships

Alternative Profit

RetailWit Take: The “street” & analysts evaluate retailers primarily on the financials (which is a backward indicator of success) & models built off of those numbers and supplement that with a subjective evaluation of what was said. This is all great and an important part of predicting where retailers are going. Yet, we believe what was said in investor calls & press releases throughout a quarter as well as the trends of topics over time can better inform predicted future success so we ran the past 4 earnings transcripts though our proprietary solution that evaluates investor call transcripts and it shows some interesting insights into what Kroger’s thinking is.

Note: the bars are proportionate, i.e. what % of the conversation was about these topics. Also, these topics are not all inclusive, the tool just chooses the most important trending topics.

Over the past several years there have been three cornerstones to every Kroger earnings call: Customers, Associates and Corporate Strategy.

Starting left to right:

Associates & Employees: This topic returned almost to Q4 2020 levels when we were all in the throws of COVID lockdown and their associates were receiving highly deserved ‘hero pay’. Kroger, even before COVID and despite some stumbles along the way understand that their Associates are the front line to their customers and the better trained, paid & rewarded they are, the higher retention they will have which both drives customer satisfaction as well as a decrease in turnover costs. This quarter Kroger spoke of both significant hiring needs & initiatives but also about investment in employee benefits and new programs on diversity and inclusion. While not all the way to bright with investment in employees it is heading the right direction. It is never a bad strategy to invest in associates or customers.

As Richard Branson said, ” If you look after your staff they’ll look after your customers. it is that simple.”

“Our agility, and the commitment from our amazing associates, is allowing us to navigate current labor and supply chain conditions and provide the freshest food at affordable prices across our store and digital ecosystem.”
- CEO Rodney McMullen.

Corporate, Leadership & Strategy – Q3 saw a rather large spike in this being a majority of the conversation; this includes topics like corporate strategy, internal initiatives & the leadership team vs external forces impacting their business like COVID, competition or the economy. This demonstrates confidence in themselves vs looking external to explain their business situation.

Shopper & Customer – “Customer First” has been the foundation of Kroger’s strategy for almost 20 years and while supplementary strategies, schemes & solutions have come and gone, Kroger continues to ‘put the customer central in every decision.’

As Kevin Coupe put it,  "an overarching strategy on which Kroger (and every retailer) needs to focus – being on the consumer’s side. Whether creating eat-at-home offerings that appeal on nutritional or economic grounds (or both), or keeping prices in check in segments where it matters, that appears to be what Kroger is doing. It is all about defining – and continuing to redefine – “essential” for tumultuous times."

Historically there has been a 4th topic covered, ‘data and insights’, which seems to be returning to the conversation which is a really good thing as data & analytics is an area of competitive advantage at Kroger but also one that the rest of the industry is quickly catching up on. A couple other ‘pops’ to call out are ‘merchandising’ and ‘supply chain’ – neither of which are surprising with the global supply chain challenges and with the return to in store shopping.

Last word: it is also very important to look at these topic trends relative to competition, which we have – so stay tuned as we begin to compare and contrast other retailers.

Now onto last week’s Top Retail News Stories.

CVS Health & Microsoft announce strategic alliance

Since the start of the COVID-19 pandemic, organizations in every industry health care in particular have grappled with the need to adapt quickly. CVS Health is going to outsource some of the heavy lifting as they have launched a new strategic alliance focused on developing innovative solutions to help consumers improve their health. This move will empower over 300,000 CVS Health employees with tools to better serve more than 100 million people.

Food Lion opens their 75th store of the year

Food Lion currently operates 1,100 stores, and has been expanding – opening 75 stores so far this year. A division of Ahold Delhaize USA, these new stores feature an extensive product assortment, including fresh in-store made sushi, a self-service hot and cold food bar, in-store fresh-cut fruit and a wide variety of affordable and easy “grab-and-go” options for meal solutions.

Macy’s considering splitting their digital business

Macy’s has said that online sales are typically two to three times higher in markets where it has stores versus those where it has no presence. There is strong consideration for the retailer as they consider spinning off their e-commerce unit as a standalone business.

Spotify places listeners in ‘2021: The Movie’ for data-driven Wrapped campaign

One of our favorite times of year is when Spotify dives into the data which is a mix of two of our three passions (data & music), assuming you guessed retail is the third? (bonus points if you can figure out who below is listening to 36K minutes of music vs 18k!)

Anyway, the 2021’s theme based around users continuing to express themselves in unique ways despite the absence of a sense of normalcy. This has become a data-driven company tradition, which started in 2016, and has proven to resonate with consumers eager to discuss their tastes with friends and followers while reflecting on the year.

Dollar General plans to build 1K new Popshelf stores over next 4 years

Dollar General has, obviously, found a new store format that is working for them as they announced they are planning to build an additional 1000 new stores in the coming years. If you aren’t familiar with the format, Popshelf is Dollar General’s answer to what many view as a hole in the market. The retailer is fashioning a higher-end discount store that uses a treasure hunt format and higher price points to target value shoppers of higher incomes than the traditional dollar store.

Amazon repeats as Black Friday “Champs”

Amazon did it again by capturing the highest share (17.5%) of Black Friday 2021 spending, according to Numerator. The total spending reflects all retailer banners across fast-moving consumer goods channels, eCommerce, apparel and specialty stores. Online sales accounted for 38.1% of overall sales on Black Friday, up 11.5 points from last year. Amazon was the top retailer for all generations except Gen Z, who spent more of their Black Friday dollars at Walmart (12.7%).

Kroger adds new leadership on Private Label

Kroger appointed Juan De Paoli as vice president of its private label division. De Paoli previously served as senior vice president of private label for Ahold Delhaize. He also worked at private label manufacturer Topco Associates and as a director in H-E-B’s own brands department.

Toys R Us is back, and opening a flagship store

The two-level, 20,000-square-foot location at the American Dream megamall in New Jersey is set to open in the middle of December. Toys R Us is taking another shot at opening up a store in the United States after its comeback plans were thwarted earlier this year due to the Covid pandemic. In January 2021, the last two remaining Toys R Us stores in the U.S. closed as shopper visits to malls dropped off during the health crisis.

Edgewell acquires DTC razor brand Billie

Edgewell, the maker of Schick, Wilkinson Sword and Skintimate, has acquired DTC razor brand Billie for $310 million in cash. Billie will continue to be led by its co-founders, Georgina Gooley and Jason Bravman. The deal comes after the FTC had recently blocked two deals of similar nature: Edgewell’s acquisition of Harry’s and P&G’s acquisition of Billie.

Burger King puts limits on “Your Way”

Looks like the definition of “Having it Your Way” just got narrowed down. Burger King’s performance has been lagging behind the competition, and they announced will cut menu items in the U.S. to speed up its drive-thru service. Jose Cil, CEO of parent company Restaurant Brands International, said cutting down service times is an “easy win” to drive sales volume.

Ahold Delhaize unveils growth plan

The plan is expected to generate an incremental $11B in sales by 2025. It consists of four components: (1) “…developing deeper digital relationships”, (2) “accelerating… omnichannel transformation”, (3) “leading the transformation into a healthy and sustainable food system”, and (4) “leveraging the company’s portfolio to create the ultimate ecosystem for smarter customer journey’s”.

Walmart CFO to leave company

Brett Biggs will be leaving Walmart after 22 years. Having held multiple senior level positions within Walmart and Sam’s Club, Brett has helped shaped the direction of Walmart and is leaving while momentum is strong.

Major Retailers and CPGs receive FTC supply chain order

The FTC’s order will require supply chain data from top retailers and CPGs. The cause? The FTC is looking for insights into causes behind supply chain disruptions—and, of course, any tomfoolery that might be having behind the scenes from these firms. The firms are: Amazon, Associated Wholesale Grocers, C&S Wholesale Grocers, Kraft Heinz, Kroger, McLane, Procter & Gamble, Tyson Foods and Walmart.

CVS rolls out SpokenRX

A new, propriety solution was released from CVS. SpokenRX will allow patients to have their prescription details read aloud. It was developed in partnership with the American Council of the Blind. Stellar move from CVS for accessibility and inclusivity.

Boxed acquires MaxDelivery

Boxed, a pure-play eComm retailer, is acquiring MaxDelivery—positioning the company for on-demand, fresh delivery. Boxed will gain the benefits of dark stores, scale, and rapid fulfillment as a result.