Kroger: Wal-Mart focuses on price over other "components of retailing"

Kroger: Wal-Mart focuses on price over other "components of retailing"

US supermarket operator Kroger indicated today (23 March) that it expects to see promotional activity in the US market easing as the grocery sector moves from deflation to inflation.

Speaking at the Citi 2010 Retail Conference this morning, Kroger chief executive and chairman David Dillon said the company has seen margins come under pressure over the past six months due to price deflation and higher tonnage, which resulted in increased labour costs.

Nevertheless, Dillon insisted Kroger was successfully growing its earnings by focusing on higher sales volumes.

Kroger has looked to expand its number of “loyal households”, rather than appealing to “cherry pickers”, he added.

“We are trying to design a strategy that has sustainable sales growth that is not based on week to week specials to draw people into the store.”

Dillon suggested that poor economic conditions have resulted in the emergence of a "more frugal customer mindset" in the US. The “more frugal” customer is likely to remain, even as economic conditions improve, he suggested.

Dillon predicted that grocery prices will return from deflation to inflation “in modest form” this year. However, he indicated that the impact that this would have on consumer spending was hard to predict.

“When we have deflation in some of the meat categories or some of the other perishable areas, when the price returns to something that looks like inflation you have less tonnage,” he conceded.

However, he continued: “We don't expect that kind of an abrupt change.”

Instead, Dillon suggested that gentle inflation would lead to increased identical sales throughout the industry. This, in turn, could lead to an easing of the competitive environment as competitors become less promotional and aggressive on pricing.

“In the last six months some of the aggression that some of our competitors have had I think is a direct result of having negative IDs,” he said.

Dillon's comments come the week after it emerged that Wal-Mart, the world's largest retailer, was planning a large-scale price promotion campaign in a bid to reverse negative traffic trends at its namesake US stores.

“Wal-Mart really focuses, in my judgement, more on price than other components of retailing. It is part of their business model. Works well for them. It is based on them having a low cost of doing business,” Dillon said.

“That business model is in sharp contrast to the business model that we are carving out at Kroger. When we have talked about customer keys, price is one of the four keys. But our objective in price is to make sure that price is not an impediment for people shopping with us: we are not trying to make price the reason for people to shop with us.

"Our real emphasis is on the other three keys and I think that is the area we would contrast ourselves from an operator like Wal-Mart. Those other three keys are our people, our products and our shopping experience.”