The supermarket that beats Wal-Mart's prices
Posted
Sep 05 2008, 03:23 PM
by
Anthony Mirhaydari
Rating:
A weakening employment outlook only adds to a dismal economic picture for millions of Americans. Retailers have quickly realized that price has superseded factors like quality and brand as middle-class consumers struggle to maintain their lifestyle. Increased interest in private-label products and promotional items is a testament to this.
Month after month, we are reminded of how Wal-Mart's business model is perfectly positioned for the current recessionary environment. But Wal-Mart isn’t the only beneficiary. Although some grocers have gone up-market in recent years, Kroger has committed itself, through investments in its supply chain, to a low-price position without sacrificing incremental improvements to the quality of its food.
So low, in fact, that in some areas the supermarket chain not only beats its peers on price, but Wal-Mart too. Earlier this summer, Morgan Stanley analyst Mark Wiltamuth conducted a pricing survey in six major retail markets: Chicago, Dallas, L.A., Denver, Baltimore, and Fairfield, Connecticut. After looking at everyday prices, sale items, bulk pricing, and private-label products, Kroger emerged as the clear winner.
Kroger's everyday prices undercut competitors like Safeway and SuperValu by up to 12%; best value prices, which look at the better of private label or promotions, were up to 20% lower. This best value price was within 3% of Wal-Mart's lowest cost option in Dallas and 1% below the bogey in Denver.
The secret to success for the grocer has been the vertical integration of its private-label brands. Kroger owns the manufacturing facilities for 43% of its generic items, compared to 22% at Safeway. One less middleman means fatter margins and the ability to price aggressively, as Mark's survey illustrates.
Armed with this competitive advantage, Kroger's sales have continued to grow in this difficult time while others witness a dramatic slowdown. Excluding sales of gasoline, Safeway and SuperValu have seen same-store sales growth drop from roughly 4% and 2% during the second quarter of 2007 to 1% and -1% in the second quarter of 2008 respectively. Kroger has grown this metric from approximately 5% to 6% over the same period.
Shares have traded to technical support over the past few days, pulled down by fears over the consumer. UBS analyst Neil Currie is looking for Kroger to post earnings per share of $1.94 for the year. This is a fair amount over the consensus estimate, but reflects the possibility that with its cost advantage, Kroger is looking at healthy market share gains. With a moderate price-to-earnings multiple of 15, shares should push back towards $30 over the next six months.
(Disclosure: I don’t control a position in any of the companies mentioned.)
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