Label Kroger a Success

When times are tough, the tough scrimp and save, which includes saving on groceries. Supermarket chain Kroger (NYSE: KR  ) is using these lean times to maintain and expand its market share by giving shoppers a place where they can stock up on savings.

Like Wal-Mart (NYSE: WMT  ) , which has thrived in these tough times with its value-oriented selection of goods, Kroger’s ability to deliver low-priced items to its customers has proved successful. Sales rose 12% in the second quarter, to $18.1 billion, while same-store sales climbed nearly 10% over last year. Even when you factor out the effect of fuel on the increases, comps rose 4.7%.

Lingering sales from last quarter’s incentive to convert government stimulus checks into Kroger gift cards may have positively affected the results. But more importantly, the successful second quarter further displayed management’s ability to understand its customers' changing needs. Accumulating data via its loyalty cards has helped the company cater to shoppers’ tastes by stuffing its shelves full of the right product mix.

Kroger is also capitalizing on its Private Label program, which has become the most extensive in the industry. As consumers turn away from premium-priced goods produced by name-brand labels, such as General Mills (NYSE: GIS  ) and Kraft (NYSE: KFT  ) , they’re more willing to try Kroger’s private labels for price relief. The supermarket expects its Private Label business to become a $1 billion brand this year.

This is a trend being found throughout the grocery-shopping industry. Wal-Mart, SUPERVALU (NYSE: SVU  ) , and Safeway (NYSE: SWY  ) are all seeing such private-label sales rising. The Food Institute says that 60% of shoppers are now buying store brands. This, of course, bodes well for any company that can generate a significant portion of sales from its private-label brands, as these products lead to higher margins.

Even with some 26% of its sales represented by private label-brands, margins proved difficult for Kroger to uphold in this time of promotional and inflationary pressures. The gross margin slipped 120 basis points and profits inched up just 3.4%, a rate notably slower than that of sales. However, thanks to buybacks, the per-share figure rose 10.5%.

Kroger has implemented a successful strategy to take advantage of a time when consumers are trading down for cheaper goods and eating in rather than dining out. It’s investing for long-term success, and it's positioned to continue gaining further market share.  

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Wal-Mart Stores is a Motley Fool Inside Value recommendation. Kraft has been recommended by Income Investor. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey owns shares of Kroger and Wal-Mart but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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