It may be true that everybody has to eat, so groceries are a necessity rather than a discretionary category in our budgets. But competition in the space is fierce for many reasons, and margins are always tight. That in part explains why Kroger (NYSE:KR) -- one of the biggest food sellers in the country -- underperformed last quarter on both the top and bottom lines.
In this segment from the Market Foolery podcast, host Mac Greer and senior analysts Ron Gross and Jason Moser consider the issues it faces, the areas where it's spending heavily to stay competitive, what its most successful rivals are doing differently, Amazon's brick-and-mortar plans, and more.
A full transcript follows the video.
This video was recorded on March 7, 2019.
Ron Gross: Let's move on to a rough, rough day for Kroger. Shares down around 12% at the time of our taping. Disappointing earnings and revenue. Guys, Kroger is spending a lot on online sales, on delivery, on improving their stores. They're facing fierce competition from the likes of Walmart and Amazon. What do we think of Kroger?
Jason Moser: As far as grocers go, I like it. I think it's one of the better operators out there. Harris Teeter is a pretty sweet experience, I enjoy it.
Gross: I agree.
Moser: But this is why I don't own any grocer stocks in my portfolio. It's such a tight margin game to begin with on a good day that when you have to start investing in your business like they have to do, it just makes it even that much more difficult to compete. If you're going to look for that grocer exposure in your portfolio -- Mac's going to love this -- you have to go with something like Costco.
Mac Greer: Thank you!
Moser: You have to get that membership model that just breeds that fiercely loyal customer base. We talked a lot about Costco in Austin last week. A lot of people out there still really love it. Good company, good grocer. Raised their dividend for the 12th consecutive year.
Gross: Yes they did!
Moser: They're trying to get to be that dividend aristocrat at some point.
Greer: I will tell you, I was in Costco this week, and I had a feeling that I've never ever had in Costco: disappointment. It's because I think that some of the quality of the clothes is slipping a bit.
Gross: That's a funny thing. Quality of the clothes, it's an oxymoron!
Greer: [laughs] They've always been about value! When we interviewed Jim Sinegal back in the day, they don't like the word cheap. It's all about good value. And if people start feeling like the value is slipping, that they're cutting corners --
Gross: Yeah, that's not good.
Greer: These were just sweatpants --
Gross: Are the rotisserie chickens still good?
Greer: The food is still solid. Not as many samples on weekdays now. That's another complaint.
Moser: I was telling you, I got a couple of those Amazon Essentials dress shirts because honestly, I wanted to see, No. 1, are they a good quality?
Moser: Is it worth my time? Do the measurements hold true? And if so, maybe there's something there, because if I don't have to leave the house to get clothes, I'm not leaving the house to get clothes.
Greer: How'd that work out?
Moser: I have to tell you, I'm very impressed!
Moser: I've got two dress shirts. They hold up very nicely. Nice, thick cotton. Fit well, look nice --
Greer: OK, back to Kroger. One more thing on groceries, I want to ask Jason. What do you think about Amazon getting into the actual grocery stores, brick and mortar?
Moser: It's obviously complementary to what they have with Whole Foods. When you look at grocery, you're really looking at scale being a massive competitive advantage. If you can build out that network of distribution, whether it's fulfillment centers or actual stores, you do have that advantage of being able to leverage some of those costs.
Again, if Amazon was just a grocery company, I don't think I'd be interested.
Gross: [laughs] 3% margins doesn't impress you?
Moser: This is just one of those things. They've already committed to it with the Whole Foods acquisition, so hey, why not just try to get every price point?