Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Kroger is hitting the reset button.

The high-flying grocery chain, whose shares have risen 184 percent in the past five years, cut its full-year earnings outlook on Friday after second-quarter results missed forecasts. To preserve cash, it said it would also pull back on capital spending by $500 million. 

Food Fight
After rising 30% last year, Kroger's shares are down nearly 25% so far this year
Source: Bloomberg

The moves elicited little more than a shrug from investors on Friday, with shares flat on the news. That's likely because the grocer's warning comes a bit late: While Kroger has reported 51 straight quarters of increasing sales at established stores, not including fuel, growth has slowed for the past three quarters. Its shares, which rose 30 percent in 2015, are down nearly 25 percent so far this year. 

Deflated
Lower food prices are taking their toll on Kroger's sales
Source: Bloomberg

Better late than never, though. It's smart for Kroger to reset investor expectations, steering them away from assumptions of continued industry-defying performance and encouraging analysts to pare earnings estimates. Lower expectations are, of course, easier to beat, assuming Kroger manages to overcome some of the macroeconomic issues it faces. 

Kroger warned investors on Friday that the dollar value of its sales growth will keep falling, citing a level of U.S. food-price deflation not seen since the 1960's, aside from the recent financial crisis. Kroger, which sells a boatload of gasoline, said sustained low gas prices aren't helping, either.

The price wars sparked by this deflation are already here, as illustrated by the scuttle between Walmart and dollar-store chains, which aren't even cheap enough these days. 

Everyday Low Prices
Aside from the latest recession, food-price deflation hasn't been this low since the 1960s
Source: Bloomberg, U.S. Bureau of Labor Statistics
Note: US CPI urban consumers food at home, seasonally adjusted

Still, everything in business is relative. Sinking food prices naturally affect America's largest grocers, Kroger and Walmart. But their heft will help them survive relatively unscathed, and they'll benefit when prices start rising again.

The natural, organic, and better-for-you grocers such as Sprouts and Whole Foods won't fare as well. These specialty grocers thrived on the high food prices consumers reluctantly accepted in the first half of the decade. They could struggle to charge such premiums now that prices are falling hard everywhere else. That, in turn, helps Kroger and Walmart, which are ramping up organic and natural offerings to lure customers away from higher-priced competitors. (Organic now makes up more than 10 percent of Kroger's business.)

In a deflationary environment, success in retail and food switches from being about turbo-charging sales to gaining market share. If Kroger and Walmart can offer customers quality food at lower prices, then they might convert new customers for the long term. And when prices turn around, as they did in 2009, those new customers can boost sales.

Despite its slowing sales figures, Kroger said the number of households shopping at the grocer kept growing in the quarter. Meanwhile, it plans to keep investing in its digital grocery business and loyalty program, which lets it offer targeted discounts instead of store-wide promotions. And despite the cutback in capital spending, it said it would keep looking for M&A opportunities. 

Kroger's stock might be down, but don't count it out just yet. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net