Kroger and the return of private label

Kroger, America’s largest pure-play grocer, reported another consistent quarter. For its first quarter of 2022, the firm matched the previous year’s 4.1% percent sales growth while increasing operating margins. The big news is the composition of the company’s sales. For the first time in the pandemic era, private label led the way. According to management, sales of Kroger’s own brands increased by 6.3%–outpacing all national brands.

Here’s CEO Rodney McMullen discussing it on his company’s most recent earning’s call:

During the quarter, we saw tremendous growth in Our Brands, which had identical sales of 6.3% and outpaced all national brands. With 92% of households purchasing at least one of these products, we launched 239 new and innovative products during the quarter, reflecting many of the top food trend predictions we made at the beginning of the year. All of our new products continue to be tested and validated to ensure that they are as good or better than the comparable national brand.

What’s interesting is why this is happening. Of course, rising inflation is impacting wallets. According to the Federal Reserve, the cost of at-home food increased nearly 12 percent since last May.

With no additional fiscal stimulus in sight, shoppers are looking for cheaper alternatives. However, an interesting component of the switch is supply constraints from branded CPG manufacturers.

McMullen explains:

I think there’s still a lot of capacity constraints among some of the national brands. So I would expect if it’s a national brand with capacity, you’ll see a typical trend where they get more aggressive in promoting as their tonnage goes down. But if they’re supply-constrained, I would be surprised. And part of that is just because all of us are exiting COVID at a level of volume higher than what we had going in, which has put different people at different points on supply constraints.

Essentially, the Campbell Soups and Smucker’s of the world can’t produce enough products to meet demand. Since sales are brisk, their management sees no reason to offer promotions that would normally make their products more price competitive and spur incremental volume.

The decision to cut back on promotions will also impact Kroger down the line. During the COVID-19 era, the company invested in new warehouse infrastructure. Unfortunately, it’s sitting somewhat idle as the lack of promotions means management doesn’t see an incentive to lock in lower prices through forward buying.

For its part, Kroger management announced that it has no plans to gain market share by taking price. “We always think it’s important to remember it’s the total customer experience that we’re focused on,” McMullen concluded, “rather than price alone.”