Kroger's Q1 2023 Earnings: Surpassing Expectations Through Personalized Promotions

Kroger is leaning in to personalized promotions, but is that a good thing?

Kroger's Q1 2023 earnings were another great result for America's largest pure-play grocer. This quarter, the Cincinnati-based retailer, which sells around 12% of all groceries in America, saw revenues excluding fuel pass $45 billion, a 3.5% increase since last year. 

Management said spending patterns vary across segments, with budget-conscious shoppers feeling significant impacts from inflation and rising interest rates. Unlike its chief competitor Walmart, Kroger operates on a high-low model. Walmart sells products at the lowest price it can--all the time. Kroger prefers a higher standard price, with lower-priced promotions throughout the year. These promotions were stopped during the pandemic--a hidden driver of grocery inflation.

However, supply chains are running, and manufacturers offer them in droves. 

Kroger is focused on offering personalized promotions 

• Kroger is using its loyalty app to cater promotions to individual customers. You and I will pay different product prices based on our shopping history. 

• Personalized promotions generate higher profit for both the manufacturer and retailers.

• Sales made on promotion increased by approximately 380 basis points, and digital coupon redemptions rose by 180 million during the quarter.

• Promotions are back to pre-pandemic rates, and Consumer Packaged Goods (CPG) are funding more and more. 

Targeted and personalized promotions are good for business, but larger questions remain. 

• Personalized promotions at scale are systematic price discrimination. Are we okay with that as a society?

• A low-income person who shops at Kroger once a month may never even see discounts that a wealthy weekly shopper sees.

• The high-low model hurts low-income shoppers. Promotions are a great value if you "stock up" on on-sale items. "If you only have so much money to spend," CEO Rodney McMullen said, "you don't have the ability to stock up on something.

Additional Insights on Our Brands

• Kroger has increased promotional spending on its brands.

• Our Brands sales increased by 4.9%

• Kroger Our Brands demonstrate higher margins, typically 600 to 800 basis points better than national brands.

• Kroger expects Our Brands to continue being margin accretive and anticipates growth driven by customer preferences and economic conditions.

• The company recently launched "Smart Way," an entry-level own brand.

They said it:

CFO Gary Millerchip on promotion personalization across income levels:

I think maybe it ties a little bit as well to Rodney's comment earlier around different customer segments and how they're changing behavior in the current environment. Simeon, we mentioned earlier in the prepared remarks, we're seeing the mainstream customer and then the higher-income customer, in many cases, they're engaging more in fresh products, engaging more in brands like Private Selection. We saw Private Selection outperform our overall sales growth during the quarter.

So there are certain customers that were certainly using our personalization to target to drive greater loyalty, greater engagement. And then that customer that we clearly see is on a very constrained budget and have been impacted by the lower number of SNAP dollars in the market. Really focusing our marketing effort to ensure that we're personalizing offers to resonate with those customers and help them manage their budgets more effectively.