Cincinnati, Ohio-based Kroger expects to see the effects of inflation’s slowing pace emerge over the next year but it’s too early to point to specific pickups in product volumes that often arise as prices fall, according to a transcript of executives speaking on the company’s first quarter earnings call Thursday.
“If you look historically…as inflation gets lower, you do see tonnage increases. We would expect, as you look over the balance of the year, that would…happen again,” Kroger CEO Rodney McMullen said, noting that the company has started to see “relief” in fresh food categories as year-over-year inflation levels moderate.
Lower-income customers in particular remained sharply price sensitive in what the grocery giant’s CFO Gary Millerchip characterized as the first quarter’s still “challenged operating environment,” in the wake of a decline in benefits from the Supplemental Nutrition Assistance Program, formerly known as the Food Stamp Program. In March extra pandemic-era SNAP food assistance ended for 30 million people in the U.S., according to a CBS News report.
Effectively stationed on the front lines of the consumer economy, grocery financial executives have been battling the impacts of inflation for more than a year.
Now a pricing pullback appears to be in the works. In April, the consumer price index slowed to a 4.9% annual rate — the smallest 12-month gain in two years — and last month it downshifted again to a 4% annual rate, CFO Dive previously reported.
Prices for food, along with housing and used vehicles rose last month more than other categories, sustaining inflation well above the Fed’s 2% target.
Phillip Blee, a consumer analyst with William Blair, said the second half of 2023 is still shaping up to be a challenging time for the grocery sector as recent volatility in supply chains and commodities have a lot of suppliers “spooked” and less willing to pull down prices. “It’s still going to be a little trickier than maybe some people expected,” Blee said of the second half.
On Thursday, Kroger reported that its first quarter reported sales were relatively flat at $45.2 billion, compared with $44.6 billion in the year-earlier quarter, as the company said more customers were feeling the impact of inflation and economic uncertainty. At the same time, McMullen said higher-income shoppers are migrating from specialty retailers to Kroger.
On the call, Millerchip also said the company expected its adjusted second quarter earnings per share would be at the low end of the company’s guidance range due to unusually high fuel margins for the year-earlier quarter.
Separately, McMullen said the company is working “cooperatively with regulators” and still expects its pending merger with Albertsons Companies to close in early 2024. Kroger and Albertsons need government clearance to complete the deal, which would create a “supersized grocery company,” Industry Dive sister publication Grocery Dive previously reported.