Let it be duly noted after today that the grocery business has become no better than the department store as a place to invest. That's right after the horrendous forecast cut by the largest food chain in the country, Kroger (KR) , we have officially come to still one more un-investible space in the retail business.
I don't want to blame Kroger for its ills. It's a fantastic company, the best at what it does. I love shopping at their Fred Meyer stores. They are clean and bright and offer fantastic values, particularly with their private-label brands.
But after listening to today's conference call, one can only conclude that supermarkets are in one gigantic race to the bottom and no one will be unscathed, perhaps least of all Kroger.
How bad is it? There was a time when Kroger would deliver a consistent same-store-sales number that led the industry. I got spoiled into believing it was impossible for them to do less than 4% comps, that's how good they were.
This past quarter, same-store sales excluding fuel fell 0.2% and it sounded like a bit of a victory given that analysts were actually forecasting a 0.7% decline. But after that, the news was all bad. To start, there was labor inflation and food deflation, never a good combination.
Then there was a pledge that they were not going to lose customers or share going forward.
The Kroger conference call, which used to be full of idolatry for the Cincinnati masters, this time was almost like an open rebellion. Over and over they were peppered with questions about how they were going to fend off Walmart (WMT) and Amazon (AMZN) and other competitors and not a single questioner seemed satisfied. Worse, at one point they simply seemed to give up and agree. "At the end of the day, we always assume this industry is going to get more competitive, quarter in, quarter out, year in, year out," CFO Michael Schlotman told the unhappy group of analysts. "And unfortunately, I guess, we're rarely disappointed with the result."
I think that's an understatement. This business has always had razor-thin margins when there were only traditional players in the game.
But then, a few years back, Costco (COST) decided to emphasize food above all other areas and pretty much decided it was willing to lose money at it and make it back on the membership. Whole Foods (WFM) decided to go the other way and cherry-pick the wealthier shopper. Trader Joe's then arrived and went after all sorts of demographics.
Then Walmart and Target (TGT) decided they had to offer food, and while initially both seemed off their game, they rapidly realized there was only one way to compete: on price.
Not to be left out, the dollar stores, buoyed by the opportunity to take advantage of customers with food stamps, moved all in to the segment. At the same time, the two biggest drugstore chains, CVS Health (CVS) and Walgreens (WBA) , decided they were losing out if they weren't into food. (Walgreens is part of TheStreet's Action Alerts PLUS portfolio.)
Then Amazon decided to try its hand at the non-food segment of the grocery store, which is often the most lucrative, and now we know it is making noises and inroads in food, too.
Finally, last straw, two German outfits, Aldi and Lidl, have just declared open season on American grocery chains, moving in with aggressive plans to take on all comers. They, too, are chains that will compete on price. How fitting that Kroger reported on the day that Lidl hit the beach with stores opening today in Virginia, North Carolina and South Carolina.
There is no way Kroger is going to cede its turf to everyone. It will compete aggressively, which is exactly why, even down 19%, this one's a tough one to own. Sadly, I think Kroger knows it. There was a resigned nature to this call that makes me say, "Call me back when somebody blinks." Right now, though, everyone's approaching groceries with eyes wide open and I think in the end the only winner is you, the consumer.
