By Emma Thomasson and Richa Naidu
BERLIN/CHICAGO (Reuters) - Kroger (NYSE:KR) Co has room to improve on sales and is looking to its Deluxe Unicorn Swirl ice cream and other store-brand products to boost growth, Chief Executive Rodney McMullen said on Thursday.
Multicolored, sparkly ice cream is an unlikely battleground in U.S. grocery stores. But Kroger Co believes trendy house-brand items like Unicorn Swirl will help it win market share from Walmart (NYSE:WMT) Inc, Aldi and Amazon.com Inc (NASDAQ:AMZN).
"We know we can do better when it comes to identical sales results," McMullen told analysts after Kroger posted quarterly same-store sales below Wall Street estimates, sending its shares down 2.5%.
The grocer's store-brand business was one of its most powerful tools, McMullen said.
Kroger's own brand sales for the quarter rose 3.3%. Unicorn ice cream, pork belly bites and artesian jerky were among 219 new store brand items that boosted sales by $225 million.
By churning out new house-brand items, Kroger hopes to tap into broad sales growth for private labels. The push comes as grocers compete fiercely on price and race to expand online ordering and delivery, an area where the biggest U.S. grocery chain has lagged.
Kroger added 1,022 "own brand" items in 2018, and each supermarket on average stocks more than 15,000 private-label products such as pet food, clothes, furniture, meal kits and office supplies. Kroger's 16 house brands account for more than 30% of unit sales, the company said in March.
"We don't see this slowing down at all," McMullen had told Reuters in a separate interview in May.
Cincinnati-based Kroger has long made store brands that compete with name brands from Kraft Heinz (NASDAQ:KHC) Co, Nestle and others. But it started focusing more on its own brands in 2012 and flagged them as key to reviving sales growth when introducing its “Restock Kroger” plan two years ago.
Graphic on store brand growth: https://tmsnrt.rs/31Ff7UN
Kroger's Simple Truth line hit $2.3 billion in annual sales to become the biggest U.S. natural and organic brand, the grocer said in March. Sales of its Kroger range and premium Private Selection food line are also growing, with the total own brand portfolio expanding 45% since 2011.
Starbucks Corp (NASDAQ:SBUX) kicked off the unicorn food craze in 2017, sparking a social media frenzy with its pink and blue Unicorn Frappuccino. Breakfast cereal and cake followed, and Target Corp (NYSE:TGT) launched a cherry-flavored Unicorn Magic ice cream last year.
Kroger debuted its cake batter-flavored Unicorn Swirl in March, and saw more than 2.5 million likes and shares on social media for the product on National Unicorn Day on April 9.
"Kroger has been very clever about expanding into rapidly growing categories," said Neil Saunders, who heads retail consultancy GlobalData, highlighting brands like Simple Truth and Home Chef meal kits.
Simple Truth has likewise benefited from a social media boost. Kayla Schneider, 28, a vegan receptionist and beauty advisor from Fenton, Michigan, has 11,000 Twitter followers and earlier this year tweeted when Simple Truth vegan ice cream went on sale.
“I have a lot of followers who also share my type of diet and I like sharing new finds/yummy products so they can try them out as well,” Schneider said in a Twitter direct message.
Almost half of Kroger's private-label grocery lines, including bakery and dairy items, are produced in its 37 plants, giving it an advantage when it comes to creating and testing out items.
Kroger makes more in-house than other U.S. retailers, with Walmart outsourcing all store-brand production until very recently, when it opened a dairy in Indiana, retail consultant Roger Davidson said.
"They (Kroger) are very serious about private label and in my opinion better than any consumer goods company in the U.S.," said Davidson, who used to oversee food procurement at Walmart. "Big CPG companies are really struggling," he said, referring to consumer packaged goods makers.
Kroger has been looking for ways to claw back market share from Walmart, the world's biggest retailer, and German discount chain Aldi. It also has to grapple with Amazon's fast-growing private-label sales, both online and in Whole Foods.
MARGIN PRESSURES
Soaring commodities and freight costs have pressured margins at companies like Procter & Gamble Co and Unilever (LON:ULVR) PLC in recent years, making it harder for them to compete.
Meanwhile, Kroger's private-label margin is typically 600 to 800 basis points higher than that of big consumer brands, McMullen said on Thursday.
Private-label products on average are about 20% less expensive than branded goods, according to data from market research firm IRI.
At a Kroger-owned Mariano's in Chicago, 24 bottles of own-brand water cost $2.50 versus $4.99 for Nestle's Pure Life, for instance. The world’s No.1 consumer company said in April there was no point in Pure Life trying to outcompete private-label bottled water.
Own-brand products made up 14.9% of U.S. store sales in 2018, up half a percentage point, with frozen, pet and baby products growing fastest and millennials buying most, according to IRI.
That compares with an international average of 39.4%. The share is highest in Britain at 52.5%, in part due to discounters like Aldi. [nL8N1Z712I]
Aldi is expanding rapidly in the United States and seeks to become the No.3 U.S. grocery chain with 2,500 stores by 2022. It sells products that are almost entirely house brand.
KETO, PALEO, FLEXITARIAN
Kroger has a 400-person team developing its brands. The company poached Gil Phipps in 2012 from Texas-based retailer H-E-B, which has sought to emulate British store brand leaders like Sainsbury's since the 1990s.
But Walmart has also been adding private labels, while already squeezing Kroger on price and outperforming on e-commerce and automation.
In March, Walmart launched its Hello Bello line of plant-based baby products with actor couple Kristen Bell and Dax Shepard. A month later, it introduced Unicorn Sparkle ice cream selling for $2.24 for 48 ounces, compared to $2.50 for Kroger's Unicorn Swirl.
As part of the "Restock Kroger" drive, the company is also investing in store revamps and delivery, although a joint venture with British online grocer Ocado (LON:OCDO) is taking time to ramp up.
"I worry whether Kroger is really keeping the end consumer in mind. They have so many irons in the fire," said consultant Davidson.