Kroger sees digital coupons, private label sales rise amid inflation

As the country’s largest pure-play grocer, Kroger has a front row seat to the interplay between the economy and the consumer. On the company’s Q3 earnings call, executives shared a few snapshots of how inflation is bringing about shifts in behavior.

Inflation has been running at 40-year highs for much of 2022, and food prices have been the most stubborn. But given the essential place of groceries in the hierarchy of needs, Kroger is not seeing a shift away from its business yet.

“When we talk to our customers, they are telling us they are changing,” said Kroger CEO Rodney McMullen. “But so far, they are changing on purchases other than food.”

Some changes are appearing in categories where shoppers are more likely to make choices to cut back. The company does have general merchandise, and it is seeing weaker performance than the total there, but this is not as important to Kroger as it is to Walmart or Target.

The holidays are also a source of discretionary spend, so it's a place for savings. The company’s research showed that 48% of customers planned to cut back on Thanksgiving spending due to inflation. Kroger moved to meet this with recommendations on a basket of Thanksgiving goods that was designed to bring savings.

It's reflective of how the company wants to meet shoppers seeking out savings. Engagement with digital coupons in the third quarter was 32% higher than the same quarter of 2021, McMullen said. This is driven by the company’s loyalty program and personalized promotions. Recent app enhancements such as in-app flash sales and the ability to clip digital offers were also targeted toward savings.

“We anticipate these interactions will continue through the holidays with customers expected to realize more than $200 million in savings from our highly personalized digital offers,” McMullen said.

In many ways, Kroger is built for the changes taking place. The company’s research shows that it is 3-4 times cheaper to cook at home than to eat out, so it benefits from consumers choosing to eat at home.

At the same time, it offers private label brands, which are typically more cost-effective and stand out as an option to consumers looking to trade down from name brands at a time of elevated prices. Identical sales of these private label brands, which Kroger calls Our Brands, grew 10.4% in the third quarter. The company is continuing to grow this portfolio, with the launch of the opening price point-targeted Smart Way last quarter, and grow in pet food during the latest period. In all, Kroger introduced 147 new Our Brands products, with many timed to debut for the holiday season.

It could even be a time to gain. With this infrastructure in place, Kroger is positioning itself to attract additional customers at a time when many are seeking out stores where they know they can realize savings.

CFO Gary Millerchip said that Kroger is seeing affluent customers who typically shopped at a wide variety of stores consolidate trips with Kroger.

“They may not need to adjust their budget because of inflation, but they feel it’s the sensible and responsible thing to do, and they see Kroger as a great place to get the right quality at a great value, as well,” Millerchip said.

Here's a quick snapshot of Kroger's earnings for Q3 2022.

Identical sales, excluding fuel, increased 6.9% over Q3 2021.

Adjusted earnings per share were $0.88, compared with $0.78 in Q3 2021.

Digital sales grew 10%, while delivery sales grew 34% over last year.

Outlook for full year 2022: "We now expect identical sales without fuel to be in the range of 5.1% to 5.3% and adjusted net earnings per diluted share to be in the range of $4.05 to $4.15," Millerchip said.