(Bloomberg Opinion) -- Kroger Co. picked a bad time to stumble.
The grocery chain on Thursday offered a 2019 profit forecast and outlook that signaled it isn’t making the progress investors were expecting as it enters the second year of a major turnaround initiative. This came at the same time Kroger reported lackluster fourth-quarter earnings. While comparable sales rose 1.9 percent from a year earlier, a respectable result that was in line with analysts’ expectations, its revenue and adjusted earnings per share fell short of estimates. The one-two punch prompted Kroger’s shares to plunge in early trading.
It makes sense that Kroger’s overhaul is going to be bumpy. Its “space optimization” initiative, in which it is resetting how shelf space is used at individual stores, creates temporary disruption as it is rolled out to hundreds of locations. It is starting to identify sites for Ocado-powered fulfillment centers, which it said it would build after it increased its stake last year in the U.K. online-grocery innovator, and is piloting Kroger Express locations within Walgreens stores. There are bound to be hitches as it tries to implement so many new things at once.
But investors are right to be concerned about whether the efforts are going to come together and make for a more competitive Kroger. The company said Thursday that its pickup and delivery options now reach 91 percent of Kroger households. It’s good that the retailer has rolled out these offerings widely, but it also means it has plucked much of the low-hanging fruit. We simply don’t know how it will fare in this high-growth — but also fiercely competitive — area.
Kroger has outlined a plan to derive more profit from what it calls “alternative” sources, meaning from businesses like advertising that offer fatter margins than selling milk and produce. This is, in theory, a decent idea, and comes at a time when Walmart Inc. is also trying to fortify its advertising business. But this kind of work isn’t Kroger’s core competency. So I have some caution about how successful it will be at steering these efforts. Kroger stated in its Thursday press release that it is changing “from grocer to growth company.” For now, though, it hasn’t clearly demonstrated it can achieve that lofty goal.
It doesn’t help that Kroger announced its results and outlook less than a week after it was reported that Amazon.com Inc. is planning to open dozens of grocery stores across the country that are separate from its Whole Foods banner. I don’t think anyone should assume that Amazon’s offering will be a runaway hit. Some of its other physical retail concepts, including its bookstores and its 4-Star store, haven’t been the bastions of innovation you might expect. And dozens of new stores from a competitor (even if it’s Amazon) shouldn’t be able to put that much of a dent in the comparable sales of a company that has around 2,800 food locations.
Still, any fresh threat from Amazon has been known to test investors’ patience with incumbent companies’ transformation plans, and I suspect that is some of what is weighing on sentiment about Kroger. But whatever Amazon does and doesn’t do, the grocery business is changing quickly. Kroger must do more to show it is keeping up.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
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