Talk about putting on a brave face.
Kroger (KR) Chief Executive Rodney McMullen on Tuesday downplayed the potential risk to his grocery chain by Amazon.com’s (AMZN) upcoming $13.7 billion acquisition of Whole Foods Market. (WFM) Kroger is the second largest U.S. grocer after Walmart. (WMT)
McMullen, whose company’s shares have taken a plunge since the mega deal was announced 11 days ago, said Kroger would continue to work on building up its market presence, pursuing business as usual.
“We do really focus on the long term. The long term is three to five years. We continue to grow market share. Our customers continue to tell us were doing a better job,” McMullen said in an interview with CNBC.
His sanguine approach stands in contrast to the anxiety of investors, who’ve sent Kroger shares down 32% this year on fears that the Amazon-Whole Foods tie-up, as well as a brewing price war between Walmart and others will pinch sales and profit.
Still, McMullen suggested in the interview that the Amazon deal wasn’t unexpected. “You know, you could tell that Amazon wanted to do something from a physical asset standpoint and I think Whole Foods is a great fit for them,” he said.
To protect its place in the grocery market, Kroger has ramped up its lower price organic food, a move that has come in the wake of Walmart aggressively increasing its natural foods selection and re-setting the fresh food areas at hundreds of stores, moves that have boosted comparable sales at a retailer that gets 56% of sales from its grocery business.
Still, Amazon benefits from a lot of largesse from investors who don’t seem to mind that the e-commerce giant doesn’t produce much in terms of profits. That has led many to expect a price war that could hurt the likes of Kroger with a price war. Mullen said that stiff competition has always been a given in the supermarket industry.
McMullen also defended the role of physical stores, especially when it comes to buying food. “What we find is for some events, the customer likes to come into the store, visit with family and friends and our store associates, and learn more about food. Other times when they’re in a hurry,” he said.
Nonetheless, observers say Kroger is in for a tough patch. Kroger, which also owns supermarket chains such as Ralphs and Harris Teeter in addition to its namesake stores recently lowered its annual profit forecast, with McMullen saying.” We will not lose on price.” And relief will be slow in coming.
“We expect the pricing environment to get more competitive in 2017 … causing Kroger’s profits to remain pressured,” Moody’s Vice President Mickey Chadha told Reuters earlier this month.