What Kroger’s CEO meant when he said he never thinks about raising prices

Testifying this week in Colorado’s antitrust trial to block the $24.6 billion supermarket megamerger, Kroger Co.’s CEO Rodney McMullen stuck to his statement made to a local newspaper last year that yes, he’s never thought about how to raise prices. 

During the trial in Denver District Court, he shared simple responses to questions asked by Jason Slothouber, a senior prosecutor at the Colorado Attorney General’s office. No, he wasn’t familiar with a Kroger division that studied pricing and found they could raise prices at stores with little competition without losing shoppers. No, he wasn’t familiar with a group of eight City Markets put into a “mountain no comp zone,” where prices were raised. No, he didn’t know this zone was a big part of the state’s antitrust case. 

“Kroger has invested in lowering prices for the last 15 years,” he said. “Strategically every year, we would make decisions on continuing to lower relative pricing.” 

“In areas where there is competition?” Slothouber asked.

“Across the country,” McMullen responded.

“Well, not in the mountain no comp zones, right?” Slothouber asked.

“I don’t know,” McMullen said.

McMullen, who had been sequestered during the trial, had not been privy to earlier testimony in the Colorado vs. Kroger et al, now in its third week with closing arguments scheduled for Oct. 24. But so far, lawyers for the Attorney General’s office have laid out their case for the potential harm a merger between Kroger and Albertsons could cause to residents, employees, local suppliers and farmers if it results in store closures. A merger might create “no comp” stores, in addition to those now located in Aspen, Breckenridge, Carbondale, Eagle, El Jebel, Glenwood Springs, Granby and New Castle. 

The prosecution rested Monday. But throughout the first part of the trial, grocery executives did have a lot to say about competition as they were questioned. They said their prime competition was Walmart, Costco and Amazon and less so with one another. And those competitors are everywhere, including in some of those eight communities. The merger creates a national chain with stores in 48 states and ability to use Kroger’s money-saving technology and strategies chain-wide. Kroger, the parent of King Soopers and City Market, also would invest $1 billion to lower prices at the acquired Albertsons stores, which includes $40 million in Colorado. 

Meanwhile, the comparatively tiny competitor C&S Wholesale Grocer would buy 579 Albertsons stores, including 91 Albertsons and Safeways in Colorado, for $2.9 billion. C&S, which has about two dozen supermarkets and a national distribution network, has no plans to close any stores. It’s offering jobs to current Albertsons employees, Chief Operations Officer Susan Morris, a Colorado State University graduate who got a job at an Albertsons in Littleton at age 16. Morris, who would leave Albertsons with an exit package valued at $30 million, agreed to become CEO of C&S’ new retail arm if the merger is completed.

CEO doesn’t make short-term price decisions

McMullen, who worked at Kroger while in college and became Kroger’s CEO in 2014, was the first witness to share the grocery stores’ side of the merger. When it was the defense team’s turn again, McMullen elaborated on what he meant by never thinking about raising prices.

He said he reads “every book on retail,” and learned companies that are most successful are those that lower prices over time. Companies newer to the grocery business or expanding to new markets — including Walmart, Amazon and fast-growing Illinois-based grocer Aldi — start with lower prices. So, he thinks about the long term. He thinks about lowering prices — not raising them. The day-to-day ups and downs of prices? That doesn’t concern him. That would be the concern of Stuart Aitken, Kroger’s chief marketing officer, testified later that day. 

McMullen acknowledged that supermarket prices have increased for customers. That’s not the store’s doing, but inflation, credit card fees and the consumer packaged goods companies that produce the goods who are raising the prices they charge to Kroger.

“Sometimes CPGs will do cost increases that we don’t think is justified and it’s the reason why our brands are so important,” McMullen said. If Kroger wasn’t actively trying to lower prices, he said prices at King Soopers and City Market would be closer to Albertsons and Safeway, which are 10% to 12% higher.  And Kroger stores are about 3% more expensive than Walmart stores.

But he said he didn’t contradict himself by saying he never thinks about raising prices. He was talking about the basket of goods over time. His goal is to lower the overall cost to shoppers.

“We believe when you look over a 10-year horizon, if we try to raise prices or raised relative pricing, we would be like A&P as opposed to being successful, like an Amazon or a Costco or a Walmart,” McMullen said.

A&P is one of America’s original grocery stores, founded in New York just before the Civil War. It filed bankruptcy for the last time in 2015, sold off a number of locations to Albertsons and other grocery companies, as well as shut down stores. 

Aitken on Monday afternoon testified that Kroger has no stores without competition. Even areas identified in Kroger’s no-comp mountain zone, other options exist, like a Costco in Eagle, a Natural Grocers in Glenwood Springs and a Whole Foods a half-mile from the City Market in El Jebel. Prices were raised in those areas to offset higher labor and transportation costs, he said. 

“We’re a low, low margin business and those additional transportation costs, even housing costs — we have 66 units in the mountains for associate apartments so they can afford to stay up there — those costs are costs we’re looking to recoup,” Aitken said.

Overall prices in those communities are 1.8% higher than other Kroger stores not in the zone while Safeways are 9% more expensive than the low-comp zoned City Markets, he said.  

Kroger’s formula: Cost cutting, personalized shopping, alternative profits 

Kroger has figured out how to make more money without raising prices. McMullen said they do that by lowering costs. He said Kroger has reduced energy usage by 30% per square foot by doing things like using equipment in stores that generate heat to help heat stores in the winter, or purchasing bags from one place instead of multiple locations. 

There are also the value-added products, like selling guacamole instead of just avocados and all the ingredients. “Obviously, the customer is willing to pay more for that,” McMullen said. 

Aitken talked about Kroger’s growing e-commerce business, which includes partnering with Instacart to provide grocery delivery to customers. Almost 30% of its $13 billion e-commerce business is handled by Instacart, or $4 billion. 

But there’s something else that the company began investing heavily in within the past decade: alternative profit businesses.

That includes gift cards, credit cards and targeted advertising, which have “significantly higher” margins than the regular grocery business, McMullen said. Its Kroger Precision marketing business essentially sells access to customers, much like Google and Meta do.

In its most recent annual report, Kroger said 95% of customer transactions were part of its loyalty program. That data feeds its system to create personalized shopping experiences, which includes selling ads to consumer-product companies like Coca-Cola. McMullen confirmed that Kroger doesn’t sell a customer’s personal data to advertisers. But if a customer tends to buy Coke products, they’ll see ads for new products from Coke — not Pepsi. 

Yael Cosset, Kroger’s chief information officer, testified Tuesday that the alternative businesses bring in $1 billion in annual profit today. In its most recent quarter, which ended Aug. 17, Kroger reported $33.9 billion, which was the same as the year-ago second quarter. Operating profit improved to $815 million from a loss of $479 million a year earlier.

“All these pillars are a significant source of revenue. They’re in excess of a billion dollars in profit as we stand today,” Cosset said. “They contribute to funding investment … to lower prices and be more relevant on the value side of the experience and invest in wages for our associates who ultimately are responsible for delivering that customer experience.”