Kroger Rises After Lifting Outlook on Healthy Grocery Demand

0:00I don't love the word retirement because I think it has negative baggage. I like the word financial independence. If you were to be financial independent, like how would you spend your time? I think that's a better way to think about the end of life stage versus quote unquote retirement.

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1:27Scarlet Fu:Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's move over to talk a little bit about food. I love to talk about food here, and we're talking about the grocery industry. My stomach is growling, so I love it too. So this is very timely here. But apparently, we're seeing through Kroger's results here that it's attracting value-seeking customers who are now opting to eat at home as opposed to potentially ordering out.

2:08I don't know that I can include myself in that segment, but clearly the street likes what Kroger has to say here. We're seeing shares that are up as much as 4.2 % in trading today, now trading about 1.5 % higher. It's really been a great year for Kroger. They're up about 11 % year to date, but we are joined by somebody who's able to break this down more in depth for us. That's Jennifer Bartaschus. She is Bloomberg Intelligence Senior Analyst of Retail Staples and Packaged Food here to break down these earnings for us. Jen, talk to us about what you're seeing from this report. Are people apparently cooking more?

2:39Well, it would appear so, especially with middle and lower income consumers. They're being a little bit more careful about where they're spending. And this is something we usually see when there's any kind of threat of inflation. People sort of retrench and they cook more at home. And it's also complemented by a growth in awareness about health and wellness, whether it's GLP-1 drug related or whether it's just self-induced, people are trying to live healthier lives. And that's generally easier when you prepare your own food.

3:09Scarlet Fu:So when you look at comparable sales, Kroger saying that for the full year, and now it sees comparable sales gaining 3.4 % versus a previous guide of three and a quarter percent. So kind of a marginal move higher. Jen, what does Kroger's future look like overall? Because not so long ago, it was trying to get through this deal with Albertsons, this$24.6 billion deal that it later abandoned and is now stuck in a legal mire? Yeah, it's, you know, Kroger, I think, is at the point where they're retrenching and they're reevaluating their core business and they're figuring out what is the best way to move forward.

3:47And I think there's some really encouraging signs in the business of how they're approaching that. The first thing, and they've talked about this a little bit over the last couple quarters, is they're really taking a hard look at their e-commerce business and all of the investment that they had lined up for the Ocado automated fulfillment centers that they were building. So we're expecting to hear a lot more detail on that next quarter. But they're also talking about really looking at non-core assets. And so to us, that means things like the Fred Meyer jewelry business. It means the Vitacost.com business.

4:19So that approach to becoming leaner and more efficient and more cost-effective is really a positive trajectory for the company.

4:28Scarlet Fu:And just jumping in here with a headline that just crossed the Bloomberg. It's a hothead, which means it's one of those that we deem really important. Gold has just surpassed its inflation adjusted record high set in 1980. So, Nora, we talked about that everything rally, whether it's risky assets or whether it's safe haven assets. You see that reflected in gold prices. Gold futures right now higher at the moment. And, you know, we continue to see this plowing into safe haven assets. Absolutely. We are seeing that across the board. So this is definitely something to look at. Jen, back to you. I want to talk a bit more about the e-commerce aspect that Kroger has going on here.

5:05So essentially, do they have online ordering so that they're able to deliver groceries to consumers? Or how does this work? They do. So they offer the ability to order online. And then they fill that order in one of two ways. They either fill it from one of these highly automated fulfillment centers, which is Okada driven. And those are the ones with all the robots that do all the work that you see images of. Or, and which is much more common in the network, they fill those orders in stores. So somebody walks around the store, fills the orders, and people either pick it up or it is delivered from the store to their house.

5:39So they have these, you know, both of these models that are working well. What's interesting is that Kroger said today for the first time ever, delivery sales in terms of e-commerce outpace those for the curbside pickup. And so that just shows how much the consumer has shifted to where they would much rather have things brought to them than to stop at a store, even if it's only to stop at the curb outside the store to pick up their order. So there's definitely some interesting trends moving there. And I think Kroger is just looking to stay in tune with where the customer is moving.

6:12Scarlet Fu:Right. I mean, they certainly want to cater to the customer and the changing preferences of this customer. I'm curious about the profitability of this strategy. Does e-commerce, are the profit margins in delivery higher? No, generally speaking, they're lower. And so that's why it becomes so important to be able to be super cost efficient when you're filling orders. When you're talking about groceries, historically, grocery as an industry is a very low margin industry to begin with. But when people all used to go to the grocery store, you were doing the fulfillment and you're doing the last mile delivery yourself.

6:50You took it, you put it in your cart, you paid for it, you took it home. You know, that is the most profitable transaction that a grocery store happens. The second most profitable is when you go to the store and pick it up. So that curbside pickup. And then the least profitable is when they have to bring it to you because now the retailer is absorbing the cost of that last mile delivery and getting it to your house. So that's why there's such a focus on looking at the operations, looking for ways to cut cost to help move that needle of profitability to where it will be neutral, you know, or similar to what it would be for an in-store shopping experience.

7:27Scarlet Fu:Unless they start to charge people for that. I think about DoorDash and Uber Eats and all those services where, you know, the delivery charge is almost half of what the actual product costs. Yeah, the delivery charges help. But the other thing that's probably the more important part that's a little less visible to the public is the revenue that they generate from ad sales. And so that's when you're online and you get special offers for a certain brand of cereal or a certain type of soup. You know, that advertising sales are driven through their retail media networks. And that is a very, very high margin, very profitable business.

8:05So the bigger that online e-commerce becomes, the more effective they are at managing that that advertising business, that helps offset the profitability and the drain on the delivery costs as well. Stay with us.

8:21Scarlet Fu:More from Bloomberg Intelligence coming up after this. I don't love the word retirement because I think it has negative baggage. I like the word financial independence. If you were to be financial independent, like how would you spend your time? And that's exactly what a lot of my clients talk about. And the term they'll use is a work optional lifestyle. I agree. Like the next gen millennials and below are not thinking about retirement. We're thinking about let's find something that we enjoy, that we can have financial independence. I think that's a better way to think about the end of life stage versus quote unquote retirement.

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9:28Plus, you'll get expert help, fast turnaround times, and their 360-degree guarantee. So you can be 4imprint certain your order will arrive on time and look exactly right. Whatever your goal, 4imprint makes it easy to find your perfect promo match. Explore the possibilities today at 4imprint.com. 4imprint. 4certain. The thing about AI for business, it may not automatically fit the way your business works. At IBM, we've seen this firsthand. But by embedding AI across HR, IT, and procurement processes, we've reduced costs by millions, slash repetitive tasks, and freed thousands of hours for strategic work.

10:08Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business, IBM.

10:20Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. I want to move on to a conversation in the consumer space. Let's talk about CVS and Ulta and how they can spur growth by connecting wellness with beauty. We're joined by Lindsay Dutch. She's Bloomberg Intelligence Consumer Hardline Senior Analyst. And we have a lot to dig into here, Lindsay. Tell us what's going on in this space and how CVS and Ulta could potentially connect beauty and wellness.

10:57Hi, Nora. Thanks for having me. The wellness market is huge,$400 to$500 billion at least. That's four to five times the beauty market alone. Beauty is closer to$100 billion opportunity. But in our survey, we found that 70 % of people prefer to shop beauty and wellness together. So we think that the opportunity for retailers, both big and small, to sort of break into this wellness category and gain share is to bring the two categories together with marketing in the store and really get people to shop across both.

11:32Scarlet Fu:Let me ask an obvious question, Lindsay. What is the difference between wellness and beauty? Is wellness products or is wellness services? So in this conversation, we were really thinking about products, but the wellness market is very difficult to define. So we're thinking about people are leaning into preventative routines. They're thinking about longevity. They're trying to improve their sleep, their digestion. They also want to look better. They want to feel better. So it's really across all aspects of mind, body, wellness, but products that you would be taking off the shelf from a CVS or a Walmart type of product.

12:16Scarlet Fu:So my question here then is, if it's products, are these products that are regulated in any way? So some of them are, some of them are not. I mean, if you think about maybe your social feed, you probably see a lot of influencers touting products. You know, there's a big focus on gut health recently that I've seen. You know, a lot of people are buying into, you know, that idea and thinking about that and buying products for that. And the bottom line is when they shop for things that make them feel better on the inside, they're also shopping for things that make them look better on the outside. You know, it's interesting as I'm reading through your research report here.

12:54One of your points says beauty enthusiasts also like to shop wellness products. And you're mentioning how a lot of people want to pour into themselves on the inside. as well as the outside. Can you talk a bit about, you know, influencer culture and how this could potentially also be adding to this push? You mentioned CVS, Ulta, Walmart. What does this look like right now? What's the landscape? Okay, so if we take a step back, so we think, you know, some of the biggest players in this space, it would not be surprising to you. You know, you're talking about an Amazon, you're talking about Walmart, CVS, you know, Dollar General, I think, also has a big, you know, hold in this space.

13:30But then there's a lot of smaller retailers that are also looking to get into this space. So Alto Beauty, for example, they have about 700 SKUs that are devoted to wellness. That's a small portion of the 20 ,000 plus SKUs that they carry in their store, but they're really trying to push into this market. They think that wellness could be a billion dollar opportunity for them. But I think retailers, both big and small, can find an opportunity in this big market. Also because the growth in the market exceeds lots of other categories, including beauty. If we think about sort of the influencer angle that you talked about, the survey is really interesting because people say, a large amount of people said that they prefer an expert opinion.

14:18And I think that's why they like to shop at places like CBS. The pharmacist is right there. You can get their opinion. But then they also said, 34 % said that they value a celebrity or an influencer backing a product. So there's sort of like two different things going on and there's a lot of misinformation in the social media world. So we're sort of seeing consumers lean into both, that social viral product and then also wanting an expert to weigh in.

14:46Scarlet Fu:Somehow I feel like we might see a scenario where CVS or Ulta will now have an influencer at the store to actually provide advice. Lindsay, when it comes to products related to wellness that these stores can stock, what would they give up shelf space for? Meaning, what would they remove from their stores in order to make available products that relate to longevity, sleep, nutrition, mindfulness? Yeah, I don't think they are necessarily removing things. I think, you know, they might just be doing sort of an end cap. You know, Ulta has been working really hard to make their wellness section a lot bigger, and they go through their brand negotiations very often, especially with emerging brands.

15:31So you might be sort of swapping one emerging for another in a different category. I also think that for wellness, wellness really lends itself well to online. And obviously online is an endless aisle. You can carry as many products as you want. And the reason for that is really that wellness products are often in a 30-day supply. So that's something that if you start taking a vitamin or any type of supplement, creatine, whatever, you're going to want to take that every single day and you don't want to run out. So I think online subscribe and save models are going to be really important in this space.

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18:38Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's move over into the airlines industry. We are about to be joined here by George Ferguson. He's Bloomberg Intelligence Senior Aerospace Defense and Airlines Analyst. George, we always love speaking with you. what's the latest right now with Delta? Well, so Delta came out with an 8K this morning, where they disclosed to the marketplace that they're going to speak at the Laguna Conference, I guess Morgan Stanley's Laguna's conference.

19:20And they said that their revenue numbers would be at the high end of the original range they gave. So that's a good sign, I guess, that fares have come in in the current quarter, at least not worse than what Delta thought, right? And again, maybe ooched a little bit to the higher end of their expectations. We didn't see any change to EPS, though, guidance or any other guidance. So it makes you wonder if some of the expenses aren't a little bit higher. So I thought it was okay news, but this was no sort of, you know, raised guidance because the quarter's been going much better than they expected.

20:03Scarlet Fu:OK, so it was encouraging, but it was not an all clear, like, let's increase our guidance and tell you that things are notably better. What's interesting is that the CEO, Ed Bastian, spoke at the Economic Club of Washington earlier this week and gave a little more color about what he's seen. And his takeaway was that the lower income customers remain challenged, but they're seeing a lot more enthusiasm from business travelers and premium customers. And this is where Delta has really staked its claim on that segment of the market. Agreed. Agreed. I mean, we saw a CPI number this morning, right, that has airfares in it.

20:39It was up about 3 % year over year. And I think the sequential was up four to five, if I remember correctly. So, I mean, those were decently strong numbers for airfare growth. But I still suspect we have the same trend going on inside the business that we saw in 2Q. And that is, as you said, I think the high-end consumer continues to travel and want more amenities, want better seating as they travel. So if you're American, United, Delta, you're well positioned to capture that and subsidize what I think is probably still weakness at the lower end of the business. I think as we get into the 3Q, we'll hear that.

21:19You know, if you're a basic economy flyer, you're managing other increased costs in your budget. And so you may be not flying or, you know, flying less, trading down a bit. George, is corporate travel back? So at the end of 2Q, I think, you know, what we heard was that corporate travel was starting to surpass 2019 levels. so so we definitely know corporate travel has returned slower than leisure and I think frankly it's probably very structural and will continue this way I think there are industries like consultants that traditionally went sat at their at their customers offices to do their work I think you know now we've gotten a lot more comfortable with video conferencing and things like that I think you'll miss some of that old demand for corporate that had supported airfares.

22:17I think it has become much more of a leisure business. But 3Q is going to be awash on that because 3Q is really a leisure story typically for the airlines. We'll find out more, I think, in 4Q.

22:28Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this. Whether you're planning a big tech event, launching a new campaign, or just stocking up on team gear, finding the right promotional products makes all the difference. 4imprint offers thousands of options, from on-trend apparel and premium drinkware to tech, totes, and giveaways, so you can find the right fit for any audience, purpose, or budget. You can customize it all, your logo, your message, your look, and many items come with no setup charge to help you save. And if you're really watching the bottom line, you'll find standout choices at every price point so you can make a real impact while staying on budget.