Falling Meat Prices could Boost Kroger’s Sales

Falling beef prices and increasing meat consumption could help Kroger (NYSE: KR) move forward on its relentless march towards grocery industry domination.

The average price of a pound of beef sold in the United States fell by about seven percent in the last year, Bloomberg reported. The Bureau of Labor Statistics found that the average American was paying $4.38 for a pound of ground beef in March 2016. A year earlier the same pound of ground beef cost around $4.69.

This price drop is one of the reasons why the US Department of Agriculture predicts that American consumption will increase for the time since 2006 this year. That of course is very good news for Kroger which sells beef and operates delis and butcher shops in most of its supermarkets.

Beef prices are down for the same reason that gasoline prices are falling – the supply is increasing. The size of America’s cattle herds is at a five-year high because ranchers are trying to cash in on higher beef prices. A let up in the recent mega-drought in the Southwest and Texas is also letting ranchers graze more cattle.

Lower Prices Mean Traffic at Kroger

Kroger stands to profit from this drop in meat prices much as it profited from last year’s collapse in gasoline prices. The American Automobile Association (AAA) reported that average US gasoline prices hit a 12 year low during the first quarter of 2016 – $1.86 a gallon – after falling throughout 2016.

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Kroger’s revenue hit a high of $109.83 billion on January 31, 2016, after rising for every quarter of 2015. The monster grocer started the year with a revenue figure of $108.47 billion that number rose to $108.56 billion in April 2015, $108.78 billion in July, $108.87 billion in October and $109.83 billion in January.

During the same period, Kroger’s cash from operations grew from $4.163 billion in January to $4.167 billion in April, $4.326 billion in July, $4.545 billion in October and $4.833 billion for the first earnings report of 2016. These figures indicate that the company’s cash from operations increased by $670 million over the course of 2015.Get the picture folks as gas prices drop Kroger makes more money.

How Lower Gas Prices Drive Sales at Kroger

There are several reasons why lower-gas prices drive more sales at Kroger. The most obvious of these causes is that Kroger’s customers simply have more money to spend on groceries.

Another is that Kroger is in a good position to use fuel as a loss leader. Its 1,330 supermarket fuel centers and 782 convenience stores give Kroger the leverage needed to bulk buy gasoline and diesel fuel at low wholesale prices. The company then passes the lower prices onto customers in the form of fuel points accrued through Kroger’s popular rewards card program.

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The program lets customers accrue one rewards card point for every $1 worth of groceries purchased. For every 100 points or $100 of grocery purchases a customer receives 10¢ off a gallon on gasoline. Since customers can accrue up to 1,000 points a month, a person can receive up to $1 off a gallon fuel. That means some rewards cardholders could now be paying 86¢ a gallon for gasoline at Kroger’s pumps.

Now Kroger has the opportunity to repeat this accomplishment with another commodity and it is doing just that. On April 2, 2016, my local Kroger subsidiary City Market was advertising New York Strip steaks at $4.99 a pound for rewards card holders. Corn Beef brisket was selling for $1.99 a pound, and private selection premium angus ground round was selling for $4.99 a pound.

Since Kroger is now the nation’s second largest grocer with 2,625 supermarkets and supercenters and 37 of its own food processing plants it is in a good position to pass the low beef prices onto customers. Note these figures are low because they do not include the stores and infrastructure Kroger picked up when it bought out Roundy’s in Wisconsin late last year.

A Perfect Storm of Discounting

It looks as if Kroger’s revenues will keep growing all through 2016. That growth will be propelled by a perfect storm of low beef prices and low gas prices, giving Kroger more ability to deep discount than ever before.

Lower beef prices will lead to lower pork, turkey and chicken prices because there will be surpluses of those meats as well creating even more opportunities for Kroger to discount. All that discounting will enable customers who will have even more money in their wallets to buy more at Kroger’s registers.

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The result of this will be that smaller and regional grocers will have a harder time competing. Particularly as other discount giants such as Walmart Stores Inc. (NYSE: WMT), Costco Wholesale (NASDAQ: COST) and Aldi join Kroger in slashing beef prices to drive more sales.

My prediction is that we’ll see one or more regional grocers collapse this year and Kroger make more acquisitions. A probable target is Supervalu (NYSE: SVU) which is suffering from low share prices because of anemic cash flow.

Cheap beef might not be good for Americans’ health or the environment but it is certainly good for Kroger’s bottom line. This super grocer is on its way to having yet another great year.

Disclosure: your friendly neighborhood blogger and market analyst recently sold some shares of Kroger.