As the novel coronavirus pandemic continues to impose hardships on American society despite evidence that the U.S. infection curve is flattening, most publicly traded securities have taken a beating. However, a rare few have actually thrived during this crisis. Not surprisingly, one of the lucky names is grocery giant Kroger (NYSE:KR). While so many investments have printed a garish amount of red ink, KR stock has steadily ticked higher.
At least in the nearer term, chances are good that the trend will continue. As always, KR stock has found support in the irreplaceable nature of its underlying business. No matter how advanced a society becomes, it can never do away with essentials, such as food, water and supplies. Thus, related companies like Costco Wholesale (NASDAQ:COST) and especially Walmart (NYSE:WMT) have enjoyed significant demand.
Additionally, Kroger and its ilk are now riding a wave of supreme relevance. With Covid-19 presenting a substantial threat to people’s health and livelihood, most consumers are willing to pay any price. That’s become evident at grocery stores across the country. As either supply or supply chains get disrupted, shoppers have witnessed sizable price increases.
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Based on recent momentum, we should see this trend continue. Over the last few months, the consumer price index for food and beverages has steadily increased. In March, the CPI increased 0.35% against February, which saw a 0.36% increase over January’s tally.
Since February 1967, the month-to-month increase in food-and-beverages CPI averages 0.32%.
Again, what this indicates is that shoppers are willing to pay the premiums on their groceries. In theory, this benefits KR stock. And while I’m bullish on shares, there are some risks to consider.
A Missed Opportunity Might Hurt KR Stock
First, although the CPI for all items except energy have moved higher, we shouldn’t expect this particular trend to sustain. After all, the hit to energy was severe, down 5.7%. Furthermore, specific sectors like gasoline or airline fares suffered severely, down 10.5% and 12.6%, respectively.
Obviously, when you have such stark imbalances in the economy, it’s never a good sign. Therefore, I wouldn’t consider KR stock as an impermeable defensive investment.
Further, during a three-week period, more than 16 million Americans filed for unemployment benefits, in what the New York Times termed a “sudden black hole.” Say what you want about the NYT, I don’t consider the description hyperbole. In part, that’s because throngs of the newly jobless can’t reach their state’s unemployment office. Thus, it’s almost guaranteed that these figures we’re seeing are understated.
But another point that I came across is that Kroger is missing opportunities effectively marketing its delivery services. Given the social unrest, I tried Kroger’s delivery service but it was a miserable failure.
For one thing, the delivery person doesn’t start picking your items until the day of your delivery, which could be several days from when you order. In my experience, the picker found only one of the items I requested.
But here’s the thing: I didn’t have the option of canceling the order. Worse yet, I had to pay the same delivery fee as if I received all my requested products.
Naturally, I was unhappy. I emailed Kroger’s customer service department, requesting a gift card in the amount of the delivery fee. Several days passed and I’ve yet to receive a response.
Now, this is just one example. But carried across tens of thousands of shoppers, this oversight could be a problem for KR stock.
Leaving the Door Open for Competition
Overall, I’m still bullish on KR stock. As the most essential of essential services (in terms of daily transactions), Kroger and the grocery industry will continue racking up outsized revenue. Even with mass-scale unemployment, people will spend their last dollar on groceries.
It’s terribly cynical but it’s true. Only a fool would spend money on luxury items they can’t afford in this environment.
Nevertheless, I’m disappointed in Kroger. Personally, I must downgrade their customer service. But on a broader level, you can’t have such a glaring weakness in the delivery business. Simply, it unnecessarily opens doors to the competition.
Adding to the point, the stressed environment cuts both ways. As a retailer, you don’t want to tick off your customers. Once the situation returns to normal, grocers will go back to their high-volume, low-margin business. Gifting your rivals valuable customers is just plain stupid.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
