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What’s Really Driving Kroger’s Steady Margins?

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Improved sales composition and enhanced product offerings

Kroger has not only maintained consistency in its same-store sales performance but has also improved its sales composition and product offerings, which have helped it maintain steady margins. Kroger boosted its operating margin by 13 basis points to 3.5% in fiscal 1Q17.

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Private brands are the key

The company has been continuously increasing the number of private brands in its portfolio. Such products typically have higher margins than company brands and help grocery retailers maintain stable margins in an industry that’s characterized by paper-thin margins.

While corporate brands represented 27% of total units sold and 26% of dollar sales (excluding fuel and pharmacy) for Kroger in fiscal 2015, the contribution of corporate brands increased to ~29% of total units sold and 26.2% of dollar sales in fiscal 2016. The mix improved further in the first quarter of fiscal 2017 as Kroger’s own brands represented 29.9% of total unit sales and 27.9% of dollar sales.

Natural and organic products

The company continues to innovate within its natural and organic products segment in order to meet changing customer tastes and preferences. The company’s addition of Simple Truth household and personal care products to the Simple Truth line resulted in expectations-beating sales growth in all categories in fiscal 1Q17. The company now plans to launch new Simple Truth offerings in the laundry, household, baby, and health and beauty care segments.

Investors looking for exposure to Kroger (KR) through ETFs can invest in the SPDR Consumer Staples Select Sector ETF (XLP). KR makes up 2.1% of XLP, which tracks the Consumer Staples Select Sector Index and invests at least 95% of its portfolio in the index securities. XLP has 5.8%, 3.7%, and 0.6% of its investments in Wal-Mart Stores (WMT), Costco Wholesale (COST), and Whole Foods Market (WFM), respectively.

Continue to the next section for more on Kroger’s plans and initiatives in fiscal 2017.

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