Kroger is using its shelf space as negotiating leverage to push suppliers to hold the line on prices – and the Red Bull and Boar’s Head situations appear to be early, visible examples of a broader strategy push.
Consumer packaged goods (CPG) brands should be put on notice that the gloves are coming off in the fight for the American consumer – and their wallet. The moves from Kroger under CEO Greg Foran should be a signal for vendors to start “sharpening those pencils,” as they like to say in the trenches.
Kroger has removed Red Bull from all of its more than 2,700 stores and fuel centers nationwide, with the last products sold in August and displays and coolers removed by Aug. 31. Kroger’s website subsequently displayed a message saying Red Bull was unavailable while the company worked with suppliers to “keep prices affordable.”
At the same time, Kroger has reduced or eliminated Boar’s Head products at roughly 200 stores, although that situation is less clear-cut. A source familiar with the negotiations told Briefs that proposed price increases were a central issue, while Boar’s Head disputed the characterization that its products were removed because of a pricing dispute.
The important point is that Kroger appears increasingly willing to sacrifice sales of individual national brands rather than automatically accept supplier price increases. It’s uncertain if Red Bull and Boar’s Head are the first examples of this approach or simply the most visible.
In the energy-drink category, for example, Kroger has shifted space previously occupied by Red Bull to brands including Monster, Alani Nu, Celsius, Bloom, Rockstar and NOS. That makes it relatively easy for Kroger to replace one national brand with competing brands or private-label products.
It’s reported that Red Bull’s grocery store sales represent roughly 30%-35% of their total U.S. sales with Kroger bringing in 3%-5% of their total U.S. business before this move.
Why Did Kroger Go After Red Bull?
In our inflationary environment, costs have been rising for just about everyone – on just about everything. Most companies are trying to pass those increases directly to their retail customers or consumers.
Since becoming CEO in February, Foran has emphasized making Kroger more price competitive and has said the company needs to push back when suppliers seek higher prices, particularly while consumers remain under pressure.
Kroger is trying to change the economics of the shopping trip, not simply negotiate the price of individual products. If it can offer comparable alternatives at lower prices, it can potentially improve its overall value proposition against Walmart, Costco, Amazon and Aldi – competitors that have been aggressively courting Kroger’s customer base.
But there is a significant risk: A shopper who leaves Kroger to buy Red Bull could potentially buy the rest of the grocery basket somewhere else as well.
Foran is making a bold move by cutting these product lines – and putting the rest of his vendors on notice. It’s a playbook we’ve seen play out at Walmart over the years, as the retailer has become famous for driving costs down, sometimes at the expense of specific brands.
The Bigger Grocery-Vendor Shift
I think the interesting takeaway for our audience is that this represents a shift in the balance of power between retailers and CPG suppliers.
For years, retailers generally had to absorb at least some supplier cost increases because consumers expected national brands to remain on the shelf. Kroger’s current approach suggests that the retailer is increasingly asking a different question:
Is this brand important enough to the shopper to justify the price the supplier wants?
If the answer is no, Kroger can delist the product, give the space to another brand or private label, and use the lost volume as leverage in negotiations. That doesn’t mean Kroger will win every negotiation – or that every supplier price increase is unjustified.
But Foran appears willing to test how much brand power suppliers actually have when the retailer is under pressure to demonstrate lower prices to shoppers.
An Insider’s Perspective on the Moves
Don Walker recently joined our staff, bringing a wealth of experience as a third-generation industry executive and former broker. We thought we’d get his perspective on what’s happening behind the scenes.
Alex: Don, what’s going on here that I’m not seeing? Is what Kroger is doing with Red Bull and Boar’s Head unusual, and do these things happen a lot? This seems like the first public dispute of its kind in a while.
Don: Alex, these conversations happen all the time. What’s rare is that we’re hearing about it in the open. What I’d wager is getting misreported is that Kroger “kicked out” Red Bull.
The more likely scenario is that Red Bull was trying to put through a price increase – we’ve heard it might be from aluminum costs – and Kroger said, ‘We’re not accepting that price change.’
When that happens, a company has two options: Eat the proposed increase and the additional costs, or stop supplying the product to that retailer. It’s doubtful that Red Bull was kicked out. It’s more likely that the price increase wasn’t accepted and Red Bull decided to pull out rather than sell it at the current price.
AW: So basically, they are playing a game of chicken. That I understand. For someone who isn’t familiar with this side of the business, how often do companies raise prices or try to put price increases in?
DW: Well, you need to understand that you can’t just raise prices in this day and age. A vendor has to justify the price changes. Generally, larger companies don’t just accept an increase without detailed explanation of every component of the pricing of an item, from the actual product itself, raw materials to the packaging, to labor, to freight, to the actual corrugated boxes they ship in.
In a competitive retail environment where few products don’t have competition, no one wants to be the first to raise prices and when the price increase is justified due to raw materials increases that they all might share. Now, most will eventually raise their prices – they just don’t want to be the first.
If it turns out that Red Bull raised prices because of rising aluminum costs, most likely everyone else will probably have to as well. Basically companies will look as to whether they can remain profitable at the retailer if the retailer refuses the price increase and make the decision as to whether they want to sell it at a loss.
AW: When Kroger pushes back on a supplier price increase, what is the typical outcome – who wins in these situations?
DW: The strongest brands have the ability to negotiate more than most. But that doesn’t always mean they have the power today that they used to.
A big, strong brand, with a lot of volume and multiple lines or categories, probably has a lot more pricing power. There are a lot of things these companies can do and ways they can take advantage of their scale. They could justify continuing to sell an item at a loss if they are making money on other products sold to the store. This is especially true for conglomerates that sell multiple brands and types of products throughout the stores.
AW: What does this mean for smaller and mid-sized CPG brands that don’t have the negotiating power of a Red Bull or Boar’s Head? Are they more vulnerable to being replaced, or does Kroger’s willingness to walk away from big brands actually create opportunities for them?
DW: I think you mentioned it earlier: This should be a clear notice to all vendors that Kroger isn’t messing around and that brand negotiating positions are a lot weaker than they’d like.
The smaller and mid-sized guys – who already weren’t in the best negotiating position – might find themselves in an even tighter spot.
An Ongoing Shift in Vendor Relationships
Obviously, this is an ongoing story, and we hope to learn more about the backdrop of these negotiations and the outcomes for the industry and consumers.
The Red Bull and Boar’s Head disputes therefore matter beyond those two brands. They provide an early indication of how aggressively Kroger intends to use its scale and shelf space in the next round of CPG negotiations.
And if Kroger’s approach proves successful, it potentially gives other middle-market retailers a playbook for pushing back on supplier price increases.