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CNBC Exclusive: CNBC Transcript: Kroger Chairman & CEO Rodney McMullen Speaks with CNBC’s “Squawk on the Street” Today

WHEN: Today, Tuesday, June 27th

WHERE: CNBC's "Squawk on the Street"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Kroger Chairman & CEO Rodney McMullen on CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET) today, Tuesday, June 27th. Following is a link to the video on CNBC.com:http://video.cnbc.com/gallery/?video=3000631164.

All references must be sourced to CNBC.

SARA EISEN: ALSO, MASSIVE CHANGE RIGHT NOW IN THE SUPERMARKET INDUSTRY, CAPPED OFF BY THE RECENT ANNOUNCEMENT THAT AMAZON IS BUYING WHOLE FOODS THAT SENT SHARES OF KROGER DOWN 9% NOW WITH US TO DISCUSS THE COMPETITIVE ENVIRONMENT, E-COMMERCE, FUTURE OF RETAIL AND A LOT MORE, ITS RODNEY McMULLEN, THE CHAIRMAN AND CEO OF KROGER, THIS IS AN EXCLUSIVE. HE JOINS US FROM CINCINNATI. RODNEY, THANK YOU FOR BEING ON NICE TO SEE YOU AGAIN.

RODNEY MCMULLEN: GREAT TO SEE YOU.

EISEN: SO, WEVE GOT TO START WITH THE STOCK PRICE. I MENTIONED ON THE BACK OF THAT DEAL NEWS, STOCK IS DOWN ABOUT A QUARTER OF ITS VALUE SINCE THE BEGINNING OF JUNE. YOU JUST HAD YOUR INVESTOR DAY LAST WEEK. WHAT DID YOU TELL SHAREHOLDERS AS FAR AS HOW YOURE GOING TO CORRECT THAT STOCK MOVE?

MCMULLEN: WHAT WE TOLD OUR SHAREHOLDERS IS EVERYTHING WE DO, WE START WITH THE CUSTOMER AND FOCUS ON THE CUSTOMER AND WE FOUND THAT THROUGH ALL DIFFERENT BUSINESS ENVIRONMENTS THAT PAYS GREAT DIVIDENDS FOR CONNECTING WITH OUR SHAREHOLDERS AND EVERYBODY ELSE YOU KNOW, THE CUSTOMER WILL ALWAYS TELL YOU WHAT THEY WANT ITS OUR JOB TO DELIVER AGAINST THAT WHEN WE DO THAT, OUR SHAREHOLDERS GET A GREAT RETURN AS WELL.

EISEN: I KNOW YOU LIKE TO THINK LONG TERM SO ON THE BIG DEAL, AMAZON BUYING WHOLE FOODS, YOU AND I HAD TALKED ABOUT AMAZON GETTING INTO ONLINE GROCERY YOU HAD SAID YOU EXPECT MORE CONSOLIDATION IN THE SECTOR. DID YOU EVER IMAGINE WE WOULD SEE AMAZON OUTRIGHT BUYING WHOLE FOODS?

MCMULLEN: YEAH. I GUESS FOR ME IT WASNT AS MUCH OF A SURPRISE AS IT WAS FOR OTHERS YOU KNOW, YOU COULD TELL THAT AMAZON WANTED TO DO SOMETHING FROM A PHYSICAL ASSET STANDPOINT AND I THINK WHOLE FOODS IS A GREAT FIT FOR THEM WE FEEL GREAT ABOUT WHERE WE ARE. WE HAVE GREAT PHYSICAL ASSETS. GREAT STORE ASSOCIATES, GREAT ASSOCIATES ACROSS THE COMPANY. WEVE BEEN BUILDING OUR DIGITAL PRESENCE BECAUSE OUR CUSTOMER TELL US THEY WANT TO ENGAGE WITH US FROM ALL PIECES, NOT JUST FROM ONE DIRECTION.

EISEN: SO WHY DID INVESTORS HAVE IT WRONG, IN YOUR OPINION, SELLING OFF KROGER SHARES, THE MOST OF ANYBODY, ON THE BACK OF THAT NEWS DOWN 9%?

MCMULLEN: FROM OUR PERSPECTIVE, AS YOU MENTIONED BEFORE WE DO REALLY FOCUS ON THE LONG TERM. THE LONG TERM IS THREE TO FIVE YEARS. WE CONTINUE TO GROW MARKET SHARE. OUR CUSTOMERS CONTINUE TO TELL US WERE DOING A BETTER JOB. AS I MENTIONED IN THE LAST NINE WEEKS OF THE QUARTER, IDENTICAL CELLS TURNED POSITIVE AND HAVE BEEN POSITIVE QUARTER TO DATE. ALL THOSE THINGS ARE TELLING US THE CUSTOMERS ARE CONNECTING WITH US AND WE CONTINUE TO GROW OUR BUSINESS.

EISEN: A LOT OF PEOPLE SEE THIS DEAL AS AN INFLECTION POINT FOR GROCERIES, THE ENTIRE INDUSTRY AND MAYBE EVEN ALL OF RETAIL. DO YOU AGREE?

MCMULLEN: WELL, YOU KNOW, AS I MENTIONED BEFORE, THE DEAL DIDNT SURPRISE ME SO I THINK THE RETAIL INDUSTRY IS A CONSTANT CHANGE. WEVE BEEN SAYING THAT FOR SEVERAL YEARS. AND FOR US, WE DONT SEE THIS DEAL AS ANY DIFFERENT THAN ANYTHING ELSE. WE KNOW IN RETAIL ITS GOING TO CONSTANTLY CHANGE. AND CHANGE IS THE ONLY CONSISTENCY. WHEN YOU LOOK AT WHAT WERE TRYING TO DO ITS TAKING CARE OF THE CUSTOMER ON THEIR TERMS NOT OUR TERMS.

EISEN: MANY ARE WONDERING IF YOURE PLANNING TO MAKE A COMPETING BID FOR WHOLE FOODS TO KEEP IT OUT OF THE HANDS OF AMAZON AND WHETHER YOU HAVE THE FINANCIAL FIREPOWER STILL WITH THE STOCK LAGGING OVER THE PAST YEAR TO DO SO.

MCMULLEN: YOU KNOW, WE WONT TALK ABOUT SPECIFIC TRANSACTIONS BUT I ALWAYS TELL ALL OUR INVESTORS YOU SHOULD ASSUME THAT WE LOOK AT ANY POTENTIAL OPPORTUNITIES WE FEEL GREAT ABOUT THE FINANCIAL STRUCTURE AND FLEXIBILITY THAT WE HAVE TO BE ABLE TO DO WHATEVER WE THINK IS APPROPRIATE TO CONTINUE TO GROW OUR BUSINESS.

EISEN: WHAT ABOUT MARGINS, RODNEY? THEYRE ALREADY UNDER PRESSURE AS A RESULT OF ALL THE COMPETITION IN THE SECTOR. THE FEAR NOW IS THAT AMAZON HAS SUCH A BIG FINANCIAL CUSHION, THEY CAN LOWER PRICES FOR WHOLE FOODS BRANDED ORGANICS ACROSS THE BOARD AND THAT WILL ONLY PUT MORE PRESSURE ON YOUR ALREADY RAZOR-THIN PROFIT MARGIN. IS THAT SOMETHING YOU ARE EXPECTING?

MCMULLEN: FROM OUR LONG-TERM BUSINESS MODEL WE ALWAYS ASSUME THE MARKET WILL GET MORE COMPETITIVE. ITS ONE OF THE THINGS THAT, WHEN YOU LOOK AT NATURAL AND ORGANICS FOR US, ITS A $16 BILLION CATEGORY AND OVER THE LAST SEVERAL YEARS, WEVE BEEN ABLE TO MAKE NATURAL AND ORGANIC ACCESSIBLE TO ALL CUSTOMERS BOTH FROM A PRICING STANDPOINT AND FROM A PRODUCT OFFERING STANDPOINT. WE FEEL GREAT ABOUT THE PROACTIVE THINGS THAT WEVE DONE TO HELP LOWER PRICES FOR OUR CUSTOMERS AND WE SEE THAT OPPORTUNITY CONTINUE GOING FORWARD.

CARL QUINTANILLA: HEY RODNEY, LONG TERM, I WONDER IF AMAZON OR ANYONE IS ABLE TO REALLY SMOOTH OUT THAT LAST MILE DELIVERY WHERE GROCERY DELIVERY TO YOUR HOME IS RELIABLE, IT'S FAST, CONSUMERS BET ON IT. THEY TRUST IT. WHAT REMAINS COMPELLING ABOUT GOING TO THE GROCERY STORE? AND IF THAT ENDS, WHAT DOES THAT MEAN FOR ALL THE REAL ESTATE?

MCMULLEN: I CAN TELL YOU THE EXPERIENCE WE'VE HAD SO FAR IN PLACES WHERE WE HAVE CLICK LISTS AND WHERE WE DELIVER TO PEOPLES HOMES. PEOPLE STILL LIKE TO GO VISIT WITH FRIENDS, ENGAGE AND SEE NEW FOODS AND NEW EXPERIENCES. SO IF YOU LOOK AT OUR MURRAYS CHEESE SHOP, CHEESE MONGERS UNDERSTAND WHAT FARM THE CHEESE CAME FROM, LOVE OF THE FOOD AND HELP SHARE THAT KNOWLEDGE WITH OUR CUSTOMERS. AND WHAT WE FIND IS FOR SOME EVENTS, THE CUSTOMER LIKES TO COME INTO THE STORE, VISIT WITH FAMILY AND FRIENDS AND OUR STORE ASSOCIATES, AND LEARN MORE ABOUT FOOD. OTHER TIMES WHEN THEY'RE IN A HURRY, THATS WHEN THEY WANT TO JUST DRIVE THROUGH, PICK SOMETHING UP OR GET IT DELIVERED TO THEIR HOUSE. SO WHAT WE FIND IS WHEN YOU PUT ALL OF THOSE THINGS TOGETHER IN A SEAMLESS WAY, THAT IS WHEN IT REALLY CONNECTS WELL WITH THE CUSTOMER.

DAVID FABER: SIR, I JUST WANTED TO FOLLOW UP ON YOUR ANSWER TO SARA'S QUESTION A MOMENT AGO. YOU TALKED ABOUT YOUR FINANCIAL FLEXIBILITY AND BEING HAPPY WITH IT IN TERMS OF RESPONDING IF YOU NEED TO STRATEGICALLY TO VARIOUS THINGS THAT MAY HAPPEN IN THE MARKET. WHY? WHY ARE YOU HAPPY – OR WHY DO YOU BELIEVE YOU HAVE THAT FINANCIAL FLEXIBILITY? YOU HAVE A DECENT AMOUNT OF DEBT. YOU HAVE A STOCK PRICE THAT HASN'T DONE PARTICULARLY WELL IF YOU WANTED TO USE IT AS A CURRENCY. SO CAN YOU EXPLAIN A BIT MORE BEHIND THAT ANSWER?

MCMULLEN: WELL, IF YOU LOOK FROM A DEBT STANDPOINT, THE COVERAGES, WE ARE STILL VERY STRONG INVESTMENT GRADE. THATS BEEN IMPORTANT TO US FOR A LONG PERIOD OF TIME. IN TERMS OF SOME TYPE OF TRANSACTION, A BALANCE OF DEBT AND EQUITY, IT WOULD REALLY DEPEND ON ANY SPECIFIC TRANSACTION AND WHAT MADE SENSE FOR THAT TRANSACTION AND WHAT A SELLER WAS INTERESTED IN AS WELL.

FABER: BUT YOU DON'T FEEL AS THOUGH YOU'RE MITIGATED IN ANY WAY FROM PURSUING WHAT YOU NEED TO, GIVEN THE CONSTRAINTS THAT YOU MAY OR MAY NOT HAVE ON YOUR BALANCE SHEET?

MCMULLEN: NOT AT ALL. WE REALLY FEEL GOOD ABOUT THE FLEXIBILITY THAT WE HAVE AND REALLY UNDERSTANDING WHERE THE CUSTOMER IS GOING AND WHAT ARE THE THINGS WE CAN DO TO MAKE SURE WE'RE THERE FOR THEM.

EISEN: I THINK WHAT INVESTORS ARE WONDERING, RODNEY, IS YOU'VE ALREADY BEEN GOING UP AGAINST THE COUNTRY'S LARGEST RETAILER – THAT IS WALMART – WHICH HAS A GIANT GROCERY BUSINESS. NOW YOU'RE GOING TO GO UP AGAINST THE COUNTRY'S LARGEST ONLINE RETAILER AND WHETHER YOU'RE UP FOR THAT CHALLENGE AND WHAT SORT OF EDGE KROGER BRINGS TO THAT FIGHT. WHAT CAN YOU TELL US THERE?

MCMULLEN: WELL, WE'RE DEFINITELY UP FOR IT, ALL CHALLENGES. KROGER HAS BEEN IN BUSINESS 134 YEARS AND WE'VE BEEN THROUGH MANY, MANY CHANGES AND WE REALLY SEE THIS CHANGE AS WELL. AND WHAT WE FIND IS WHEN WE HELP THE CUSTOMER FALL IN LOVE WITH FOOD AND WE DELIVER IT AT A GREAT VALUE, THE CUSTOMERS REWARD US WITH THAT BUSINESS. WE DON'T SEE THAT CHANGING. AND DIGITAL IS ONE PIECE OF THAT. OBVIOUSLY, WE'VE BEEN USING OUR DATA FOR OVER ALMOST TWO FULL DECADES IN TERMS OF HELPING MAKE IT A LITTLE BIT EASIER FOR THE CUSTOMER TO SHOP WITH US AND PROVIDE GREAT VALUE FOR THE CUSTOMER AS WELL.

EISEN: I WANTED TO ALSO ASK YOU ABOUT SOME OF THE FOOD BRANDS WHICH SOLD OFF ON THE BACK OF THE DEAL, TOO. NAMES LIKE KELLOGG AND GENERAL MILLS, YOUR CLIENTS, AND MONDOLEZ. WHAT DOES IT MEAN FOR THEM? IS THIS GOING TO BE A MARGIN STORY OVER THERE, TOO? IS IT GOING TO MEAN MORE ACCESSIBILITY OF CHEAPER, ORGANIC FOODS – ESPECIALLY IF AMAZON DECIDES TO PUT WHOLE FOODS BRANDED ITEMS ON A LARGER SCALE? WHATS YOUR EXPECTATION THERE?

MCMULLEN: IN TERMS OF EXPECTATIONS, IF YOU LOOK AT OUR BRANDS, WE'VE BEEN GAINING SHARE FOR THE LAST 25 YEARS BOTH IN TERMS OF UNITS AND DOLLARS. AND THE QUALITY OF OUR BRANDS IS JUST INCREDIBLE. SO, IF A CUSTOMER WANTS A NATIONAL BRAND THEY CAN HAVE IT, BUT OUR BRANDS IS GREAT QUALITY AND THE CUSTOMER CAN HAVE THAT AS WELL. SO WHEN YOU LOOK, I THINK A LOT OF THE BRANDED COMPANIES HAVE BEEN GOING THROUGH THAT PRESSURE OVER SEVERAL YEARS IN TERMS OF THE CUSTOMERS CHANGE AND WHAT THEIR DESIRES ARE. AND THEN NATURAL ORGANIC –

EISEN: YOU EXPECT THAT TO CONTINUE?

MCMULLEN: YEAH, I WOULD NOT SEE THAT CHANGING AT ALL.

EISEN: YOUR NATURAL AND ORGANIC BRAND HAS BEEN A BIG SOURCE OF STRENGTH FOR YOUR COMPANY. AND I THINK IT'S A BIGGER BUSINESS OVERALL THAT WHOLE FOODS CURRENTLY OPERATES. IS THAT CORRECT?

MCMULLEN: YEAH, THE WHOLE CATEGORY FOR US IS $16 BILLION. IF YOU LOOK AT OUR SIMPLE TRUTH, WHICH IS OUR BRAND, IS $1.7 BILLION BY ITSELF. AND IT CONTINUES TO GROW AT DOUBLE DIGITS. SO CUSTOMERS TELL US THEY LOVE IT AND WE GIVE A GREAT VALUE FOR THE MONEY AND CONTINUED IMPROVED VARIETY.

EISEN: ON THE QUARTER, A LOT OF ANALYSTS WERE SURPRISED TO SEE THE GUIDE DOWN, SPECIFICALLY. THEY FELT THEY TALKED TO YOU RECENTLY AND YOU SOUNDED UPBEAT. ARE YOU HAVING ANY VISIBILITY PROBLEMS? BECAUSE THIS IS A – YOU'VE HAD TO, IN THE LAST FEW QUARTERS, SORT OF PARE DOWN EXPECTATIONS WHEN IT COMES TO COST, LABOR AND FOOD DEFLATION. IS THAT HARD TO SEE OUT IN FRONT OF YOU?

MCMULLEN: WELL, ANY TIME YOU'RE TRANSITIONING FROM INFLATION TO DEFLATION AND BACK TO INFLATION, THE ENVIRONMENT IS A LITTLE HARDER. WE'VE BEEN TELLING OUR INVESTORS THAT FOR THE LAST – A LITTLE OVER A YEAR. YOU KNOW, WE ARE STARTING TO GET AT THE BACK END OF THAT DEFLATIONARY ENVIRONMENT WHERE YOU CAN START SEEING A LITTLE BIT OF INFLATION. THERE'S A COUPLE OF THINGS WE PROACTIVELY DID IN TERMS OF ENTRY LEVEL PAY IN CERTAIN MARKETS TO HELP REDUCE TURNOVER AND ALSO SOME ENTRY PRICE POINT ITEMS IN A COUPLE OF MARKETS WE ADDRESSED. BOTH OF THOSE THINGS WERE THINGS THAT REFLECTED IN THE CHANGING GUIDANCE AND THEN ALSO THE CHANGE IN INFLATION, WE RAISED OUR ESTIMATE AS WELL.

EISEN: RODNEY McMULLEN, WE RESPECT THAT YOU CAME ON TO TALK ABOUT ALL OF THIS. THANK YOU.

MCMULLEN: THANK YOU. APPRECIATE IT, SARA.

EISEN: THANKS A LOT. THE CHAIRMAN AND CEO OF KROGER, JOINING US EXCLUSIVELY FROM CINCINNATI.

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