Kroger's Traditional Preferences

Kroger is one of retail's more anomalous figures insofar as it is massive - and yet somewhat invisible. Said simply, Kroger taken across the various retail operations it stands behind is much, much larger than most people are aware.

And that lack of awareness comes because Kroger is a lot of different grocery stores. Depending on where one is shopping in the 35 states Kroger operates in, the store of choice might be a Dillons, Fry’s or Harris Teeter (among many, many others). All in, Kroger runs 2,620 supermarkets and multi-department stores, as well as 326 fine jewelry stores, 1,360 supermarket fuel centers and 37 food processing plants. It did over $100 billion in sales in 2014 and employs about 400,000 people.

But despite its size and dominance of the typical grocery arena, Kroger is a firm increasingly beset by competition and a world that is moving away from the traditional supermarkets that it has made its stock and trade in operating. The big-box players like Walmart and Target have been eating up an increasing share of market for over decade, while wholesale clubs, predominantly Costco, have been eroding the grocery customer base for closer to two-and-a-half decades. Also emergent have been the rising speciality groceries drawn forward by Whole Foods and the realization that consumers are willing to pay a lot more for bacon if they are reasonably certain the pig has a happy life first.

Kroger, particularly with its massive scale post Fred Meyers merger, was more than even to holding off that onslaught, but the ante in the last 24 months has been increasingly upped by digital grocery outfits like Amazon's, not to mention a host of startups that deliver groceries, meal kits, whole cooked meals and even private chefs to cook them directly to customers' doors.

Plus, because headwinds have a tendency to multiply all at once, Kroger's massive scale and undisputed position as the biggest players operating in traditional supermarkets is now a bit threatened. Rival dutch outfit Ahold snapped up Delhaize for $28 billion in stock. Ahold is the firm behind Stop & Shop, Giant-Carlisle and Giant-Landover in the U.S., while Belgian Delhaize operates the Food Lion and Hannaford. That is all one big happy grocery family, and though Kroger remains larger, lither and more profitable now, a frequent refrain is being sung among investors. Ahold-Delhaize, with its control of the well developed and popular Peapod program. Peapod is popular, well developed, streamlining for efficiency and growing basket sizes.  The concern is that Kroger may be the bigger player of today, but Ahold-Delhaize is better to build the grocery stores for the suburban tomorrow.

And while being second place is not always the worst possible fate, with grocery so entirely overcrowded these days, there may simply be no room for second when it comes time to cull out traditional grocery operations unable to respond to consumer needs that are becoming increasingly untraditional.

But Kroger of course likes being at the top, and is investing big in making sure it remains there. Kroger is much less interested in being the technologically sharpest grocer out there, and is instead looking to simply be the best all around.

How risky a plan is it?

A $4 Billion Investment In What's Next 

Kroger is spending a lot of money building out and better coming up. We'd say a ton of money but, as the Cincinnati Business Times points out, if the money Kroger plans to spend were in $100 bills, the Cincinnati- based retailer would be spending almost 41 tons of money.

Those funds will flow mostly into building new stores, renovating old ones and upgrading technology and logistics to support them.

"It's a big number there's no question," said Terry Kelly, principal at Bartlett & Co. "But let's face it, it's also necessary. Stores wear out and look old. It's one of the keys to their success: they've been good investors in their own business."

A big price tag is in part an outcome of a big operation. Kroger is literally the world's third-largest retailer with nearly $110 billion in sales.

Kroger CEO Rodney McMullen told shareholders last week that adding or expanding stores is simply necessary. More marketshare is the key to gaining efficiencies that make flashy moves like big technical upgrades possible.

"These are markets where we already operate, yet offer a significant opportunity to grow the business," McMullen wrote, noting 8.5 million shoppers visit a Kroger every day. "We continue to expand our presence in fill-in markets across the country."

But those flashier attempts are also part of the story. ClickList service, Kroger's order online/pickup at the store option, has been growing across Kroger's markets nationwide all year — and progress is set to reportedly double in 2017.
Leon Loewenstine, managing director at Riverpoint Capital Management, said Kroger can maintain and build on its momentum by increasing its store presence in its existing markets.

"If you're not always trying to pick up that extra customer, you run the risk of losing them," Loewenstine said. "It's keep growing or die. If you don't continue to add share, a competitor could begin to nibble away at your business."

But It's Mostly About Going Back To Basics 

While Kroger has certainly looked to push some digital upgrades, most notably BOPIS, it has been a slow progression, and very much in contrast to the rest of the industry that seems persistently to be screaming that the time for tech is now. But Kroger's McMullen isn't convinced, and wrote his shareholders last week that he sees his industry as over focused on splashy tech innovations and corporate takeovers at the expense of sustained nuts-and-bolts investment in stores.

"Too many companies over-focus on innovation in the hopes of discovering the next 'big thing,'" McMullen wrote. "Important to our success with mergers is that we don't need them to meet our long-term earnings per diluted share growth target. ... Balance – the integration of these strategic elements across our business – is how we'll continue to win with customers."

Kroger says grocery, for all the headlines, remains a marketshare business. The more Kroger controls in an area, the more efficiently it can price, and the more market it can control. McMullen notes that flexibility allows Kroger to make different types of choices than their more lauded rivals, who have opted to lower prices, buy out competitors or develop new technologies while continuing to make more money.

And while it is easy to be skeptical of those who aren't enthusiastic cheerleaders for the digital commerce revolution, Kroger has a point on numbers at least. Kroger controls 14 percent to 45 percent of retail food sales in its 10 most lucrative markets, according to industry tracker Chain Store Guide. And according to its CEO, it thinks it can do a lot better. Last fall McMullen noted Kroger could double up on $110 billion in annual share with an increase of marketshare in existing markets.

So that is where they are gong after.

How they are going to execute that exactly remains up in the air, as Kroger has been light on expansion details. But as of late 2015, McMullen told Wall Street analysts the company had identified eight markets where it would concentrate its firepower on further growing.

Will it work? It's hard to judge. But in retail these days thinking differently does seem to be the rule for reward, and if everyone else is trying to boldly go where grocery sales have never gone before, it at least stands to reason that one firm could make a go of it by just doing what consumers traditionally like somewhat better.



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