Kroger may be the nation's largest traditional grocer, but it still must watch out for falling prices; Wal-Mart long ago overtook Kroger as the largest seller of groceries in the US. While Kroger has diversified through acquisitions, adding jewelry and general merchandise to its mix, supermarkets still account for more than 90% of sales. The company operates about 3,750 stores, including some 2,640 supermarkets and multi-department stores, under two dozen banners, in about 35 states. It also runs more than 785 convenience stores under names such as Quik Stop and Kwik Shop. Kroger's Fred Meyer Stores subsidiary operates 130 supercenters, which offer groceries, general merchandise, and jewelry, in the western US.
Kroger operates supermarkets in about 30 US states from coast to coast. Key markets include California, Ohio, Texas, and Georgia, which combined are home to more than a third of its supermarkets. Its Fred Meyer subsidiary does business in the Pacific Northwest and Alaska. All of Kroger's sales are rung up in the US.
Kroger (either directly or through its subsidiaries) operates a wide variety of store formats and banners that divvy up the retail market by size, price point, and geography. Its combination-food-and-drug stores account for 85% of its stores base, followed by price-impact warehouse stores (7%), large multi-department stores (5%), and Marketplace stores (3%).
The company's 86 Marketplace stores, which trade under the Dillon's, Fry's, Kroger, and Smith's banners, capitalize on Fred Meyer's general merchandise expertise. While similar to multi-department stores, Marketplace stores are generally smaller and don't stock apparel. They offer full-service grocery and pharmacy departments and an expanded general merchandise section that includes outdoor living products, electronics, home goods and toys. Kroger's 171 price-impact warehouse-style stores operate under the Food 4 Less and Foods Co. banners and cater to the thrifty with no-frills, low-cost shopping for grocery and health and beauty care items.
Kroger is also a major pharmacy operator, with pharmacies in about 80% of its food stores. Kroger operates nearly 40 manufacturing plants, including 18 dairies and a pair of ice cream plants, which supply its stores with breads and baked goods, dairy products, meat, and thousands of other grocery items, including organic foods. Kroger's supermarkets typically stock about 11,000 of its own-brand products, about 40% of which the company manufactures. Kroger also has a personal finance business (launched in 2004).
Sales and Marketing
Kroger is devoting more dollars toward advertising expenses. In fiscal 2014 the ubiquitous retailer logged $587 million in advertising costs, up from $553 million in fiscal 2014.
The company’s revenues increased by 2% in fiscal 2014 due to a 2% supermarket sales increase partially offset by the extra accounting week in fiscal 2013. The 2014 increase was also due to higher average sales per customer (partially due to inflation) and an increase in transactions.
Kroger’s fiscal 2014 net income increased marginally to $1,519 million (compared to $1,497 million in fiscal 2013) driven by higher sales together with a decrease in rent, income tax, and interest expense offset by an increase in operating, general, and administrative expenses, and higher depreciation costs.
The company’s cash provided in operating activities for fiscal 2014 was $3,380 million (up from $2,833 million a year earlier) mainly due to a slight increase in net income coupled with lower store deposits in-transit and a decrease of $208 million in prepaid expenses, partly offset by higher depreciation expenses and lower receivables of $118 million.
Kroger is fighting to defend its share of the US grocery market from increasing competition from big-box retailers, drugstores, and specialty grocers. Indeed, Kroger is the only traditional grocery company among the top four sellers of groceries in the US. (The others are Wal-Mart, Costco, and Target.) Increasing its market share is an important part of the company's long-term strategy. To that end, Kroger launched a loyalty program that offers discounts to customers based on their past purchases and has been cutting prices while improving service and product selection to hang on to customers. It has also whittled the wait time at the checkout stand to an average of about 30 seconds, from as long as four minutes in the past. Private-label products, which help to differentiate supermarket chains from their competitors and foster customer loyalty, are a pillar of Kroger's merchandising strategy. The grocer's 11,000 private-label products account for more than 25% of its grocery sales.
Working to jump-start its online strategy by folding an established e-commerce platform into its business, Kroger in August 2014 acquired vitamin and supplement retailer Vitacost.com for $280 million. The Florida-based company boasts technology expertise and ship-to-home fulfillment centers located in Las Vegas and Lexington, North Carolina, that allow it to ship products to customers in all 50 US states and internationally. (Purchasing Vitacost.com also gives Kroger access to 16 new states.)
Kroger is also looking to fill in gaps in its retail reach through acquisitions and organic growth. The grocery operator is expanding in the Dallas-Fort Worth market, where it plans to invest $150 million to open five new Marketplace stores and increase the size of three existing locations by late 2015.
In 2014 the company opened three new fuel center locations including Abingdon, Virginia; Decatur, Georgia; and Louisville, Kentucky, bringing Kroger's fuel center locations total to 2,000.
With pharmacies in many of its stores nationwide, Kroger purchases specialty pharmacy company Axium Pharmacy Holdings, based in Florida in 2012. The move satisfies Kroger's long-term growth plans and allowed the grocery chain to serve customers that require complex drug therapies.
Mergers and Acquisitions
In August 2014, Kroger acquired online vitamin and supplement retailer Vitacost.com Inc. for $280 million, adding an e-commerce platform to its business.
Kroger in January 2014 acquired Harris Teeter Supermarkets, a regional chain of some 225 stores with a big presence in the Carolinas, where Kroger does not have significant heft. Kroger paid about $2.5 billion for the regional grocery chain, which rang up $4.7 billion in sales in fiscal 2013.
In February 2014, the company purchased the assets of YOU Technology Brand Services, Inc., the Silicon Valley-based leader in digital coupons and promotions. The deal enables Kroger to deliver hundreds of millions of digital coupons to Kroger customers.