The Kroger Co

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 3,575 stores, including some 2,640 supermarkets and multidepartment stores, under two dozen banners, in about 35 states. It also runs more than 780 convenience stores under names such as Quik Stop and Kwik Shop. Kroger's Fred Meyer Stores subsidiary operates about 130 supercenters, which offer groceries, general merchandise, and jewelry, in the western US.

Operations

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 86% of its stores base, followed by price-impact warehouse stores (6%), large multidepartment stores (5%), and Marketplace stores (3%).

The company's 70 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 multidepartment 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 145 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 15 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).  

Geographic Reach

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.

Sales and Marketing

Kroger is devoting more dollars toward advertising expenses. In fiscal 2013 the ubiquitous retailer logged $553 million in advertising costs, up from $532 million in 2012.

Financial Performance

The company's retail operations, which comprise more than 99% of its consolidated sales, are its only reportable segment. Kroger's retail operating divisions have been aggregated into one reportable segment due to the operating divisions having similar economic characteristics with similar long-term financial performance.

Kroger's net sales jumped 7% in fiscal 2013 (ends January) as compared to 2012 due to identical supermarket sales increases. Operating profits helped to pump up the company's net income by a noteworthy 149% during the same reporting period. Kroger points to improvements in operating, general, and administrative expenses; rent; depreciation; and the LIFO charge for the gains, offset however by efforts to keep prices low and increased shrink and warehousing costs.

Unlike many other traditional US grocery operators, including ailing SUPERVALU, Kroger has seen its sales increase every year over the past decade. Indeed, the company achieved 37 consecutive quarters of positive same-store sales growth, excluding fuel.

Strategy

Kroger is looking to fill in gaps in its retail reach through acquisitions and organic growth. The grocery operator is expanding in North Texas, where it plans to invest $150 million to open five new Marketplace stores and increase the size of three existing locations by late 2015.

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 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.

With pharmacies in many of its stores nationwide, Kroger announced plans in late 2012 to purchase specialty pharmacy company Axium Pharmacy Holdings, based in Florida. The move satisfies Kroger's long-term growth plans and allows 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.

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