October 16, 2008
Kroger Confident of Strategy
Kroger management is feeling pretty good about the chain’s performance. Yesterday, the company announced that same-store sales were up five percent for the first eight weeks of this quarter and that it expected to hit its forecast for 2008.
The company has benefited in part, according to Reuters, from “cash-strapped consumers” turning to its various stores for savings on store brands and discounted gasoline. Kroger is looking to finish 2008 with sales, excluding fuel, up between 4.5 and 5.5 percent.
David Dillon, chairman and chief executive officer of Kroger, expressed confidence in the company’s strategic direction even in light of the current economic challenges facing it and its customers.
“In this uncertain economy, we are delivering value to shoppers on any budget through our Customer 1st approach,” he said in a press release.
While availability of credit is a major concern in the market today, Mr. Dillon said Kroger has access to the funds it needs to operate the company.
“Our financial strategy provides us with sufficient liquidity to finance our short-term borrowing needs through our $2.5 billion five-year credit facility that matures in November 2011. On peak borrowing days, we expect that more than $1.2 billion of this facility would remain available. In addition, Kroger maintains uncommitted money market lines totaling $75 million,” said Mr. Dillon.
Discussion Question: What are Kroger’s major strengths and weaknesses? How does their credit situation compare with other major grocers?
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King Soopers, which operates under the Kroger banner here in Denver, offers a great shopping experience. They keep all of their self-checkouts open all of the time and there is an employee with a handheld device to eagerly help you if necessary. They have spinners at the self-checkout so that you can look up the codes for fresh foods and not have to guess. Also, they have a couple of hanging aisle boards that provide you with quick look up for an item. This way you don’t have to squint down every aisle to find something you need in a hurry.
I’m a fan of Ralph’s in Southern California and now King Soopers which tend to be located in affluent communities. This strategy, along with the aforementioned inflation, has probably helped them through the weak economy.
Kroger is hanging in there with near even same store sales in real dollars. Much of the increase is from inflation. Still, it’s better than most other publicly held chains which are thrilled to get 2 or 3%.
There is nothing special about Kroger’s operations. It’s still a plain vanilla grocery store chain. What is different is that it is better managed. With the onslaught of supercenters, Kroger has maintained its market share while Winn-Dixie, A&P, Big Bear, Super Kmart, and Albertsons have folded up their tents and closed stores. They simply just ran a better company. They don’t seem to be overly greedy either. Kroger seems real happy keeping their stock price level around $25 and not doing any wacky, desperate changes to get a short term stock price increase.
Kroger does offer an extensive line of private label which adds value to the shopping experience. Their online presence is also strong. A few complaints I’ve heard are the lack of customer service during some busy times, and that some stores in certain areas are showing lean inventories and it is starting to affect image.
Controlling labor is important but not at the expense of the store. Good fills and well merchandised shelves will always translate into more shelves. Kroger should look at renovating some older stores and look for different products to compliment the core offering.
Kroger has a successful culture that perpetuates its ability to operate well-run stores. They have depth of management that understands the business. They are consistent in providing a good shopping experience across the country. Kroger may not rise to the Publix level in service or shopping experience but they are better than most of their competition.
They have also competed well against Walmart in most markets. I’ll never forget a Kroger exec explaining with regards to competing with Walmart that it’s like trying to outrun a bear in the woods with two others, “you don’t have to be the fastest, just not the slowest.” Kroger may not be the best in every market, but they definitely aren’t the worst.
Most well run grocers should do okay as the economy suffers. As consumers look to save on costs (e.g., dining out) they will turn to buying more at the grocers (though gourmet goods will probably suffer a bit). With strong cash flow, the grocers should survive without too much trouble. In fact, the situation may actually help the weaker grocers survive a bit longer (assuming they don’t lose access to working capital funds).
Food inflation is a factor, but price investments and the strength of its analytics (powered by dunnhumby) are keeping Kroger ahead of other traditional grocers at the moment. The obvious risk is that Kroger is competing on price in Walmart’s world, and Walmart is getting even more aggressive.
Today’s CPI numbers show that YoY inflation in September was essentially flat. It will be interesting to see how food share plays out over the next 3-6 months. My guess is that supercenters and clubs stand to gain, Kroger will tread water, and the rest of the pack will suffer.
There are a couple questions here, but to answer the credit question directly, I think the timing of this whole financial mess was significant for retailers. Most of the credit commitments for holiday purchases (Halloween, Thanksgiving, Hanukah, Christmas, and New Years) were already arranged by September and the build up of inventory had already begun. Whether the consumer will show up to buy all that inventory is another question, but the credit necessary to bring it in was already in place. So, I don’t think credit is a key right now.
I think a bigger factor is how retailers react to the uncertainty of consumer activity. Some will discount early and focus on getting rid of inventory. We won’t know whether that was a good move or not until after the season, when hindsight will reveal whether it was necessary to lower margins or not.
Credit will become a bigger issue beyond the winter holidays. Some retailers will respond by extending payments. More aggressive use of “OPM” will allow retailers to stock the shelves at suppliers’ expense. But eventually, tight credit will impact the ability of retailers to forward buy and affect inventory availability.
Kroger is smart enough to do what it has to do to succeed without trying to be another Walmart. It has good locations, has a great PL program, features quality, promotes and merchandises very well and it has smart management.
The poll for the evaluation of Kroger’s greatest strengths is quite diverse with nine different selections and not one is getting more than 20 percent. In addition, “inflation” was the top write-in candidate in the panelists’ commentaries. Why is Kroger’s strength an enigma?
While some think Kroger is plain vanilla–and that might be partially true–Kroger has made lots of consumers like “plain vanilla.” So let’s give them a few kudos instead of crediting their current “success” to inflation.
Begs the question–how much of this growth in same store sales is due to rising food prices and not real growth (due to more shoppers or shoppers shopping more often)?
Like many grocery businesses, Kroger is undoubtedly benefiting from consumers “trading down” from restaurants to purchasing specialty grocery orders, rather than going out. The trick for continued success over the next 18-24 months, through the economic storm will be to ensure the customer voice is truly listened to at every location, every day. Cash strapped and frustrated consumers are likely to become more demanding and difficult to please, so ensuring their needs are met will become even more critically important.
Kroger and all the other conventional supermarkets looked bad when Walmart was rolling out groceries. Walmart, Target, Costco, Sam’s Club, and BJ’s are building very few locations lately, so all conventional supermarkets can breathe easier.
And food stamps are a great subsidy for supermarkets, especially these days, when unemployment is rising. What would happen to the surpermarket and drug store businesses if the Federal and state governments demanded a 25% discount in the gross margin generated by Medicaid, Medicare, and food stamp purchases?
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King Soopers, which operates under the Kroger banner here in Denver, offers a great shopping experience. They keep all of their self-checkouts open all of the time and there is an employee with a handheld device to eagerly help you if necessary. They have spinners at the self-checkout so that you can look up the codes for fresh foods and not have to guess. Also, they have a couple of hanging aisle boards that provide you with quick look up for an item. This way you don’t have to squint down every aisle to find something you need in a hurry.
I’m a fan of Ralph’s in Southern California and now King Soopers which tend to be located in affluent communities. This strategy, along with the aforementioned inflation, has probably helped them through the weak economy.
Kroger is hanging in there with near even same store sales in real dollars. Much of the increase is from inflation. Still, it’s better than most other publicly held chains which are thrilled to get 2 or 3%.
There is nothing special about Kroger’s operations. It’s still a plain vanilla grocery store chain. What is different is that it is better managed. With the onslaught of supercenters, Kroger has maintained its market share while Winn-Dixie, A&P, Big Bear, Super Kmart, and Albertsons have folded up their tents and closed stores. They simply just ran a better company. They don’t seem to be overly greedy either. Kroger seems real happy keeping their stock price level around $25 and not doing any wacky, desperate changes to get a short term stock price increase.
Kroger does offer an extensive line of private label which adds value to the shopping experience. Their online presence is also strong. A few complaints I’ve heard are the lack of customer service during some busy times, and that some stores in certain areas are showing lean inventories and it is starting to affect image.
Controlling labor is important but not at the expense of the store. Good fills and well merchandised shelves will always translate into more shelves. Kroger should look at renovating some older stores and look for different products to compliment the core offering.
Kroger has a successful culture that perpetuates its ability to operate well-run stores. They have depth of management that understands the business. They are consistent in providing a good shopping experience across the country. Kroger may not rise to the Publix level in service or shopping experience but they are better than most of their competition.
They have also competed well against Walmart in most markets. I’ll never forget a Kroger exec explaining with regards to competing with Walmart that it’s like trying to outrun a bear in the woods with two others, “you don’t have to be the fastest, just not the slowest.” Kroger may not be the best in every market, but they definitely aren’t the worst.
Most well run grocers should do okay as the economy suffers. As consumers look to save on costs (e.g., dining out) they will turn to buying more at the grocers (though gourmet goods will probably suffer a bit). With strong cash flow, the grocers should survive without too much trouble. In fact, the situation may actually help the weaker grocers survive a bit longer (assuming they don’t lose access to working capital funds).
Food inflation is a factor, but price investments and the strength of its analytics (powered by dunnhumby) are keeping Kroger ahead of other traditional grocers at the moment. The obvious risk is that Kroger is competing on price in Walmart’s world, and Walmart is getting even more aggressive.
Today’s CPI numbers show that YoY inflation in September was essentially flat. It will be interesting to see how food share plays out over the next 3-6 months. My guess is that supercenters and clubs stand to gain, Kroger will tread water, and the rest of the pack will suffer.
There are a couple questions here, but to answer the credit question directly, I think the timing of this whole financial mess was significant for retailers. Most of the credit commitments for holiday purchases (Halloween, Thanksgiving, Hanukah, Christmas, and New Years) were already arranged by September and the build up of inventory had already begun. Whether the consumer will show up to buy all that inventory is another question, but the credit necessary to bring it in was already in place. So, I don’t think credit is a key right now.
I think a bigger factor is how retailers react to the uncertainty of consumer activity. Some will discount early and focus on getting rid of inventory. We won’t know whether that was a good move or not until after the season, when hindsight will reveal whether it was necessary to lower margins or not.
Credit will become a bigger issue beyond the winter holidays. Some retailers will respond by extending payments. More aggressive use of “OPM” will allow retailers to stock the shelves at suppliers’ expense. But eventually, tight credit will impact the ability of retailers to forward buy and affect inventory availability.
Kroger is smart enough to do what it has to do to succeed without trying to be another Walmart. It has good locations, has a great PL program, features quality, promotes and merchandises very well and it has smart management.
The poll for the evaluation of Kroger’s greatest strengths is quite diverse with nine different selections and not one is getting more than 20 percent. In addition, “inflation” was the top write-in candidate in the panelists’ commentaries. Why is Kroger’s strength an enigma?
While some think Kroger is plain vanilla–and that might be partially true–Kroger has made lots of consumers like “plain vanilla.” So let’s give them a few kudos instead of crediting their current “success” to inflation.
Begs the question–how much of this growth in same store sales is due to rising food prices and not real growth (due to more shoppers or shoppers shopping more often)?
Like many grocery businesses, Kroger is undoubtedly benefiting from consumers “trading down” from restaurants to purchasing specialty grocery orders, rather than going out. The trick for continued success over the next 18-24 months, through the economic storm will be to ensure the customer voice is truly listened to at every location, every day. Cash strapped and frustrated consumers are likely to become more demanding and difficult to please, so ensuring their needs are met will become even more critically important.
Kroger and all the other conventional supermarkets looked bad when Walmart was rolling out groceries. Walmart, Target, Costco, Sam’s Club, and BJ’s are building very few locations lately, so all conventional supermarkets can breathe easier.
And food stamps are a great subsidy for supermarkets, especially these days, when unemployment is rising. What would happen to the surpermarket and drug store businesses if the Federal and state governments demanded a 25% discount in the gross margin generated by Medicaid, Medicare, and food stamp purchases?