Kroger SWOT Analysis

COMPANY PROFILE

The Kroger Co.

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TABLE OF CONTENTS

Company Overview..............................................................................................3

Key Facts...............................................................................................................3

SWOT Analysis.....................................................................................................4

The Kroger Co. © MarketLine

The Kroger Co.TABLE OF CONTENTS

COMPANY OVERVIEW

The Kroger Co. (Kroger or ’the company’) is a grocery retail chain in the US. The company operatessupermarkets and multi-department stores under a number of banners including Kroger, Ralphs,Fred Meyer, Food 4 Less, Fry's, King Soopers, Smith's, Dillon’s, Jay C, QFC and City Market. Krogerprimarily operates in the US. It is headquartered in Cincinnati, Ohio, and employed about 343,000people as of February 2, 2013.

The company recorded revenues of $96,751 million in the financial year ended January 2013(FY2013), an increase of 7.1% over FY2012.The operating profit of the company was $2,764 millionin FY2013, compared to $1,278 million in FY2012. Its net profit was $1,497 million in FY2013,compared to $602 million in FY2012.

The company's financial year ends on the Saturday closest to January 31. FY2013 was a 53-weekperiod and FY2012 was a 52-week period.

KEY FACTS

The Kroger Co.Head Office1014 Vine StreetCincinnatiOhio 45202USA

1 513 762 4000Phone

Fax

http://www.thekrogerco.comWeb Address

96,751.0Revenue / turnover(USD Mn)

JanuaryFinancial Year End

343,000Employees

KRNew York Ticker


The Kroger Co.Company Overview

SWOT ANALYSIS

Kroger is a grocery retail chain in the US. The company holds the largest or the second largestmarket share position in 38 of the 41 major markets in which it operates.The company ranks amongthe largest corporations in the US. Kroger's size provides it with significant pricing power over foodproducers, giving the company economies of scale over smaller supermarket operators. However,increasing competition could negatively impact Kroger's market share.

WeaknessesStrengths

Overcharging customers in Ralphs storeshurt consumer confidence and exposed thecompany to penalties

Large and established presence led tostrong performanceEffective differentiation measuresPresence in several formats increasesaddressable market

ThreatsOpportunities

Intense competition may pressurize marginsGrowing private label market will lead togrowth in revenues and profitability High degree of unionization will increase

labor costs against a backdrop of risingwages and healthcare costs

Increasing popularity of retail clinicsGrowing influence of Hispanic population

Increase in food safety regulationsHigher demand for natural and organicproductsAcquisition of Harris Teeter Supermarkets

Strengths

Large and established presence led to strong performance

Kroger is one of the largest retail grocery chains in the US in terms of revenues.The company holdsthe largest or the second largest market share position in 38 of the 41 major markets in which itoperates. At the end of FY2013, Kroger operated 2,424 supermarkets and multi-department stores,786 convenience stores, 328 jewelry stores and 37 manufacturing plants. In 2013, the company wasranked among the America's largest corporations, as well as the world's largest corporations by abusiness magazine. Kroger's size provides significant pricing power with food producers, giving iteconomies of scale over smaller supermarket operators. The company's strong performance in anextremely challenging operating environment is reflected by its identical store sales growth of 3.5%(excluding fuel) it recorded in FY2013. Moreover, Kroger’s identical store sales have grown for 38consecutive quarters. The company also recorded a revenue growth rate of 7.1% in FY2013, whileWal-Mart's revenues grew by 5% in the financial year ended January 2013, and Safeway's revenues


The Kroger Co.SWOT Analysis

grew by 1.3% in the financial year ended December 2012. Kroger has been able to increase itsmarket share in an extremely competitive environment which has been characterized by price warsfrom value retailers and other competitors, who have been gaining popularity owing to their pricepositioning.

The company being a large retailer enjoys advantages of scale, which can be passed on toconsumers. Additionally, its established presence enabled it to increase market share and revenuesin a tough operating environment.

Effective differentiation measures

Kroger follows a strategy which has evolved to incorporate more elements of differentiation on factorsother than price. The company has tried to identify various factors that drive customer visits andloyalty and has made several targeted investments to achieve the same. One such move is theincrease in gasoline stations. The company has increased the number of stores with fuel centers to1,169 in FY2013 from 376 in FY2003. At the end of FY2013, the company had fuel centers in 31US states. Having more than 1,000 fuel centers is a key advantage for Kroger, enabling the companyto drive traffic to its stores. Kroger also uses several targeted promotions on gasoline to attractcustomers to its stores. In 2010, the company partnered with Shell to roll out the grocer rewardsprogram in Cincinnati, Dayton, Knoxville, Nashville, San Diego, Houston, Atlanta and NorthernGeorgia. Kroger and Shell expanded this program to include Augusta and Ohio areas in 2011. Thisprogram allows customers in participating markets to earn points and redeem them for savings ongasoline at Kroger Fuel Centers and participating Shell stations. Additionally, it also gives its customersan opportunity to earn rewards including a minimum of 10 cents off a gallon of gasoline for every100 Fuel Points they earn by using their free loyalty card when purchasing a variety of productsinside Kroger and Ralphs stores. Shell serves millions of Americans each day and through this tie-upKroger was able to substantially enhance its customer base.

On the other hand, the company increased its exclusivity and differentiation by investing on theprivate label program. Over the years, the company has built a strong private-label program whichcaters to premium and value segment markets. Kroger focuses on providing quality products throughits private label program and manufactures about 40% of the proprietary brands it sells. Kroger alsodifferentiates itself by providing individual attention to its customer needs and requirements. This isfacilitated by the intelligence provided to the company on its customer behavior by dunnhumbyUSA,a joint venture between Kroger and dunnhumby (a company engaged in data management, customeranalysis and insight-led planning) established in 2003. dunnhumbyUSA provides Kroger with in-depthanalysis on the shopping patterns of its customers.The information so gained is then used to developa basket of customized offerings and coupons specific to a particular customer segment’srequirements.This acts as a compelling proposition for its customers and results in repeat purchases.

These efforts helped Kroger to strengthen its foothold in the supermarket industry. Its targetedpromotions which focus on products and services in line with customer preferences and measuresto enhance customer experience will enable the company to sustain severe price wars. Additionally,these measures also increase the company's potential customer base and average spend whichwill contribute positively to the top line growth.



Presence in several formats increases addressable market

Kroger follows a multi-format model to target all customer segments. Its supermarkets are generallyoperated under one of the following formats: combo stores, multi-department stores, marketplacestores, and price impact warehouses. Combo stores are typically in a food store format and targetcustomers located in two to 2.5 mile radius. While maintaining the convenient food store aspect,these stores are large enough to include specialty departments. Through such departments Krogerhas established these stores to offer one-stop shop positioning along with a convenience retailingpositioning. Multi-department store is an extension to the combo store and it additionally offersgeneral merchandise items such as apparel, home fashion and furnishings, electronics, automotiveproducts, toys and fine jewelry. These stores diversify revenues across several product categories.Kroger's marketplace stores are similar to the multi-department stores and offer full-service groceryand pharmacy departments as well as expanded general merchandise offering outdoor living products,electronics, home goods and toys. The price impact warehouse operates a low cost warehousemodel catering to the value segment. Additionally, the company through its subsidiaries operatesconvenience stores and specialty jewelry stores.

The presence across several formats increases the addressable market as Kroger is able to caterto the varied customer preferences. Large addressable market facilitates increased potential customerbase which, in turn, enables the company to drive top line growth.

Weaknesses

Overcharging customers in Ralphs stores hurt consumer confidence and exposed the company topenalties

Ralphs was charged for overbilling customers. Between January 2010 and March 2010, the LosAngeles County Department of Weights and Measures conducted undercover inspections at 14Ralphs stores across Los Angeles and found that customers were overcharged for prepackagedand weighed products including fried chicken and salad. Most of the violations involved the storeillegally charging for the weight of the package, or including the ice glaze on frozen products in thenet weight. Some prepackaged items also were found to be under the weight posted on the label.Following the investigation, the City Attorney's Criminal Branch filed a multi-count criminal caseagainst Ralphs. Both Ralphs and Kroger faced fines and penalties separately of up to $256,000 in2010. However, the charges against Kroger were dropped later. In March 2011, Ralphs was orderedto pay $67,600 in fines against these charges. This is not the first time that Ralphs paid penaltiesfor false labeling and overcharging prices. Later, in September 2012, Ralphs was ordered to pay$1.1 million in civil penalties, costs, and restitution for overcharging customers on deli and otherweighed food products and for failing to reduce the weight of packaging on those items.This paymentwas made as result of a settlement reached with the Los Angeles City Attorney's Office in partnershipwith the Los Angeles County District Attorney's Office.



Such charges against the company severely hurt consumer confidence. In a market where consumersare attracted to low price high value products, over pricing will erode Kroger's brand image.Additionally, fines and penalties would increase the expenses for the company.

Opportunities

Growing private label market will lead to growth in revenues and profitability

The growing preference of customers to buy value oriented merchandise is expected to boost thedemand for private label goods in the US. According to the industry sources, among all major USretail channels, private label sales increased by approximately 3% to reach nearly $109 billion in2012. Since 2009, annual growth of store brands sales has averaged approximately 5%, comparedto national brands sales annual growth of approximately 2%. Private label products provide customerswith an attractive alternative to higher-priced national brands. Instead of buying expensive brands,consumers across the industry are turning to generic and private label products. Even upper-incomeshoppers are more willing to buy generic, which has traditionally appealed more to shoppers withlimited budgets.

Kroger strongly focuses on its private label portfolio as part of its merchandising strategy. Itssupermarkets, on an average, stock nearly 12,000 private label items. Kroger follows a three tierapproach (Private Selection, banner brand and Kroger Value) to cater to varied customerrequirements. Private Selection is a premium quality brand designed to be a unique item in thegourmet or upscale brands category. The banner brand (Kroger, Ralphs and King Soopers amongothers) comprises majority of the company's private label items and focuses on taste and efficacyto satisfy customers. Kroger Value is the value brand, designed to deliver quality products at a veryaffordable price. Presently, corporate brands account for 24% of Kroger's total grocery departmentsales dollars, indicating the popularity of its private labels. The gross margins on private brands arehigher than that of national brands and increased acceptance of these brands will lead to an increasein sales and will, in turn, impact the company's bottom line positively. Additionally, as these brandsare offered exclusively in the company's stores, it is a strong differentiator and offers a competitiveadvantage.

Increasing popularity of retail clinics

Retail clinics are walk-in clinics located in pharmacies or grocery stores. Growing number of customershave been using the facilities offered by these retail clinics as these clinics offer several advantages.Low cost entry points and extended hours of operations compared to hospitals are the key factorsdriving the growth of retail clinics. The demand for convenient healthcare at affordable prices isexpected to further drive the growth in this segment. According to industry estimates, the numberof retail clinics in the US is expected to grow from approximately 1,400 in 2012 to 2,700 by 2016.

Another area where retail pharmacy channel plays an important role is immunization against varioustypes of flu. According to a survey conducted by the Centers for Disease Control and Prevention,



during 2012–13 flu season, nearly 57% of children and 42% of adults received influenza vaccination.Though the most common place of vaccination among both adults and children was a doctor's office,pharmacies, supermarkets and other stores were also key places which saw customers coming fortheir vaccine shots.

Kroger operates more than 1,940 in-store pharmacies in the US, which fill over 160 millionprescriptions every year. The company also offers convenient access to seasonal flu vaccines atan affordable price. These flu vaccines are administered by trained pharmacists and nursepractitioners. In 2012, the pharmacists at Kroger administered more than one million flu shots tocustomers. Additionally, the company's $4 generic prescription program has saved its customersmillions of dollars on drugs. The increasing popularity of in-store retail clinics and immunizationprograms will increase the footfall for Kroger.

Growing influence of Hispanic population

The US is one of the most popular destinations for Hispanic population. The growing Hispanicpopulation in the country is likely to increase the level of consumer spending considerably, in timeto come. According to the US Census Bureau, Hispanic population is expected to increase from53.3 million in 2012 to 128.8 million in 2060. Hispanic population accounted for 16.9% of the country'soverall population in 2012. Though a large number of Hispanics live in the Mexican border statessuch as California, Texas and Florida, they are moving to other parts of the country as well. TheHispanic population in the US is expected to account for 31% of the country's overall population by2060. The economic influence of Hispanics is also expected to be profound in the future. Industrysources cite that the US Hispanic purchasing power exceeded $1 trillion in 2011. This is expectedto reach $1.5 trillion by 2015.The purchasing power of immigrant population is expected to continueto show increase, as people of African, Hispanic and Asian heritage are expected to comprise agrowing proportion of the US population in future.

Kroger has a strong presence in the US market with stores in 31 states.The company's wide presenceacross states can be leveraged to cater to the household needs of the growing Hispanic populationin the US.

Higher demand for natural and organic products

The natural and organic food products segment is one of the fastest growing categories in foodretailing. The demand for organic foods is growing in the US, due to the increasing preference ofconsumers for healthy food. According to industry estimates, the US organic food sales increased11% in 2012 compared to 2011. Produce (fruits and vegetables) and dairy accounted for more than50% of total organic sales.The organic food market in North America is expected to register a stronggrowth rate in the coming years. In a latest study undertaken by an industry source, nearly 80% USfamilies reported that they purchase organic at least sometimes. With parents focusing on providinghealthier food options to their children, there has been an increase in the frequency of purchasesof organic foods in the country. Furthermore, the awareness of the USDA Organic seal is alsocontributing to such a surge in sales.With consumers looking for the seal when shopping for organicproducts, the study indicated that the trust in organic products has increased.



Kroger introduced new Simple Truth and Simple Truth Organic brands offering several naturalproducts, including meat, chicken and eggs across all its stores in 2012. These products do notcontain artificial preservatives and ingredients and are certified organic by the US Department ofAgriculture.Thus, Kroger can harness the increasing customer preference for organic foods to boostits revenue growth.

Acquisition of Harris Teeter Supermarkets

Kroger and Harris Teeter Supermarkets signed a definitive merger agreement in July 2013, underwhich Kroger will acquire all outstanding shares of Harris Teeter Supermarkets. Through itswholly-owned subsidiary, Harris Teeter Inc., Harris Teeter Supermarkets operates a regional chainof 212 supermarkets (147 of which have pharmacies) in eight states primarily in the southeasternand mid-Atlantic US, and the District of Columbia. Harris Teeter Supermarkets also operatesdistribution centers for grocery, frozen and perishable foods in Greensboro and Indian Trail, NorthCarolina, and a dairy facility in High Point, North Carolina.This acquisition will expand the company’smarket presence in high-growth markets, vacation destinations and university communities acrossNorth Carolina, Virginia, South Carolina, Maryland, Tennessee, Delaware, Florida, Georgia and theDistrict of Columbia. Through this acquisition, Kroger expects to achieve annual cost savings ofnearly $40 to $50 million over the next three to four years.

The acquisition of Harris Teeter Supermarkets considerably expands the presence of the companyin the Southeastern US markets, where Harris Teeter Supermarkets enjoys significant brandrecognition. Also, its customer base comprises households with high median incomes, which will beadded to the company’s customer base. Harris Teeter Supermarkets has maintained its positionamong the top three retailers in the North Carolina market, where it competes with large grocerssuch as Wal-Mart Stores. Through its large scale of operations and significant bargaining power,Wal-Mart Stores has been able to compete effectively in the price sensitive market. By leveragingits operational scale and resources, Kroger can work towards strengthening Harris Teeter’scompetitiveness in this market to better compete with Wal-Mart Stores and gain market share. Theacquisition of Harris Teeter Supermarkets therefore expands the company’s distribution networkand customer base, and provides it with the ability to compete with regional grocers effectively inHarris Teeter’s high-growth markets.

Threats

Intense competition may pressurize margins

Food retailing sector is the US is characterized by stiff competition leading to price wars. Non-existentswitching costs for consumers, who are largely driven by price, increased the appeal of discountersand other value retailers. Wal-Mart's entry into the grocery market and its aggressive expansion hasproved to be a major disruption to traditional operators, whose cost structures are higher and cannotmatch the low prices that Wal-Mart offers. Merchandise offered at Wal-Mart's stores is priced atmuch lower range than the prices offered by its competitors. As the purchasing power of consumersis decreasing in this weak economy, pricing matters more and it plays into the hands of the low-price



leaders. In addition, Kroger's economies of scale are trumped by discounters such as Wal-Mart andCostco. Kroger, to improve market share, was forced to become more promotional, which led toreduced profitability in the past. Although historically Kroger has been able to keep up stable margins,FY2012 saw more margin compression as a result of heavy price competition and the market sharegrowth came at an expense of profitability. Competition for the consumer food dollar continues tointensify as supercenters and warehouse clubs increasingly promote lower prices on food to drivetraffic. Kroger also faces potential competition from the online grocery services offered by variousretailers, For instance, Amazon launched its grocery-delivery service in San Francisco in December2013, expanding the service to the San Francisco Bay Area from the existing Seattle and Los Angelesmarkets. Furthermore, Wal-Mart Stores announced that it will test home delivery of groceries orderedonline in Denver following two years of trials in the San Francisco-San Jose area. Increasingcompetition could negatively impact Kroger's market penetration.

High degree of unionization will increase labor costs against a backdrop of rising wages and healthcarecosts

Tight labor markets, increased overtime, government mandated increases in minimum wages anda higher proportion of full-time employees are resulting in an increase in labor costs. The federalminimum wage rate in the US, which remained at $5.15 per hour since 1998, increased to $5.85per hour in 2008. It further increased to $6.55 per hour in 2009 and to $7.25 per hour in 2010.Moreover, many states and municipalities in the country have minimum wage rates even higher than$7.25 per hour due to higher cost of living. The minimum wage rate has increased in the states ofArizona (from $7.8 in 2013 to $7.9 in 2014), Colorado (from $7.78 in 2013 to $8 in 2014), Florida(from $7.79 in 2013 to $7.93 in 2014), Ohio (from $7.85 in 2013 to $7.95 in 2014), Oregon (from$8.95 in 2013 to $9.10 in 2014) and Washington (from $9.19 in 2013 to $9.32 in 2014) in the recentpast. In addition, the healthcare costs for employers in the US are increasing. According to industryestimates, healthcare costs for the US employers are estimated to grow by 7% in 2014 comparedto 2013.

A majority of Kroger's employees are covered by collective bargaining agreements with unions, andthe company is a party to nearly 300 collective bargaining agreements, with an expiry term of threeto five years. During FY2014, the company plans to negotiate several of these labor agreementscovering store employees in Indianapolis, Houston, Dallas, Cincinnati and Seattle, among others.In all of these contracts, rising wage, healthcare and pension costs will continue to be an importantfactor in negotiations.Yielding to demands by these unions may lead to an increase in the operatingcosts for the company and may have an adverse effect on future results of operations. Additionally,such issues may lead to strained relationship with unions. The company has endured labor strikesin the past and the resistance to incur increased costs may lead to prolonged work stoppagesaffecting a substantial number of locations. Rising healthcare and labor costs may therefore affectKroger’s profitability. Furthermore, high unionization of its labor might affect the operations in casethe company and the unions do not reach a consensus.

Increase in food safety regulations



The company's business operations are subject to regulation by a variety of federal, state, local andforeign laws and regulations regarding manufacturing, marketing and distribution of food products.In 2009, a new legislation was passed requiring more frequent inspections of processing plants andgiving the government authority to order the recall of tainted foods. According to several organizations,the present food safety regulations are inadequate and these organizations have recommendedstricter regulations. For instance, in 2009, the American Public Health Association recommendedlegislative changes to establish a new authority to strengthen the food safety system. In April 2013,the US Food and Drug Administration (FDA) requested a budget of $4.7 billion for fiscal 2014 (October1, 2013 through September 30. 2014). Of these, $295.8 million would be spent on food safetyregulations. Increased food safety measures, although beneficial, will increase the burden of specificcompliances for Kroger and may increase the related expenditure for the company.



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Kroger SWOT Analysis

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