The Kroger Co.

Company Profile
Publication Date: 21 Aug 2011

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The Kroger Co.

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TABLE OF CONTENTS

TABLE OF CONTENTS
Company Overview..............................................................................................4
Key Facts...............................................................................................................4
SWOT Analysis.....................................................................................................5

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The Kroger Co.

Company Overview

COMPANY OVERVIEW
The Kroger Co. (Kroger or "the company") is one of the leading grocery retail chains in the US. The
company operates a chain of supermarkets and multi-department stores under a number of banners,
including Kroger, Ralphs, Fred Meyer, Food 4 Less, Fry's, King Soopers, Smith's, Dillons, QFC and
City Market. In addition, Kroger operates 40 manufacturing plants in the US. The company is
headquartered in Cincinnati, Ohio, and employs 338,000 people.
The company recorded revenues of $82,189 million during the financial year ended January 2011
(FY2011), an increase of 7.1% over FY2010. The operating profit of the company was $2,182 million
in FY2011, compared with $1,091 million in FY2010. The net profit was $1,116 million in FY2011,
compared with a net profit of $70 million in FY2010.

KEY FACTS
Head Office

The Kroger Co.

1014 Vine Street
Cincinnati
Ohio 45202 1100
USA

Phone

1 513 762 4000

Fax
Web Address

http://www.kroger.com

Revenue / turnover 82,189.0

(USD Mn)
Financial Year End

January

Employees

338,000

New York Ticker

KR

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SWOT Analysis

SWOT ANALYSIS
The Kroger Co. (Kroger or "the company") is one of the leading grocery retail chains in the US. In
2011, the company was ranked 25th on the Fortune 500 list of Americas largest corporations, and
76th on the Global 500 list of worlds largest corporations. Kroger is among the top three market
share holders in 38 of the 42 major markets in which it operates. Kroger's size provides significant
pricing power with food producers, giving the company economies of scale over smaller supermarket
operators. However, the companys revenues may be adversely affected due to the low confidence
levels among consumers in the US, which is depressing the demand for discretionary items.
Strengths

Weaknesses

Large and established presence led to

strong performance
Effective differentiation measures
Presence in several formats increases
addressable market

Overcharging customers in Ralphs stores

hurt consumer confidence and exposes the
company to penalties
Lower margins compared to competitors

Opportunities

Threats

Growing private label market will lead to

growth in revenues and profitability
Increased popularity of retail clinics
Growing influence of Hispanic population

Low consumer confidence affects demand

for discretionary items
Intense competition from discounters will
pressurize margins
High degree of unionization will increase
labor costs against a backdrop of rising
wages and healthcare costs

Strengths

Large and established presence led to strong performance

Kroger is one of the largest retail grocery chains in the US. Kroger is among the top three market
share holders in 38 of the 42 major markets in which it operates. At the end of FY2011, the company
operated 2,460 supermarkets and multi-department stores, 784 convenience stores, 361 jewelry
stores, and 40 manufacturing plants. In 2011, the company was ranked 25th on the Fortune 500 list
of Americas largest corporations, and 76th on the Global 500 list of worlds largest corporations.
Kroger's size provides significant pricing power with food producers, giving the firm economies of
scale over smaller supermarket operators. The company's resilience in an extremely challenging
operating environment can be witnessed from the positive identical store sales growth of 2.8%
(excluding fuel) it recorded in FY2011. Kroger recorded a revenue growth rate of 7.1% in FY2011,

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SWOT Analysis

while Wal-Mart's growth was 3.4%, and Safeway's revenues increased by only 0.5%. Furthermore,
the company's market share increased by nearly 80 basis points in FY2011, according to industry
reports. Kroger has been able to increase its market share in an extremely competitive environment
which has been characterized by price wars from value retailers and other competitors, who have
been gaining popularity owing to their price positioning.
The company being a large retailer enjoys advantages of scale, which can be passed on to the
consumers. Additionally, its established presence enabled it to increase market share and revenues
in a tough operating environment.
Effective differentiation measures
Kroger has in place a strategy which has evolved to incorporate more elements of differentiation on
factors other than price. The company has, in recent years, tried to identify various factors that drive
customer visits and loyalty and has made several targeted investments to achieve the same. One
such move is the increase in gasoline stations. The company has increased the number of stores
with fuel centers to 1,014 in FY2011 from 227 in FY2002. Having more than 1,000 fuel centers is a
key advantage for Kroger, enabling the company to drive traffic to its stores. Kroger also uses several
targeted promotions on gasoline to lure customers into its stores. In 2010, the company teamed up
with Shell to roll out the grocer rewards program in Cincinnati, Dayton, Knoxville, Nashville and San
Diego. This program allowed customers in participating markets to earn points and redeem them
for savings on gasoline at Kroger Fuel Centers and participating Shell stations. Additionally, customers
were given an opportunity to earn rewards including a minimum of 10 cents off a gallon of gasoline
for every 100 Fuel Points they earn by using their free loyalty card when purchasing a variety of
products inside Kroger and Ralphs stores. More than 80% of Americans live within five miles of a
Shell station and through this tie-up Kroger was able to substantially enhance its customer base.
Investing on private label program is another way the company increased its exclusivity and
differentiation. The company over the years has built a strong private-label program which caters to
premium and value segment markets. Kroger focuses on providing high quality products through its
private label program and engages in manufacturing about 40% of the proprietary brands it sells.
Kroger also differentiates itself by providing individual attention to its customer needs and
requirements. This is facilitated 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, customer analysis, and insight-led planning) in 2003. dunnhumbyUSA provides Kroger
with in-depth analysis on its customers shopping pattern. The information so gained is then used
to develop a basket of customized offerings and coupons specific to a particular customers
requirement. This acts as a compelling proposition for its customers and results in repeat purchases.
These efforts are attributed to the strengthening of Krogers foothold in the supermarket industry.
Its targeted promotions focus on products and services in line with customer preferences and
measures to enhance customer experience will enable the company to sustain severe price wars.
Additionally, these measures also increase the companys potential customer base and average
spend which will contribute positively to the top line growth.

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SWOT Analysis

Presence in several formats increases addressable market

Kroger follows a multi format model to offer the customers a wide variety of merchandise. Its
supermarkets are generally operated under one of the following formats: combination food and drug
stores (combo stores), multi-department stores, marketplace stores, or price impact warehouses.
Combo stores are typically in a food store format and the target customers are usually in two to two
and a half mile radius. While maintaining the convenient food store aspect, these stores are large
enough to have a specialty department. Through such departments Kroger has established these
stores to offer one stop shop positioning along with a convenience retailing positioning.
Multi-department store is an extension to the combo stores and additionally offers general
merchandise items such as apparel, home fashion and furnishings, electronics, automotive products,
toys and fine jewelry. These stores diversify revenues across several product categories. Kroger's
market place stores are similar to the multi-department stores offering full-service grocery and
pharmacy departments as well as general merchandise which include outdoor living products,
electronics, home goods and toys. The Price impact warehouse operates a low cost warehouse
model catering to the value segment. Additionally, the company through its subsidiaries operates
convenience stores and specialty jewelry stores.
The presence across several formats increases the addressable market as Kroger is able to cater
to the varied customer preferences. Large addressable market facilitates increased potential customer
base which in-turn enables the company to drive top line growth.

Weaknesses

Overcharging customers in Ralphs stores hurt consumer confidence and exposes the company to
penalties
Ralphs has been charged with overcharging of prepackaged food in recent times. Between January
2010 and March 2010, the County Department of Weights and Measures conducted 14 undercover
inspections at Ralphs stores across Los Angeles and found that customers were being overpriced
for prepackaged and weighed products including fried chicken and salad. Most of the violations
involved the store illegally charging for the weight of the package, or including the ice glaze on frozen
products in the net weight. Some prepackaged items also were found to be under the weight on the
label. Following the investigation, the City Attorneys Criminal Branch filed a multi-count criminal
case against Ralphs. Both Ralphs and Kroger faced fines and penalties of up to $256,000. However,
the charges against Kroger were dropped later. In March 2011, Ralphs was ordered to pay $67,600
in fines against these charges. This is not the first time that Ralphs paid penalties for false labeling
and overcharging prices. During 2008 Ralphs paid $6,500 in fines after it was found that the chain
was overcharging customers, including short-weighing packages. In 2009, 30 Ralphs stores were
charged of similar violations and had to pay $10,400 in fines.
Such charges against the company severely hurt consumer confidence. In a market where consumers
are attracted to low price high value products, over pricing will erode Kroger's brand image.

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SWOT Analysis

Additionally, fines and penalties will divert significant amount of valuable resources and increase
the expenses for the company.
Lower margins compared to competitors
Though the companys revenue has shown a steady increase in the recent times, its profit margins
have not been able to keep pace with the margins of its competitors. The company's operating profit
margin declined to 2.6% in FY2011 from 3.2% in FY2009. In comparison, the operating profit margin
of Krogers competitor, Wal-Mart, has been steady and grew to 6% in FY2011 compared with 5.6%
in FY2009. For another competitor, CVS Caremark, the operating profit margins have been above
6% throughout the last three financial years (ending in December). To gain and retain customers,
the retailers have been investing in low prices. While Kroger is cutting costs, they are not aligned
with the price cuts, which, in turn is pressurizing the margins. The tightened consumer spending is
estimated to further lead to price wars which will be detrimental to Kroger's bottom line. Also, the
company has to rely on top-line growth to remain profitable amidst the severe competition and rising
customer attrition to discounters and other competitors, who can engage in severe price wars
considering their higher margins.

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 the
demand for private label goods in the US. According to industry estimates, the market for private
label branded products is worth $90 billion in the US; private label brands accounted for 17.4% of
the US food product sales in 2010 compared to 15.2% in 2006. The share of food products in private
labels has been increasing. A key reason for the growing consumption of private label brands has
been the recent economic slowdown, which has kept price the top concern for consumers. Instead
of expensive brands, consumers across the industry are turning to generic and private label products.
Even upper-income shoppers are more willing to buy generic, which has traditionally appealed more
to shoppers with limited budgets.
Kroger has highly focused on private labels as part of its merchandising strategy. Its supermarkets,
on average, stock nearly 11,000 private label items. Kroger follows a three tier approach (Private
Selection, banner brand, and Kroger Value) to cater to varied customer requirements. It offers Private
Selection, a premium quality brand designed to be a unique item in the category of gourmet or
upscale brands. The banner brand (Kroger, Ralphs, and King Soopers among others), comprise the
majority of the company's private label items and are quality products. Kroger Value is the value
brand, designed to deliver good quality at a very affordable price. In FY2011, corporate brands
accounted for nearly one-third of Krogers total grocery unit sales, indicating the popularity of its
private labels. The gross margins on private brands are higher than that of national brands and
increased acceptance of these brands will lead to increase in sales and will in turn impact the
companys bottom line positively. Additionally, as these brands are offered exclusively in the
companys stores, it is a strong differentiator and will offer competitive advantage.

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The Kroger Co.

SWOT Analysis

Increased popularity of retail clinics

Retail clinics, which are typically walk-in clinics located in the pharmacies or grocery stores, have
been gaining popularity in the US. According to the industry estimates, the number of retail clinics
in the US is expected to grow from 1,220 in 2011 to 3,380 in 2015. Factors such as demand for
convenient healthcare at affordable prices are expected to drive the growth in this segment. Low
cost entry points and extended hours of operations compared to hospitals are the primary drivers
for growth of retail clinics.
Another area where retail pharmacy channel continues to play an increasingly important role is
immunization against flu. Pharmacist-administered seasonal flu shots grew by 36% in the flu season
of 2010, accounting for approximately 10% of the total administered nationwide. According to the
Centers for Disease Control and Prevention, approximately 12% of the surveyed population received
seasonal flu shots from a drugstore or pharmacy.
Kroger operates nearly 2,000 retail pharmacy locations and also The Little Clinic retail clinics. The
company has also been actively offering convenient access to seasonal flu vaccines at an affordable
price. These flu vaccines are administered by trained pharmacists and nurse practitioners. During
the 2009 flu season, the pharmacists at Kroger administered more than 1 million flu shots to customers
and associates. Additionally, the companys $4 generic prescription program has saved its customers
millions of dollars on drugs. The increasing popularity for in-store retail clinics and immunization
programs will increase the footfall and the potential customer base for Kroger.
Growing influence of Hispanic population
The US is one of the most popular destinations for Hispanic population. The growing Hispanic
population in the country is likely to increase the level of consumer spending considerably, in time
to come. According to the US Census, Hispanic population increased to 50.5 million in 2010 from
35.3 million in 2000, representing an increase of 43%. Accordingly, Hispanic population now accounts
for 16.3% of the countrys overall population. By 2050, the Hispanic population in the US is expected
to reach 127 million and account for 29% of the countrys overall population. Though a large number
of Hispanics live in the Mexican border states such as California, Texas, Arizona and southern
Florida, they have been moving to other parts of the country as well. The economic influence of
Hispanics is also expected to be profound in the future. According to industry sources, the Hispanic
purchasing power accounted for 11% of total purchasing power in the US in 2010. It is estimated to
increase to 15% by 2015 (approximately $1.5 trillion or more than 70% of all minority purchasing
power). Market research shows that Hispanic consumers spend more on groceries, make more
frequent shopping trips, prefer bulk over smaller packaged foods, and eat at home more often than
the average American.
Kroger has a strong presence in the US market, with stores in 31 states. The companys wide
presence across states can be leveraged to cater to the household needs of the growing Hispanic
population in the US.

Threats

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SWOT Analysis

Low consumer confidence affects demand for discretionary items

The retail markets in the US have been witnessing low consumer confidence. The consumer
confidence in the US has registered a decline during recent times. The level of consumer confidence
is what determines if the US customers are likely to spend more, and the confidence has been low
in the recent times, albeit slight increases comparatively. The US consumer confidence index
increased slightly and reached 59.5 in July 2011, compared with 57.6 in June 2011. However, this
figure is very low compared with the consumer confidence index of above 100 in the first half of
2007. Since purchases of the company's products are dependent upon discretionary spending by
its customers, the company's financial performance is sensitive to changes in overall economic
conditions that affect consumer spending. Although consumer spending is seeing some positive
growth, Americans seem cautious and are not willing to increase spending, one of the reasons why
the pace of the recovery is estimated to be more subdued than in the past. High unemployment rate,
sluggish wage gains and credit crunch are all expected to keep consumers relatively cautious. All
these factors are expected to hinder shoppers to spend on big ticket items and remain value-oriented
in the near future. The low consumer confidence is depressing demand for several discretionary
items and the company's multi-department stores and marketplaces, which sell several discretionary
items such as furnishings, electronics, automotive products, outdoor living products, electronics and
home goods will be severely impacted. Any further deterioration in the consumer confidence will be
detrimental to Kroger's revenue and profitability.
Intense competition from discounters will pressurize margins
Food retailing sector is the US faces stiff competition leading to price wars. Non-existent switching
costs for consumers, who are largely driven by price, increased the appeal of discounters and other
value retailers. Wal-Mart's entrance into the grocery market and its ongoing expansion has proved
to be a major disruption to traditional operators, whose cost structures are higher and cannot match
the low prices that Wal-Mart offers. Merchandise offered at Wal-Mart's stores are priced at much
lower range than the prices offered by its competitors. Grocery stores, amidst such competition have
become price takers. As consumers' purchasing power is decreasing in this weak economy, pricing
matters more, which plays into the hands of the low-price leaders.
Although Kroger has been reducing prices to handle pressures from discounters, it has not been
immune. Kroger's economies of scale are trumped by discounters such as Wal-Mart and Costco.
Kroger, to improve market share, has been forced to become more promotional, which has led to
reduced profitability. Although historically Kroger has been able to keep remarkably stable margins,
FY2010 saw more margin compression as a result of heavy price competition and the market share
growth came at an expense of profitability. Competition for the consumer's food dollar continues to
intensify as supercenters and warehouse clubs have increasingly promoted lower prices on food to
drive traffic. With gross margins and operating margins below that of Wal-Mart's, the company might
face further pressure on profitability as the competition intensifies.
High degree of unionization will increase labor costs against a backdrop of rising wages and healthcare
costs

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SWOT Analysis

The labor costs for companies have been rising as the healthcare costs and wages increase in the
recent times. Tight labor markets, increased overtime, government mandated increases in minimum
wages and a higher proportion of full-time employees are resulting in an increase in labor costs,
which could materially impact the company's results of operation. In the US, the government increased
the minimum wage rate from $6.55 per hour in 2008 to $7.25 an hour in July 2009. Furthermore,
many states and municipalities in the country have minimum wage rate even higher than $7.25 per
hour due to higher cost of living. In addition to this, the health care costs for employers in the US
are increasing. According to industry estimates, healthcare costs for the US employers are estimated
to increase by 8% in 2011 and by 8.5% in 2012. Increasing number of consolidations in the healthcare
sector, and an expected rise in the medical claims from workers are some of the reasons that would
keep the healthcare cost high in the coming two years.
A majority of Kroger's employees are covered by collective bargaining agreements with unions, and
the company is a party to nearly 300 collective bargaining agreements, with an expiry term of three
to five years. Several of these labor agreements were negotiated in 2010, and some more will be
negotiated in 2011. In all of these contracts, rising healthcare and pension costs will continue to be
an important issue in negotiations. Yielding to the demands by these unions may lead to increase
in health care, pension and wage costs and the company may experience increased operating costs
which will have an adverse effect on future results of operations. Additionally, the issues may lead
to strained relationship with unions. The company has endured labor strikes in the past and the
resistance to incur increased costs may lead to prolonged work stoppage affecting a substantial
number of locations. Rising costs of healthcare and rising labor costs will increase the costs for
Kroger. Furthermore, high unionization of its labor might affect the operations in case the company
and the unions do not reach a consensus.

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