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The Kroger Company (US)

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The Kroger Company remains America's biggest traditional supermarket group, but was displaced as the country's leading food retailer overall by Walmart in 2002. In fact the Kroger retail brand accounts for only a small proportion of revenues. Instead the group is the umbrella for a substantial portfolio of around 3,700 outlets operating under 20 different banners, including Fred Meyer, Ralphs, Dillons, Smith's, King Soopers and Fry's. In an attempt to meet Walmart halfway, Kroger has boosted its range of non-food products in what it calls multi-department stores. After a difficult period in 2003 and 2004 as a result of labour disputes, Kroger appeared to regain its momentum and has demonstrated solid performance since 2006, partly as a result of the launch of a very successful loyalty card program. In 2013 it expanded its national reach with the purchase of regional competitor Harris Teeter for $2.5bn, and has continued to widen its footprint with at least one additional acquisition each year. The US market remains intensely competitve, but Kroger is weathering the storm with steady annual improvements in market share.

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Who handles advertising? Click here for Agency Account Assignments. The group declared advertising costs of $752m in fiscal 2018.

Competitors

See Retailing Sector for other companies.

Brands & Activities

The Kroger Company is America's biggest traditional supermarket group, although Walmart now outsells Kroger in groceries through its Supercenter division. The group's most important markets are Los Angeles, Atlanta, Houston, Seattle, and Phoenix, but it has around 2,800 supermarkets nationwide. The majority of stores operate a so-called combination format, offering "one-stop" supermarket and pharmacy services. Around half of all stores also have adjoining fuel centres.

Although the group's biggest brand is Kroger itself it also controls more than 20 other supermarket brands, most of which have retained their local branding. They vary from state to state, but now include Ralphs (mainly in California), Dillons (Kansas and Missouri), Fry's (mainly Arizona), Smith's (Arizona, Nevada, Utah), King Soopers (Colorado and Wyoming), QFC Quality Food Centers (Washington, Oregon), City Market (Colorado, Utah, New Mexico), Hilander (Illinois), Owen's and Pay Less Super Markets (Indiana), Baker's (Nebraska), Gerbes (Missouri). It acquired the Scott's chain in Indiana in 2007 from Supervalu. Some 2,255 of its supermarkets also house an instore pharmacy, making it the country's 5th biggest pharmacy operator by outlets, as well as 220 walk-in health clinics. The group also owns low-cost Food 4 Less and Foods Co warehouse stores in California and other states. It is the #1 or #2 supermarket in most of its markets.

Kroger currently has no international operations, deriving all sales within the US. However in 2018 it agreed a partnership with Chinese group Alibaba's Tmall.com online shopping portal to sell shelf-stable groceries and household products to consumers in China anbd other international markets.

In 2013 Kroger agreed terms to acquire regional rival Harris Teeter for $2.5bn. That company managed a portfolio of 212 supermarkets in eight southeastern and mid-Atlantic markets including the Carolinas, Virginia and DC, with combined sales of around $4.5bn in 2012. The deal expanded Kroger's presence into three states where it didn't already have a presence. In 2015, another deal added Roundy's Supermarkets for $800m. That group was best-known for its Mariano's chain in Chicago, but also controls Pick 'n Save and two other chains in Wisconsin. Joining the portfolio in 2017 was celebrated New York specialist store Murray's Cheese.

In 2014, Kroger took a step in a slightly different direction with the acquisition of Vitacost, an online retailer of vitamins and other shelf-stable healthcare products, for $280m. It plans to keep that business separate from its existing bricks and mortar outlets. Otherwise, the group has a comparatively low-key online presence. Harris Teeter offers online ordering for instore collection under the ExpressLane banner, and a similar service was rolled out to selected other supermarkets under the banner ClickList. By early 2017 only around a quarter of outlets offered this service, but the group has made further expansion of this service a priority.

Kroger's traditional competitors are rival grocers, mainly now the merged Albertsons Safeway, and soon-to-merge Ahold Delhaize. However the most feared enemy is Walmart which began an aggressive expansion into food retailing in the late 1980s, cutting prices below levels which the supermarket operators could afford to match. In 2002, Wal-Mart finally overtook Kroger on grocery sales, although it competes primarily in the South and Southwest. Kroger has attempted to fight back by meeting Wal-Mart halfway, establishing its own presence in the "super center" segment, selling everything from books to clothing. The group's main brand in this area is Fred Meyer, a chain of "multi-department stores" offering apparel, home and garden furniture and consumer electronics as well as a full grocery range. Most stores are located in the Pacific Northwest and Alaska. Slightly smaller in size by floor area are marketplace stores, which offer a similar range of goods, but carry the banner of Kroger's local supermarket brand, for example, Fry's Marketplace, Kroger Marketplace or Dillons Marketplace. Another new development in 2017 was a push into prepared foods for takeaway service, and even the test-launch of the group's first standalone restaurant, Kitchen 1883, in Union, Kentucky.

In order to strengthen its understanding of customer preferences, Kroger also established a joint venture relationship with UK-based marketing services agency Dunnhumby, best-known as the power behind UK grocer Tesco's rewards programme. As a result, Kroger now has its own rewards programme under the Kroger Plus Card. In April 2015, Kroger bought out Tesco's stake in that business and relaunched it as 84.51 Degrees.

A separate division of Fred Meyer is also America's third-largest fine jewellery retailer, operating 320 shopping mall jewellery stores nationwide branded as Fred Meyer, Littman, Fox's and Barclay.

The Kroger portfolio was until recently rounded out with 784 convenience store outlets under different regional banners, including Tom Thumb, Turkey Hill, Loaf 'N Jug and Quik Stop, mainly offering the group's private label products. Combined sales were around $4bn in 2017, but that year the group indicated that it might consider divesting this division to focus on supermarkets. A deal was agreed in 2018 with UK-based Euro Garages Group, which operates 3,600 gas stations, forecourt restaurants and convenience stores across Europe. Price was $2.15bn.

As a result of the sheer size of its retail operations, the company is a substantial manufacturer, turning out around 40% of the 8,000 or so own-brand food products it sells. Combined sales are around $20bn, or a fifth of total group revenues. It has 38 manufacturing plants spread across the country. As such it is one of the last of the major US retailers to also make a sizeable proportion of its own products. Food brands include store "banner brands" (in other words, goods badged as Kroger, Ralphs etc), premium gourmet ranges Private Selection and HemisFares, low cost P$$t and Check This Out, organic Naturally Preferred foods, Big K soft drinks and Turkey Hill ice cream and iced teas. Newer launches include Wholesome@Home deli foods, Fresh Selections salads, Heritage Farm and organic or free-from brand Simple Truth, sales of which topped $2bn in 2018 after only five years on-sale. In most supermarket outlets the group offers its banner brands with the pledge "Try it, like it, or get the national brand free". The group also markets private label automotive accessories, bath and body items, Abound and Pet Pride petcare, Comforts babycare and Mirra beauty products, gadgets and office/school supplies.

Financials

Revenues hit a new company record in the year ending January 2015, topping $100bn for the first time at $108.5bn. The 10% year-on-year increase was partly generated by new acquisitions Harris Teeter and Vitacost. Same-store sales increased by 5%. The group's supermarkets generated sales of $86.3bn, up 13%, with an additional $18.9bn from fuel. Other outlets, such as convenience stores and jewellers, contributed $3.3bn. Net earnings jumped 14% to $1.75bn. For the year to 2016, profits topped $2bn for the first time, at $2.04bn, on revenues of $109.8bn.

For the year to Jan 2017, revenues were up 5% (or almost 7% excluding fuel) to $115.34bn. Same-store sales ex fuel were up by 1%. Earnings slipped back slightly to $1.98bn as a result of pension adjustments. Excluding that charge there was a modest improvement to $2.05bn. Non-perishable foods accounted for just over half of revenues, or $60.2bn; perishable foods for $27.7bn. Fuel contributed $14.0bn, pharmacy sales $10.4bn, and other sales (such as jewellery and Vitacost.com) $3.0bn.

Results for the year ending Jan 2019 were disappointing, with revenues and profits both lower than expected in the final quarter. Full year sales dipped 1% to $121.2bn (from a record high of $122.7bn the year before), but the decline in the final quarter was over 9%. Net earnings for the year jumped by 63% to $3.08bn but that included a $1.8bn one-off gain from the sale of the convenience store division during the year. Operating profit was flat year-on-year.

Background

The son of German immigrants, Bernhard "Barney" Kroger opened his first grocery store in Cincinnati, Ohio in 1883. Realizing that he could buy from suppliers more cheaply in bulk, he quickly opened more stores, selling goods to customers at as low a margin as he could afford. At the turn of the century, he was the first grocer to add instore bakeries in several of his shops. By 1902, there were more than 40 stores in all, and Kroger incorporated the business as The Kroger Grocery & Baking Company. Soon afterwards he bought a local meat packer and retail chain, combining meat and groceries under one roof, another first. Other stores joined the fold in an unprecedented period of expansion and acquisition over the first 30 years of the 20th century. As a result of purchases including the Piggly Wiggly retail chain, the empire had spread to a staggering 5,575 stores nationwide by 1928. Kroger retired from the business, selling all his stock for $28m a year before the Wall Street Crash. He survived the Depression with his fortune intact, and later reacquired a third of the company he founded before he died in 1938.

Meanwhile the group continued to prosper, although store numbers were slashed during the 1930s. Kroger later established its own buying arm, as well as a dedicated scientific testing division. In 1946, the company changed its name to The Kroger Company, and by the early 1950s, sales had climbed to more than $1bn. In 1957, Kroger was one of seven retailers who joined forces to found incentive promotion scheme Top Value Stamps. As sales continues to soar, hitting $10bn by 1978, Kroger became the nation's second-largest food retailing company, overtaking Safeway. The 1980s saw a new period of growth as the group launched a series of acquisitions, including Dillons in Arkansas, Tom Thumb convenience stores in Florida and M&M Supermarkets in Georgia. In 1999, the group merged with Fred Meyer Inc to create the country's #1 supermarket operator. Fred Meyer had opened America's first self-service drugstore in 1930, and assembled a similarly diverse group over the next 70 years including Ralphs, Smith's and QFC supermarkets just a year before the Kroger deal.

However the group was also facing a new competitor in Wal-Mart, which had begun to expand into groceries in the late 1980s. During the 1990s, Wal-Mart systematically established Supercenter outlets in many of Kroger's main markets, and finally overtook the smaller company in grocery sales in 2002. A key factor was Wal-Mart's refusal to allow union representation for its workforce. As a result it was able to pay employees less than half the wages and benefits paid by unionised competitors such as Kroger, and used those savings to cut prices on its range of products instead.

In a bid to compete against Wal-Mart's awesome profit margins, Kroger and other supermarket operators began cutting pay and health benefits in order to reduce their costs. However this led to a damaging five-month strike in southern California, lasting from October 2003 into February 2004, the chief result of which was that many shoppers bypassed the stores affected altogether in order to avoid crossing picket lines. A similar dispute in West Virginia led to the temporary closure of more than 40 stores in that state for two months. Both disputes caused a severe impact to profitability for the financial year, and negotiations with unions over more flexible terms were still rumbling on two year later, before finally being resolved towards the end of 2005. At the end of that year, the Ralphs chain in California was indicted by a grand jury because some local store managers secretly rehired striking workers and allowed them to work under false names and in some case false Social Security numbers.

Last full revision 13th December 2017

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