Kroger CompanyKR

Morningstar Rating

Stock Research and Analysis

by Michelle Chang, CFA

Kroger continues to evolve its strategy that began a little more than five years ago to combat the assault by discounters and give itself a leg up on other conventional operators. We believe the firm today is positioned to increase its top line faster Read more

Bulls Say

Kroger is America's largest traditional supermarket chain. Its size provides significant pricing clout with food producers, giving the firm economies of scale over smaller supermarket operators.

Kroger continues to execute well in a consolidating environment. The company is the number-one or -two player in 39 of its 42 major markets, market share rose 61 basis points in 2008, and share in markets with a heavy Wal-Mart presence increased even faster.

The company differentiates itself from discounters through a strong private-label program, decentralized merchandising, stores tailored to suit local preferences, and targeted marketing.

Having nearly 800 fuel centers is a key advantage for Kroger, enabling the firm to use promotions on fuel to drive traffic to its stores.

Kroger's strong financial condition gives it the means to act as a consolidator in the grocery industry and be opportunistic with acquisitions. Read more

Bears Say

Competition for the consumer's food dollar continues to intensify. Although consumers look to save on necessities, supercenters and warehouse clubs have increasingly promoted lower prices on food to drive traffic.

Kroger may have competitive advantages over other conventional supermarket chains, but its economies of scale are trumped by discounters like Wal-Mart and Costco, and it doesn't have the brand equity to stray too far on price.

Deflation in key categories like dairy and produce have placed additional pressure on the top line, making it hard for the firm to leverage fixed costs.

Sales in the company's Southern California division have yet to return to the levels enjoyed before the 2004 workers' strike, and the firm pleaded guilty to hiring locked-out workers during the strike. Read more

Strategy

Kroger continues to reduce operating costs and leverage its economies of scale to lower prices and invest in service, such as having more checkout personnel at high-traffic periods. The company looks Read more

Management

David Dillon, who replaced Joseph Pichler as CEO in 2003 and chairman in early 2004, previously served as COO under Pichler for seven years. We would prefer Kroger separate its chairman and CEO positions. Dillon has about 30 years of experience in the Read more

Profile

Kroger is the largest retail grocery chain in the United States, with a little less than 2,500 supermarkets and multidepartment stores in 31 states, close to 800 convenience Read more

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