The Timing Is Right For The Kroger Co To Go Wide And Deep

  • Kroger is one of the few retailers standing strong against the e-commerce onslaught.
  • Multiple brands and grocery-heavy revenues are two reasons for that.
  • The one thing they lack is wide penetration at home, which can take them a long way forward.

Kroger (NYSE:KR), the 133-year-old retailer, is possibly one of the very few companies in this space to nearly double their revenue in the past ten years. From $66.11 billion in 2007, they’ve moved up to $109.83 billion this year.

That’s an achievement by itself, but it assumes a greater importance when you consider that they did this during the golden age of e-commerce - a phenomenon led by Amazon - when other big box stores like Wal-Mart, Target and Tesco were struggling to keep their top lines moving.

So, what made Kroger stand out in a crowd of struggling companies and swim against the e-commerce tide that continues to rise?

One major difference between Kroger and all other retailers is their store format comprising multiple brands. Instead of bringing everything under a single brand post-acquisition, Kroger chose to retain their individual identities, essentially becoming a multi-brand retail operator. Essentially, the Kroger you’d see in Ohio will be completely different from the one you’d see in California.


The biggest advantage of doing this is that it caters to local sensibilities in a very smart way. Brand value is maintained, as is customer loyalty, despite Kroger being the new owner of a particular brand. It also helps avoid any negative brand publicity for its own banner - something Wal-Mart is painfully aware of after its debacles in Germany and other countries.

The second advantage is that nearly a quarter of its revenues come from perishables - and that’s a moat that e-commerce companies will find very hard to negotiate. Of course, larger players like Amazon can afford to experiment with one-hour delivery of groceries the way they’re doing in Europe at the moment, but to scale that up to a nationwide level is something that’s not going to happen overnight. Until then, Kroger plans to cash in on that, pushing its revenue from perishables from $20.6 billion in 2013 to $25.7 billion last year.


Groceries and perishables are a big bet for Kroger for one more reason - they’ve slowly built up the segment to the extent that they now have nearly 15% market share. That’s significantly smaller than Wal-Mart’s, but enough to keep losses related to e-commerce competition down as much as possible.


The Investment Case

From a long-term investment perspective, Kroger is a safe bet. They’ve got the moat against e-commerce, they're growing market share in a critical area and their revenues are growing faster than most other retailers.

The one gripe I probably have with Kroger is why they haven’t penetrated the United States in totality yet. A quick look at their footprint map will show you what I mean.


Even with their aggressive brand acquisition strategy they’ve barely penetrated many U.S. states. There are nearly 20 states that have fewer than 50 Kroger outlets.

With the kind of high brand value they have, they should be looking at a full-scale penetration of the most populous areas like Florida and D.C., for example.

That’s the kind of growth potential they still have after 133 successful years in business, and that’s the kind of thinking that can add billions to its top line over the next decade. The time is right for such an expansion drive because Kroger stock price has been moving sideways for several quarters now. This is when they need to act. If they do, then this is when you need to invest. With a dividend yield of only 1.27%, they better show some upside real soon.

For now, I can only give this stock a HOLD rating.

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