Kroger Company Case

Kroger Company

Industry Analysis

Capella University

Professor Hadsell

Prepared by:

Erica Burnette

MBA 6008 Global Economics

12 February 2013

BACKGROUND:

The Kroger Company, together with its subsidiaries, operates as one of the largest food and drug retailers in the United States. It is the nation's purest leading grocery chain. The company operates 3,650 stores, including nearly 2,470 supermarkets and multi-department stores, under two dozen banners, in about 30 states. It also runs some 780 convenience stores under names such as Quik Stop and Kwik Shop. Kroger's Fred Meyer Stores subsidiary operates more than 120 supercenters, which offer groceries, general merchandise, and jewelry, in the western US. In addition, Kroger operates more than 1,900 pharmacies. Most of them are located inside its supermarkets. The Kroger Pharmacies continue as a profitable portion of the business, and have been expanding to now include pharmacies in City Market, Dillons, Fred Meyer, Fry's, King Soopers, QFC, Ralphs, Smith's Food and Drug, and Kroger Supermarkets. The company's combination of food and drug stores provide natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce. Its multi-department stores sell a range of general merchandise items, such as apparel, home fashion and furnishings, electronics, automotive products, toys, and fine jewelry. Its price impact warehouse stores provide grocery, health, and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. In addition, the company operates a large part of its own manufacturing, distribution which has increased profit and efficiency. Kroger operates 41 food processing facilities that make thousands of products ranging from bread, cookies and milk to soda pop, ice cream and peanut butter. Nearly half of the 14,400 private-label items found in the company's stores today are made at one of these manufacturing plants. These "corporate brands" today account for an impressive 26% of the grocery dollar sales at Kroger, providing the company with a huge strategic advantage (thekrogercompany).

Kroger is the parent company to a combination of different name brands which include and operates many chains spanning many states with store formats that include supermarkets, hypermarkets, department stores, convenience stores and mall jewelry stores. Kroger stores carrying the Kroger name are located throughout the Midwestern and southern U.S. Chains operating under the Kroger parent company. Kroger's structure is along the lines of an oligopoly. This type of market structure is dominated by few sellers at least several of which are large enough relative to the total market to be able to influence the market price. Other big supermarkets retailers who offer competition to Kroger includes: Wal-mart Stores, Target Corporation, Costco Wholesale Corporation and industry stores which consists of other retailers that are in the food retail market but their market share is not on the scale of major retailers and then there are the local "mom and pop" grocers. Oligopoly is sometimes synonymous with "big business" and each of the giant firms in the supermarket industry keeps a watchful eye on the actions of their competitors. Under oligopoly the rivalry among the big supermarkets takes it most direct and active form. Each chain is constantly acting and reacting to the frequent introduction of new products, free samples, and aggressive and sometimes nasty advertising campaign.

Competition among food retailers is fierce, and for years Wal-Mart, Costco, Target and some smaller companies have increased their grocery business at the expense of the traditional grocers like Kroger. Even though Kroger may not be able to beat Wal-Mart, Target and Costco competitively, it does not need to do so in order to generate good profitability. The company has sufficient scale to where it can price competitively and still generate financial returns well in excess of their cost of capital. Wal-mart is considered Kroger's leading competitor and with approximately 3,900 stores in the USA of which 1,906 are Supercenters. They are the biggest private employer and the largest retailer in the world. Wal-Mart sells more food than Kroger & Safeway combined and they are bigger than Home Depot, Kroger, Target, Sears, Costco, and K-Mart combined. In addition, Wal-mart operates internationally in 29 countries under 69 different banner names (www.corporate.walmart.com). Target is the second-largest discount retailer in the United States, behind Wal-mart and it is operating over 1,782 stores in 47 states and they have also started to expand globally. Costco is warehouse grocer and they are operating 622 warehouses operating in 448 locations in 42 states. They also have a strong global presence with 85 locations in Canadian provinces, 23 locations in the United Kingdom, 9 locations in Taiwan, 9 locations in Korea, 13 locations in Japan, 3 locations in Austria, and 32 locations in Mexican States (costco.com).

Supermarket operations are simple in structure. There are four operating costs incurred up to the point of sale; buying the goods, distribution to stores, store labor all of which are marginal costs and then there is operating costs such as overheads, utilities, etc., (Smith). There has been quite a dilemma on the many variables to optimize short and long term profits. Making decisions to maximize short term profits without being conscious of the impact of tactic long-term profitability may not only influence the future of the firm but the entire supermarket industry (Corhan). Therefore, Kroger does not precipitate price wars to gain profits. By all indications sales at Kroger grew to $90.4 billion in 2011 (which includes its gas pump operations), an increase by more than 10% from the previous year. But the company's 2011 profits took a major hit compared to 2010, largely on account of expenses related to consolidating pension plans for its unionized employees. In addition, Kroger has been able to use its size to keep prices low and snag market share from competitors like Target, Costco and even the gargantuan Wal-Mart. The strategy has paid off so far, but it's unclear whether the company can sustain it for much longer, particularly if food prices continue to climb (www.cnn.money).