Kroger's: Are Traditional Supermarkets' Salad Days Through?

Yes, it seems impressive: Kroger's (KR) fiscal 2005 sales were a whopping $60.6 billion. With 2,500 supermarkets in 31 states, nearly 800 convenience stores, 423 jewelry stores, and 42 food-processing plants, this traditional supermarket behemoth has taken advantage of consolidation over the years to offer competitive prices and drive business. But that was in the day and age when people shopped for food in supermarkets. Then non-unionized Wal-Mart (WMT) and Costco (COST) stepped into the scene and started selling food, and now, less than 60% of food shopping is done at supermarkets. Bad news for Kroger and those involved in the traditional supermarket business.

Of course, Kroger has tried to remain in the game, by taking advantage of its size to drive prices even lower. Wisely, Kroger also started a low price, private-label, which now makes up 32% of their groceries sold. Its grocery offerings are tailored meet the specific needs of the communities their stores are in.

As a result, Kroger holds the number one or number two market shares in 35 of its 44 major markets. But while it is a leader in its field of grocers, I just don’t see how its prices can ever compete with those of Wal-Mart or Costco. It will have to be increasingly creative to hold onto its customer base. Further, its unionized employees have been known to strike in the past, and the threat will persist. What’s more, over $800 million of its pension plans are not yet funded, which may be problematic down the line.

Type of stock: A large cap in the traditional supermarket industry, Kroger leads in major markets around the country but needs to continually come up with ways to keep competitive with Wal-Mart and Costco and other nontraditional, often non-unionized, food sellers.

Price target: Stay away from the traditional grocers and retailers that don't stand a chance next to Wal-Mart and Costco! Now trading at 52 week high of $23 range, last year’s sales jump of 7% is in part due to rise in the cost of fuel -- around 600 of its stores have fuel centers and have benefited by the higher prices at the pump. Projected growth is around 5% a year. If it were to dip to below $18, maybe, maybe I’d pick it up, as Kroger still holds a strong market share among traditional grocers. But then again, why bother with so many other opportunities out there?

KR 1-yr Chart

Comment on this article