What do they know that Wal-Mart does not know? Branding.
Wal-Mart has two brands, Wal-Mart and Sam's Club. Sam's Club is obviously Wal-Mart. You go there when you want Wal-Mart stuff in mass quantities. Online, Walmart.com is also Wal-Mart. You know what Wal-Mart is, and if you want that kind of thing that's where you go.
But shoppers come in all shapes and sizes, and come to stores from many directions. This has nothing to do with the size of a store. Wal-Mart closed its Neighborhood Markets once it figured that out.
It has everything to do with branding.
Kroger is the nation's second-largest retailer. It still trails Costco (NASDAQ:COST), which did $116 billion in business for the year ending in August, but for the last few years it has been catching up. It is expected to report about $110 billion in total year revenues when it reports March 3. Kroger is expected to report 55 cents/share in earnings, giving it a total of $2.04/share for the year, against $5.37/share for Costco during the year ending in August.
Costco is one thing. Kroger, by contrast, is many things. In Portland it's Fred Meyer. In Los Angeles it's Ralph's. In Kansas it's Dillon's, and that's a trend that is growing rapidly. In Charlotte it's now Harris Teeter, and in Chicago it's Roundy's.
Shoppers differ not only by geography, but psychologically. Just as there is a difference between an Aldi's shopper and a Trader Joe's customer (although both are owned by the same firm) there is a difference between someone who likes Roundy's and someone who goes into a typical Kroger. It is this psychographic difference that Kroger is now hoping to capture, with Vitacost, with Roundy's, and now (possibly) with The Fresh Market (NASDAQ:TFM), assuming they can agree on a price.
If you go into a Turkey Hill, Loaf n' Jug, Smith's Express, or Kwik Shop for a few things while buying gas, you're going into a Kroger. You like to buy your jewelry from Barclay, Fox's or Littman Jewelers? Kroger again. Like to save money at Food 4 Less or Ruler Foods? Yep, Kroger.
All these operations are fed by a common infrastructure. Fresh Market can plug right into it. This can easily double their profitability - they made just $10 million on revenue of $433 million for the fiscal year ending in October. All this feeds into the parent company's margins, which are currently averaging about 2% across the company. Once Kroger finds a company of size that knows how to serve its customer base, it can now pounce.
Which company do you think is more likely to grow its top line over the next year? Is it a single-brand company that is the same super-sized store everywhere, or a multi-brand retailer that has literally dozens of brands served by a common infrastructure? How do you think profits will do, as Kroger integrates all its brands into that common infrastructure?
Disclosure: I am/we are long KR, WMT, COST.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.