Could Kroger Become America's Number One Grocer?

| About: Kroger Co. (KR)

The speed at which the grocery business is changing raises an intriguing possibility. Could Kroger (NYSE: KR) replace Wal-Mart (NYSE: WMT) as America’s number one grocer at some point in the near future?

Wal-Mart is currently the nation’s number one retailer of groceries; with 24.5% of the market in 2014, according to data collected by Statista. Kroger is number two, with a market share of 12.9% in 2014. Costco Wholesale (NASDAQ: COST) was a distant third with a 7.6% market share.

Safeway (NYSE:SWY) was fourth with a 6.2% and Albertsons (NYSE:ABS) sixth with a share of 3.9%. That means a combined Safeway/Albertsons operation would be number three with 10.1% of the national grocery market. The number five grocer was Publix (OTC: PUSH); which controlled 4.3% of the market in 2014.

Kroger is Growing while Wal-Mart is Shrinking

These figures could soon change dramatically; because Kroger is growing, while Wal-Mart is shrinking. Wal-Mart’s US store count will actually fall for the first in time in years in 2016. The discount giant is planning to close 154 US stores, but it will open only 135 new American locations. To make matters worse, Wal-Mart’s revenue shrank by $3.52 billion during 2015.

Kroger now operates 2,778 grocery stores in 35 states, including 151 supermarkets it acquired after purchasing Roundy’s; a Wisconsin-based grocer in 2015. Kroger’s revenue also grew by $1.36 billion during 2015, without Roundy’s revenues. Since Roundy’s reported $4.03 billion in revenue in June 2015, it would increase Kroger’s revenue from the $109.83 billion reported in January 2016 to $113.86 billion.

Okay, Kroger is still a long way from the $482.13 billion in revenue Wal-Mart reported on January 2016, but it is growing, while the larger rival is shrinking. Something to remember is that Kroger has proven itself capable of dramatic growth; particularly when it makes an acquisition, in recent years.

As recently as January 2014, Kroger reported just $98.38 billion in revenues. That means Kroger’s revenues grew by 10% in just two years. During that time, Kroger experienced organic growth and made two major acquisitions; Roundy’s and Harris Teeter.

There’s a Lot of Room for Kroger to Grow

The nature of today’s grocery market gives Kroger a lot of room for low-cost growth. Deep discounting and intense competition are making it very hard for regional grocers to survive. News reports indicate that Kroger picked up Roundy’s and its $4.03 billion in revenue for just $800 million, because of losses the smaller chain faced.

There are some potential acquisitions out there which could put Kroger on the road to number in groceries. There’s Supervalu (NYSE: SVU) which generated $17.97 billion in revenue, yet only had a market capitalization of $1.489 billion as recently as March 15, 2016. Supervalu operates 223 supermarkets under five brands and 1,300 franchised discount grocery stores under the Save-a-Lot brand.

And even in intriguing possibility is the struggling and privately-held Winn Dixie; which operates 518 grocery stores in five states. A Winn Dixie purchase would give Kroger major market share in Florida; a large state with a growing economy, where it currently only operates one store.

There are also plenty of other regional supermarket operators Kroger could buy. Intriguing possibilities include: King Kullen, with 35 markets on New York’s Long Island; Stop & Shop, with 275 stores in New York State, New England and New Jersey; Market Basket, with 75 stores in New England; Bashas, with 118 locations in Arizona and New Mexico; and Raley’s, with 128 stores in Northern California.

Purchasing Stop & Shop could get Kroger into the Northeast where it has no presence. Owning Stop & Shop would also get Kroger into New York City; the only one of America’s three largest cities where it has no presence. Kroger currently operates Ralph’s in Los Angeles and Food 4 Less and Marino’s stores in Chicagoland.

There has also been speculation that Kroger could buy Meijer; which operates 224 supercenters in the Midwest. Meijer is a privately held chain based in Michigan – that introduced supercenters to America. These are just a few of the many supermarket brands Kroger could buy.

As you can see, Kroger has plenty of opportunities for growth. Wal-Mart’s are limited unless its e-commerce operations are a huge success.

This means Wal-Mart’s days as America’s number one grocer could be numbered, but it will not lose that position anytime soon. My guess is that it would take Kroger around 10 years to overtake Wal-Mart; if it becomes number one in US groceries, that will occur around the year 2025.