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Kroger Is Now A Bulk Discounter

|Includes: DLTR, FDO, Kroger Co. (KR), WMT

Most investors seem to have missed a massive disruption in the world of American retail. Kroger (NYSE: KR), the venerable grocer, has successfully transformed itself into a highly effective and aggressive bulk discounter with capabilities rivaling those of Costco Wholesale (NASDAQ: COST).

Kroger's bulk discounting is disrupting the retail market and hurting a wide variety of companies, including Wal-Mart, Target, and dollar store operators.

The best way to prove this argument is to take a close look at a register receipt from a Kroger grocery store such as City Market, which operates in Western and Central Colorado. Some of the highlights of my most recent City Market grocery receipt clearly and effectively demonstrate Kroger's ability to deep discount. They include:

  • A 14-ounce can of Kroger brand crushed tomatoes for 50¢ with Kroger's 2-Tier Pricing program. A similar sized can of national brand tomatoes costs $1 to $1.50 depending on the brand. Family Dollar Stores (NYSE: FDO) sells a smaller 10- to 12-ounce can of tomatoes for 79¢.
  • A 14-ounce can of Kroger brand broth for 50¢ with Kroger's 2-Tier Pricing program. Wal-Mart Stores (NYSE: WMT) sells 14-ounce cans of Swanson brand broth for 96¢.
  • Single serve packs of Chobani Greek yogurt, which normally sell for $1.59 apiece, for $1.
  • Five Kroger 160-sheet boxes of Kroger brand facial tissue for $4.99.
  • A two-pound can of Kroger brand coffee for $6.99 with 2-Tier Pricing.

Nor were these the only savings I've had at Kroger recently. I saved 30¢ a gallon on gasoline at a Kroger owned Loaf N' Jug filling station a few weeks ago because I swiped my City Market Card at the gas pump.

Judging by this evidence, Kroger is now capable of matching, and in some cases beating, Wal-Mart's and dollar stores' prices. It even seems to be able to match some of Costco's prices.

This presents chains like Target (NYSE: TGT), Kmart, Wal-Mart, and Dollar Tree with a big problem. If a shopper can get the same stuff at Kroger at the same price as the discount store, why go to the discount store? Why not cut your shopping time in half and just pick up everything at Kroger and save some gas?

Same-store comparable sales numbers seem to confirm this; Wal-Mart reported that its comparable same store sales figures fell by .8% in the first nine months of 2014, Trefis noted. Shopping patterns seem to be changing and are hurting traditional discounters.

Why Kroger Is a Threat to Target and Even Department Stores

If that wasn't enough, Kroger has been branching out into the general merchandise area in a big way. Kroger is now opening its version of a Wal-Mart Supercenter, the Marketplace Store. Some of the offerings at a typical marketplace include the following:

  1. Baby World - baby clothes and related items
  2. Bed & Bath
  3. Deli
  4. Bakery
  5. Fresh Flowers
  6. A Fred Meyer Jewelers - jewelry store
  7. A Gourmet Cheese store
  8. Home Fashion - Home Furnishings
  9. Kitchen Place - small appliances, kitchen utensils, cutlery, china, etc.
  10. A toy department
  11. Health and Beauty
  12. A full service grocery store
  13. A pharmacy
  14. A filling station

Kroger is not just a threat to other grocers like Safeway; it is now in a position to hurt general discounters like Target and even department store operators like Kohl's (NYSE: KSS), Sears Holdings (NYSE: SHLD), and JC Penney (NYSE: JCP).

What's more intriguing is that recent revenue figures seem to prove this thesis:

  • Kroger reported a TTM revenue of $99.17 billion in October 2013 that grew to $106.48 billion in October 2014.
  • JC Penney's TTM revenue rose slightly, going from $11.96 billion in October 2013 to $12.15 billion in October 2014.
  • Sears (which owns Kmart) saw its TTM revenue fall from $37.85 billion in October 2013 to $33.69 billion in October 2014.
  • Kohl's TTM revenue dropped from $19.27 billion in October 2013 to $18.79 billion in October 2014.
  • Target's TTM revenue dropped slightly from $73.81 billion in October 2013 to $73.70 billion October 2014.
  • Costco reported a TTM revenue number of $106.46 billion in November 2013 that grew to $114.49 billion in November 2014. As you can see, Kroger's TTM revenue is approaching Costco's.
  • Wal-Mart's TTM has been growing even though it is having problems attracting foot traffic to its stores. Wal-Mart reported a TTM revenue of $476.29 billion on Jan. 31, 2014, that grew to $485.35 billion on Jan. 31, 2014.

What's truly interesting is that Kroger's TTM revenue is growing at a faster rate than Wal-Mart's. Wal-Mart reported a quarter to quarter TTM revenue growth rate of 1.43% on Jan. 31, 2015. Kroger reported a quarterly TTM growth rate of 11.2%. Costco reported a TTM growth rate of 7.39%, which is impressive for a retailer but still lower than Kroger's.

Kroger Tries to Duplicate the Costco Effect

Part of the reason why Kroger has succeeded as a bulk discounter is that it is one of the few retailers to successfully imitate Costco. Like Costco, Kroger has created high quality house brands, and like Costco, it is selling in large bulk lots. Kroger now sells two-pound bags of wild-caught salmon for $11.99 for example.

It also offers a level of customer service that rivals Costco's. When my father left his City Market card at the register, an employee brought it out to him in the parking lot. One reason why people love shopping at both Costco and Kroger is that the employees are actually friendly and willing to help.

One of Wal-Mart's big failings in recent years has been a low level of staffing. This might be why Wal-Mart is raising its employees' pay.

The final piece of this puzzle is Kroger's loyalty card program, which gives customers a wide variety of discounts. It also enables customers to earn points for gas, which, like Costco's memberships, gives people a strong incentive to shop at Kroger. A person with the card, like a Costco cardholder, feels like a member of an exclusive club. A strong psychological attachment between the retailer and the customer is created.

The transformation into a bulk discounter is a wise strategy for Kroger in a time of rising income inequality and declining middle class incomes. It positions the company to sell to people that need to watch what they spend but will never go near the dollar store.

This makes Kroger a company with a lot of momentum and room for growth. It also makes Kroger a growth stock with some intriguing attributes for investors, including a dividend yield of 1.07%, a pay ratio of 20.4%, and a return on equity of 32.08%. Those looking for a long-term play in retail should definitely take a look, or another look, at Kroger.

Disclosure: The author is long KR.