It's tough to imagine any grocer as being creative, or strategic. Food is food, and there are only so many ways to market and sell the same commodities the business down the road is selling. Worse, up against growing warehouse giants and superstore operators like Wal-Mart Stores, Inc. (NYSE: WMT ) and facing bargain venues like Dollar General Corp. (NYSE: DG ), which are getting deeper into food sales, the grocery industry has become downright cutthroat.
Giving credit where credit is due, however, Kroger Co (NYSE: KR ) is a standout in this competitive arena, and Kroger stock is a "best of breed" kind of play for an investor seeking some exposure to the grocery space.
Kroger Stock: Better Than the Rest
Selling groceries isn't a high-margin venture. Over the course of the last four reported quarters, Kroger has turned $111.4 billion worth of revenue into net income of $2.08 billion. That translates net margins of 1.89%, which is not only typical of Kroger, but the norm of the industry.
While not a big number, it's a respectable number in light of the way the grocery business has changed over the course of the last several years.
Competition has, in simplest terms, become fierce. The aforementioned Walmart has continued to expand the footprint of its so-called superstores, and although the retailer's smaller-footprint Express stores are essentially a failure , the company has found plenty of reason to push ahead with its Neighborhood Market grocery store expansion.
At the same time, value stores like Dollar General - and more recently, Target Corporation (NYSE: TGT ) - are adding to their grocery selections. Although Target has not done as well as it had hoped with its recent food efforts, it's still a threat to Kroger.
Point being, it's impressive that Kroger stock has continued to grow the top- and bottom-line consistently for a decade.
More impressive is the fact that margins are edging higher, even if it's all unfurling at a snail's pace; 2013's net margins were only 1.6%.
The whole thing begs one question - why? Why is Kroger stock doing well in a business others are struggling with? The answers are, better execution, and good ideas.
Why Kroger Wins
Evidence of the superior execution lies in the company's fiscal results; it has remained consistently profitable and its performance measures have remained superior to its peers.
As for competitive ideas, Kroger has been impressively bold.
Perhaps the most aggressive measure KR has employed is its aggressive pricing strategy, taking aim at rival Walmart. Granted, it was in many regards a "have to" situation, but Kroger was still willing and able to do it. As Shea Food Consultants' Rick Shea opined , "Kroger has traditionally been best-in-class at analyzing what's selling, the competition and different brands. They've always been proactive."
Wal-Mart isn't the only competitor Kroger is willing to face head-on, though. In response to online-grocery shopping and delivery offered by Amazon.com, Inc. (NASDAQ: AMZN ), last year Kroger unveiled ClickList, allowing customers to pick their items online and pick them up at their nearby participating store. Although not all stores will offer the service, nearly 50% of them will offer the service in the near future. Consumers love it so far.
Once again, Kroger made sure to expand ClickList before Amazon had a chance to woo those customers.
Perhaps the most exciting development for current and would-be buyers of KR stock, though, is the potential for it to wade deep into the drugstore market, which is increasingly becoming a key grocery venue as well.
Thank Rite Aid Corporation (NYSE: RAD ) and Walgreens Boots Alliance Inc (NASDAQ: WBA ) for the possibility. The two drugstore chains are in route to a merger, and if they unite, it will likely mean the closing of roughly 500 stores … real estate that Kroger is reportedly mulling . If KR does indeed acquire those abandoned stores, it's well equipped to make them even bigger grocery outlets, introducing options in locales where Kroger does not yet have a presence.
Bottom Line for KR Stock
These three factors may seem business-as-usual on the surface, and in many ways, they are. But, KR does a great number of business-as-usual things, when rivals may not take on a many initiatives. Moreover, Kroger has proven that almost everything it tries ends up working well. Although Kroger stock will never have the appeal most tech stocks or biotech stocks boast, it's a quietly solid play for the less aggressive parts of most portfolios.
Kroger will post its quarterly numbers on Friday morning.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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