The Kroger Co. (NYSE: KR) is the largest operator of traditional grocery stores in the United States and the second largest food retailer in the United States after Wal-Mart. Kroger operates over 2,400 supermarkets and also manufactures and sells food under 24 of its own brands.  Kroger's diversified operations also include jewelry stores, convenience stores, gas stations, drug stores, and financial services.
Over the last few decades, the supermarket industry has undergone a transformation in the United States. Twenty years ago, 90% of food shopping was conducted in traditional grocery stores. Today, just 50% of food shopping is done at traditional grocery stores. As a large retail grocer, Kroger faces competition from similar chains, local stores, and niche stores, such as Whole Foods Market (WFMI) and Safeway (SWY). Wal-Mart (WMT), however, represents the most significant long term threat to the firm's continued growth. Wal-Mart (WMT) sells a wide variety of goods ranging from apparel to groceries. Because of its scale, the retailer is often able to offer below-market prices to its customers. In order to compete, Kroger has focused on making its stores a one-stop solution for customers' daily needs. As of the end of 2010, Kroger had 864 convenience stores and 374 fine jewelry stores in addition to its 2,468 supermarkets, 893 of which also had fuel centers. 
Kroger, founded in 1883, is the largest traditional supermarket operator in the United States. Kroger operates stores in 44 major markets across 31 states, and has the largest or second largest market share in 39 of those markets. Unlike other supermarket companies, like SuperValu (SVU), who rely predominantly on acquisitions to grow revenue, Kroger focuses on growing revenue through increasing identical store sales.
In fiscal 2009 Kroger posted $76.7 billion in revenue, a 0.7% increase over 2008 (by comparison, in fiscal 2008 sales increased 8.2% over the previous year) . Net earnings totaled million for 2009, compared to net earnings totaling $1.2 billion in each of 2008 and 2007; the net earnings for 2009 include non-recurring asset impairment charges totaling $1.05 billion, after-tax, related to a division in southern.
Kroger attributed the declines in large part to falling retail fuel prices. The average retail price for a gallon of fuel sold at Kroger fuel stations was 24% lower in the third quarter of 2009 compared to the third quarter of 2008. In the first three quarters of 2009, comparable supermarket sales were 0.4% (versus 8.1% in the first three quarters of 2008); this figure was 1.7% (versus 5.9%) when fuel sales are excluded. In addition, supermarket sales were pressured in the third quarter of 2009 by decreased consumer spending, persistent deflation in food prices (especially in produce, meat, and dairy), and heightened competitive activity.  In December 2009, a food price index posted a 0.3% increase in its price basket-- the largest monthly increase in more than a year -- in a sign that deflation is easing in the U.S. If that trend holds, it may be good news for Kroger and the supermarket industry as a whole. The price index is still down 2.4% from a year earlier.
Kroger posted total sales of $24.8 billion in the first quarter of fiscal 2010, a 8.7% compared to the first quarter of FY2009. Excluding fuel sales, total sales would have increased 3.1%. Earnings on the other hand fell to $373.7 million from $435.1 million first quarter last fiscal year, a 14.1% drop. The decrease in earnings was mainly attributed to an increase of operations, operating, general and administrative costs (excluding retail fuel operations), which increase 13 basis points from same period last year as a direct result of higher health care and pension costs. However, these uprising costs were offset by same-stores sales leverage which benefited from Kroger's active cost cutting throughout the economic downturn.
Kroger continues to target four key areas - people, product, prices and experience. This has led to a decrease of 168 basis points in FIFO gross margin to 22.66% of sales, but strong cash flow overall has still enabled Kroger to invest $79.5 million in share repurchases, a sign of confidence from management.
Kroger posted $261.6 million net profit for the second reporting quarter ending August 14, 2010 from $254.4 million same quarter last year, a 2.83% increase. Kroger attributes this increase by focusing on keeping current customers rather than cutting prices to attract new ones. As a result, the number of "loyal households," which Kroger calculates using total purchase size and frequency, rose during the quarter.
Same-store sales also rose 2.7%, though gross margins decreased 12 bps during the quarter, a testament to its philosophy of increasing volume rather than gross profit as its bottom line driver. Sales, including fuel, also increased 6% to $18.8 billion, which beat analyst estimates of $18.7 billion.
Kroger posted earnings of $202.2 million, or $0.32 EPS, for the third reporting quarter, which reversed the $874.9 million loss seen same quarter FY2009. Kroger attributes to the negative earnings experienced same quarter last year mainly to one-time charges. Sales for the period rose 5.9% to $18.7 billion, beating analyst consensus estimates of $18.5 billion.
As weak employment and higher gas prices continue to affect consumer confidence, Kroger's margins continues to be pressured. Kroger therefore narrowed its full-year profit forecast to $1.65 to $1.78 EPS from its previous estimate of $1.60 to $1.80. Kroger's stock fell roughly 9% on the day of earnings release.
Although Kroger does not break-down sales per unit, the company operates five types of stores: combo stores, multi-department stores, price-impact warehouse stores, convenience stores, and jewelry stores.vvvv
|Supermarkets and Multi-Department Stores||2,468|
In order to increase its margins and compete against Wal-Mart's lower prices, Kroger continues to invest in its private labels. Kroger sells more than 14,000 private label products at its supermarkets and convenience stores. The company sells its private label items in three quality tier: private selection, banner brand, and value brand. Kroger is generally considered to have one of the most successful private-label products in the industry. More than 26% of Kroger's sales come from these items, which typically have higher margins and fuel customer loyalty. Kroger applies a “make or buy analysis” to all of its food and retail items, in 2009 selling 39% of its retails units under its 24 brands. As of January 30, 2010, the Company operated 40 manufacturing plants. 
Wal-Mart is the greatest external force affecting any grocer. In markets that Wal-Mart has entered, grocery prices drop by an average of 10-15%. Additionally, Wal-Mart is able to drop grocery prices 10-30% drastically during promotional periods because it can remain profitable on extremely low margins due to its volume of sales. Although Kroger has introduced its price impact warehouse stores to compete with Wal-Mart (WMT) and other low cost competitors, its other stores may suffer from increased price competition.
Despite Wal-Mart's large size though, Kroger has been able to stick it out. While Wal-mart has a big piece of its sales coming from general merchandise, Kroger has oriented itself by treading around Wal-Mart and offering products that balances its own mix so it will not go into direct competition with Wal-Mart. By doing so, Kroger has allowed Wal-Mart to continue its foreign markets for expansion and Kroger has focused on developing its domestic markets.
In 2003, Kroger formed a joint venture with London-based data management and analytic company Dunnhumby to create Dunnhumby USA. With Dunnhumby's technology, Kroger can analyze a tremendous amount of information about its customers. Kroger is utilizing that knowledge to design its stores to match the needs of local markets. For instance, some of Kroger's supermarkets now have office supply stores built inside them. Kroger also used Dunnhumby's data to build Kroger Personal Finance, which offers home equity loans and mortgages at some Kroger locations. Analysts partly credit dunnhumby for boosting Kroger's sales per square foot, which have risen 20% since 2003.
Among traditional supermarket chains, Kroger has been able to use its own size to offer lower prices. In fact, despite the fierce competition, Kroger has increased its market share in most of its markets. In 2007, Kroger's market share increased by .65% in its 44 major markets.
In 2006, the most recent year for which data is available, US consumers spent a total of $1.1 trillion on food, 51.1% of it on groceries.  As a retail grocer, Kroger faces its stiffest competition several sources:
Wal-Mart Stores (WMT) Wal-Mart is the largest food retailer in the US with more than 3,550 stores and supercenters, with groceries accounting for 51% of Wal-Mart's $258.2 billion in 2009 US sales,.  Wal-Mart is able to provide low prices through its distribution network and economies of scale. Generally, Wal-Mart charges about 8% less than Kroger for the same products. Kroger stores cater to a similar broad public as Wal-Mart. Consumers turn to discount stores such as Wal-Mart when their disposable income falls.
|Company (Fiscal Year)||Comp Sales Growth||Square Footage Growth||Revenue per Square Footage (Millions USD)||New Store Additions||Closures||Average Store Size (Square Feet)||Gross Margin (%)||Operating Margin (%)||Net Profit Margin (%)||Capital Expenditure/Sales (%)|
|Whole Foods Market (WFMI) (FY2010)||7.1%||6.0%||882.0||16||3||38,000||34.8%||5.9%||2.7%||2.9%|
|Safeway (SWY) (FY2009)||(4.90%)||(0.40%)||509.99||8||23||46,000||28.62%||(1.54%)||(2.69%)||2.08%|
|Kroger Company (KR) (FY2009)||0.90%||0.01%||518.47||14||27||60,000||22.60%||1.42%||0.07%||2.99%|
|SuperValu (SVU) (FY2009) ||(5.1%)||(6.2%)||624.57||40||112||29,000||22.50%||2.96%||0.97%||1.70%|