COMPANY PROFILE

The Kroger Co.

REFERENCE CODE: 872F179C-5743-46B0-96C5-A79D066B05F9

PUBLICATION DATE: 14 Mar 2014
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The Kroger Co.

TABLE OF CONTENTS

TABLE OF CONTENTS
Company Overview..............................................................................................3
Key Facts...............................................................................................................3
SWOT Analysis.....................................................................................................4

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Company Overview

COMPANY OVERVIEW
The Kroger Co. (Kroger or the company) is a grocery retail chain in the US. The company operates
supermarkets and multi-department stores under a number of banners including Kroger, Ralphs,
Fred Meyer, Food 4 Less, Fry's, King Soopers, Smith's, Dillons, Jay C, QFC and City Market. Kroger
primarily operates in the US. It is headquartered in Cincinnati, Ohio, and employed about 343,000
people as of February 2, 2013.
The company recorded revenues of $96,751 million in the financial year ended January 2013
(FY2013), an increase of 7.1% over FY2012. The operating profit of the company was $2,764 million
in FY2013, compared to $1,278 million in FY2012. Its net profit was $1,497 million in FY2013,
compared to $602 million in FY2012.
The company's financial year ends on the Saturday closest to January 31. FY2013 was a 53-week
period and FY2012 was a 52-week period.

KEY FACTS
Head Office

The Kroger Co.

1014 Vine Street
Cincinnati
Ohio 45202
USA

Phone

1 513 762 4000

Fax
Web Address

http://www.thekrogerco.com

Revenue / turnover 96,751.0

(USD Mn)
Financial Year End

January

Employees

343,000

New York Ticker

KR

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SWOT ANALYSIS
Kroger is a grocery retail chain in the US. The company holds the largest or the second largest
market share position in 38 of the 41 major markets in which it operates. The company ranks among
the largest corporations in the US. Kroger's size provides it with significant pricing power over food
producers, giving the company economies of scale over smaller supermarket operators. However,
increasing competition could negatively impact Kroger's market share.
Strengths

Weaknesses

Large and established presence led to

strong performance
Effective differentiation measures
Presence in several formats increases
addressable market

Overcharging customers in Ralphs stores

hurt consumer confidence and exposed the
company to penalties

Opportunities

Threats

Growing private label market will lead to

growth in revenues and profitability
Increasing popularity of retail clinics
Growing influence of Hispanic population
Higher demand for natural and organic
products
Acquisition of Harris Teeter Supermarkets

Intense competition may pressurize margins

High degree of unionization will increase
labor costs against a backdrop of rising
wages and healthcare costs
Increase in food safety regulations

Strengths

Large and established presence led to strong performance

Kroger is one of the largest retail grocery chains in the US in terms of revenues. The company holds
the largest or the second largest market share position in 38 of the 41 major markets in which it
operates. At the end of FY2013, Kroger operated 2,424 supermarkets and multi-department stores,
786 convenience stores, 328 jewelry stores and 37 manufacturing plants. In 2013, the company was
ranked among the America's largest corporations, as well as the world's largest corporations by a
business magazine. Kroger's size provides significant pricing power with food producers, giving it
economies of scale over smaller supermarket operators. The company's strong performance in an
extremely challenging operating environment is reflected by its identical store sales growth of 3.5%
(excluding fuel) it recorded in FY2013. Moreover, Krogers identical store sales have grown for 38
consecutive quarters. The company also recorded a revenue growth rate of 7.1% in FY2013, while
Wal-Mart's revenues grew by 5% in the financial year ended January 2013, and Safeway's revenues

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grew by 1.3% in the financial year ended December 2012. Kroger has been able to increase its
market share in an extremely competitive environment which has been characterized by price wars
from value retailers and other competitors, who have been gaining popularity owing to their price
positioning.
The company being a large retailer enjoys advantages of scale, which can be passed on to
consumers. Additionally, its established presence enabled it to increase market share and revenues
in a tough operating environment.
Effective differentiation measures
Kroger follows a strategy which has evolved to incorporate more elements of differentiation on factors
other than price. The company has tried to identify various factors that drive customer visits and
loyalty and has made several targeted investments to achieve the same. One such move is the
increase in gasoline stations. The company has increased the number of stores with fuel centers to
1,169 in FY2013 from 376 in FY2003. At the end of FY2013, the company had fuel centers in 31
US states. Having more than 1,000 fuel centers is a key advantage for Kroger, enabling the company
to drive traffic to its stores. Kroger also uses several targeted promotions on gasoline to attract
customers to its stores. In 2010, the company partnered with Shell to roll out the grocer rewards
program in Cincinnati, Dayton, Knoxville, Nashville, San Diego, Houston, Atlanta and Northern
Georgia. Kroger and Shell expanded this program to include Augusta and Ohio areas in 2011. This
program allows customers in participating markets to earn points and redeem them for savings on
gasoline at Kroger Fuel Centers and participating Shell stations. Additionally, it also gives its customers
an opportunity to earn rewards including a minimum of 10 cents off a gallon of gasoline for every
100 Fuel Points they earn by using their free loyalty card when purchasing a variety of products
inside Kroger and Ralphs stores. Shell serves millions of Americans each day and through this tie-up
Kroger was able to substantially enhance its customer base.
On the other hand, the company increased its exclusivity and differentiation by investing on the
private label program. Over the years, the company has built a strong private-label program which
caters to premium and value segment markets. Kroger focuses on providing quality products through
its private label program and manufactures about 40% of the proprietary brands it sells. Kroger also
differentiates itself by providing individual attention to its customer needs and requirements. This is
facilitated by the intelligence provided to the company on its customer behavior by dunnhumbyUSA,
a joint venture between Kroger and dunnhumby (a company engaged in data management, customer
analysis and insight-led planning) established in 2003. dunnhumbyUSA provides Kroger with in-depth
analysis on the shopping patterns of its customers. The information so gained is then used to develop
a basket of customized offerings and coupons specific to a particular customer segments
requirements. This acts as a compelling proposition for its customers and results in repeat purchases.
These efforts helped Kroger to strengthen its foothold in the supermarket industry. Its targeted
promotions which focus on products and services in line with customer preferences and measures
to enhance customer experience will enable the company to sustain severe price wars. Additionally,
these measures also increase the company's potential customer base and average spend which
will contribute positively to the top line growth.

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Presence in several formats increases addressable market

Kroger follows a multi-format model to target all customer segments. Its supermarkets are generally
operated under one of the following formats: combo stores, multi-department stores, marketplace
stores, and price impact warehouses. Combo stores are typically in a food store format and target
customers located in two to 2.5 mile radius. While maintaining the convenient food store aspect,
these stores are large enough to include specialty departments. Through such departments Kroger
has established these stores to offer one-stop shop positioning along with a convenience retailing
positioning. Multi-department store is an extension to the combo store and it additionally offers
general merchandise items such as apparel, home fashion and furnishings, electronics, automotive
products, toys and fine jewelry. These stores diversify revenues across several product categories.
Kroger's marketplace stores are similar to the multi-department stores and offer full-service grocery
and pharmacy departments as well as expanded general merchandise offering outdoor living products,
electronics, home goods and toys. The price impact warehouse operates a low cost warehouse
model catering to the value segment. Additionally, the company through its subsidiaries operates
convenience stores and specialty jewelry stores.
The presence across several formats increases the addressable market as Kroger is able to cater
to the varied customer preferences. Large addressable market facilitates increased potential customer
base which, in turn, enables the company to drive top line growth.

Weaknesses

Overcharging customers in Ralphs stores hurt consumer confidence and exposed the company to
penalties
Ralphs was charged for overbilling customers. Between January 2010 and March 2010, the Los
Angeles County Department of Weights and Measures conducted undercover inspections at 14
Ralphs stores across Los Angeles and found that customers were overcharged for prepackaged
and weighed products including fried chicken and salad. Most of the violations involved the store
illegally charging for the weight of the package, or including the ice glaze on frozen products in the
net weight. Some prepackaged items also were found to be under the weight posted on the label.
Following the investigation, the City Attorney's Criminal Branch filed a multi-count criminal case
against Ralphs. Both Ralphs and Kroger faced fines and penalties separately of up to $256,000 in
2010. However, the charges against Kroger were dropped later. In March 2011, Ralphs was ordered
to pay $67,600 in fines against these charges. This is not the first time that Ralphs paid penalties
for false labeling and overcharging prices. Later, in September 2012, Ralphs was ordered to pay
$1.1 million in civil penalties, costs, and restitution for overcharging customers on deli and other
weighed food products and for failing to reduce the weight of packaging on those items. This payment
was made as result of a settlement reached with the Los Angeles City Attorney's Office in partnership
with the Los Angeles County District Attorney's Office.

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Such charges against the company severely hurt consumer confidence. In a market where consumers
are attracted to low price high value products, over pricing will erode Kroger's brand image.
Additionally, fines and penalties would increase the expenses for the company.

Opportunities

Growing private label market will lead to growth in revenues and profitability
The growing preference of customers to buy value oriented merchandise is expected to boost the
demand for private label goods in the US. According to the industry sources, among all major US
retail channels, private label sales increased by approximately 3% to reach nearly $109 billion in
2012. Since 2009, annual growth of store brands sales has averaged approximately 5%, compared
to national brands sales annual growth of approximately 2%. Private label products provide customers
with an attractive alternative to higher-priced national brands. Instead of buying expensive brands,
consumers across the industry are turning to generic and private label products. Even upper-income
shoppers are more willing to buy generic, which has traditionally appealed more to shoppers with
limited budgets.
Kroger strongly focuses on its private label portfolio as part of its merchandising strategy. Its
supermarkets, on an average, stock nearly 12,000 private label items. Kroger follows a three tier
approach (Private Selection, banner brand and Kroger Value) to cater to varied customer
requirements. Private Selection is a premium quality brand designed to be a unique item in the
gourmet or upscale brands category. The banner brand (Kroger, Ralphs and King Soopers among
others) comprises majority of the company's private label items and focuses on taste and efficacy
to satisfy customers. Kroger Value is the value brand, designed to deliver quality products at a very
affordable price. Presently, corporate brands account for 24% of Kroger's total grocery department
sales dollars, indicating the popularity of its private labels. The gross margins on private brands are
higher than that of national brands and increased acceptance of these brands will lead to an increase
in sales and will, in turn, impact the company's bottom line positively. Additionally, as these brands
are offered exclusively in the company's stores, it is a strong differentiator and offers a competitive
advantage.
Increasing popularity of retail clinics
Retail clinics are walk-in clinics located in pharmacies or grocery stores. Growing number of customers
have been using the facilities offered by these retail clinics as these clinics offer several advantages.
Low cost entry points and extended hours of operations compared to hospitals are the key factors
driving the growth of retail clinics. The demand for convenient healthcare at affordable prices is
expected to further drive the growth in this segment. According to industry estimates, the number
of retail clinics in the US is expected to grow from approximately 1,400 in 2012 to 2,700 by 2016.
Another area where retail pharmacy channel plays an important role is immunization against various
types of flu. According to a survey conducted by the Centers for Disease Control and Prevention,

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during 201213 flu season, nearly 57% of children and 42% of adults received influenza vaccination.
Though the most common place of vaccination among both adults and children was a doctor's office,
pharmacies, supermarkets and other stores were also key places which saw customers coming for
their vaccine shots.
Kroger operates more than 1,940 in-store pharmacies in the US, which fill over 160 million
prescriptions every year. The company also offers convenient access to seasonal flu vaccines at
an affordable price. These flu vaccines are administered by trained pharmacists and nurse
practitioners. In 2012, the pharmacists at Kroger administered more than one million flu shots to
customers. Additionally, the company's $4 generic prescription program has saved its customers
millions of dollars on drugs. The increasing popularity of in-store retail clinics and immunization
programs will increase the footfall for Kroger.
Growing influence of Hispanic population
The US is one of the most popular destinations for Hispanic population. The growing Hispanic
population in the country is likely to increase the level of consumer spending considerably, in time
to come. According to the US Census Bureau, Hispanic population is expected to increase from
53.3 million in 2012 to 128.8 million in 2060. Hispanic population accounted for 16.9% of the country's
overall population in 2012. Though a large number of Hispanics live in the Mexican border states
such as California, Texas and Florida, they are moving to other parts of the country as well. The
Hispanic population in the US is expected to account for 31% of the country's overall population by
2060. The economic influence of Hispanics is also expected to be profound in the future. Industry
sources cite that the US Hispanic purchasing power exceeded $1 trillion in 2011. This is expected
to reach $1.5 trillion by 2015. The purchasing power of immigrant population is expected to continue
to show increase, as people of African, Hispanic and Asian heritage are expected to comprise a
growing proportion of the US population in future.
Kroger has a strong presence in the US market with stores in 31 states.The company's wide presence
across states can be leveraged to cater to the household needs of the growing Hispanic population
in the US.
Higher demand for natural and organic products
The natural and organic food products segment is one of the fastest growing categories in food
retailing. The demand for organic foods is growing in the US, due to the increasing preference of
consumers for healthy food. According to industry estimates, the US organic food sales increased
11% in 2012 compared to 2011. Produce (fruits and vegetables) and dairy accounted for more than
50% of total organic sales. The organic food market in North America is expected to register a strong
growth rate in the coming years. In a latest study undertaken by an industry source, nearly 80% US
families reported that they purchase organic at least sometimes. With parents focusing on providing
healthier food options to their children, there has been an increase in the frequency of purchases
of organic foods in the country. Furthermore, the awareness of the USDA Organic seal is also
contributing to such a surge in sales. With consumers looking for the seal when shopping for organic
products, the study indicated that the trust in organic products has increased.

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Kroger introduced new Simple Truth and Simple Truth Organic brands offering several natural
products, including meat, chicken and eggs across all its stores in 2012. These products do not
contain artificial preservatives and ingredients and are certified organic by the US Department of
Agriculture. Thus, Kroger can harness the increasing customer preference for organic foods to boost
its revenue growth.
Acquisition of Harris Teeter Supermarkets
Kroger and Harris Teeter Supermarkets signed a definitive merger agreement in July 2013, under
which Kroger will acquire all outstanding shares of Harris Teeter Supermarkets. Through its
wholly-owned subsidiary, Harris Teeter Inc., Harris Teeter Supermarkets operates a regional chain
of 212 supermarkets (147 of which have pharmacies) in eight states primarily in the southeastern
and mid-Atlantic US, and the District of Columbia. Harris Teeter Supermarkets also operates
distribution centers for grocery, frozen and perishable foods in Greensboro and Indian Trail, North
Carolina, and a dairy facility in High Point, North Carolina. This acquisition will expand the companys
market presence in high-growth markets, vacation destinations and university communities across
North Carolina, Virginia, South Carolina, Maryland, Tennessee, Delaware, Florida, Georgia and the
District of Columbia. Through this acquisition, Kroger expects to achieve annual cost savings of
nearly $40 to $50 million over the next three to four years.
The acquisition of Harris Teeter Supermarkets considerably expands the presence of the company
in the Southeastern US markets, where Harris Teeter Supermarkets enjoys significant brand
recognition. Also, its customer base comprises households with high median incomes, which will be
added to the companys customer base. Harris Teeter Supermarkets has maintained its position
among the top three retailers in the North Carolina market, where it competes with large grocers
such as Wal-Mart Stores. Through its large scale of operations and significant bargaining power,
Wal-Mart Stores has been able to compete effectively in the price sensitive market. By leveraging
its operational scale and resources, Kroger can work towards strengthening Harris Teeters
competitiveness in this market to better compete with Wal-Mart Stores and gain market share. The
acquisition of Harris Teeter Supermarkets therefore expands the companys distribution network
and customer base, and provides it with the ability to compete with regional grocers effectively in
Harris Teeters high-growth markets.

Threats

Intense competition may pressurize margins

Food retailing sector is the US is characterized by stiff competition leading to price wars. Non-existent
switching costs for consumers, who are largely driven by price, increased the appeal of discounters
and other value retailers. Wal-Mart's entry into the grocery market and its aggressive expansion has
proved to be a major disruption to traditional operators, whose cost structures are higher and cannot
match the low prices that Wal-Mart offers. Merchandise offered at Wal-Mart's stores is priced at
much lower range than the prices offered by its competitors. As the purchasing power of consumers
is decreasing in this weak economy, pricing matters more and it plays into the hands of the low-price

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leaders. In addition, Kroger's economies of scale are trumped by discounters such as Wal-Mart and
Costco. Kroger, to improve market share, was forced to become more promotional, which led to
reduced profitability in the past. Although historically Kroger has been able to keep up stable margins,
FY2012 saw more margin compression as a result of heavy price competition and the market share
growth came at an expense of profitability. Competition for the consumer food dollar continues to
intensify as supercenters and warehouse clubs increasingly promote lower prices on food to drive
traffic. Kroger also faces potential competition from the online grocery services offered by various
retailers, For instance, Amazon launched its grocery-delivery service in San Francisco in December
2013, expanding the service to the San Francisco Bay Area from the existing Seattle and Los Angeles
markets. Furthermore, Wal-Mart Stores announced that it will test home delivery of groceries ordered
online in Denver following two years of trials in the San Francisco-San Jose area. Increasing
competition could negatively impact Kroger's market penetration.
High degree of unionization will increase labor costs against a backdrop of rising wages and healthcare
costs
Tight labor markets, increased overtime, government mandated increases in minimum wages and
a higher proportion of full-time employees are resulting in an increase in labor costs. The federal
minimum wage rate in the US, which remained at $5.15 per hour since 1998, increased to $5.85
per hour in 2008. It further increased to $6.55 per hour in 2009 and to $7.25 per hour in 2010.
Moreover, many states and municipalities in the country have minimum wage rates even higher than
$7.25 per hour due to higher cost of living. The minimum wage rate has increased in the states of
Arizona (from $7.8 in 2013 to $7.9 in 2014), Colorado (from $7.78 in 2013 to $8 in 2014), Florida
(from $7.79 in 2013 to $7.93 in 2014), Ohio (from $7.85 in 2013 to $7.95 in 2014), Oregon (from
$8.95 in 2013 to $9.10 in 2014) and Washington (from $9.19 in 2013 to $9.32 in 2014) in the recent
past. In addition, the healthcare costs for employers in the US are increasing. According to industry
estimates, healthcare costs for the US employers are estimated to grow by 7% in 2014 compared
to 2013.
A majority of Kroger's employees are covered by collective bargaining agreements with unions, and
the company is a party to nearly 300 collective bargaining agreements, with an expiry term of three
to five years. During FY2014, the company plans to negotiate several of these labor agreements
covering store employees in Indianapolis, Houston, Dallas, Cincinnati and Seattle, among others.
In all of these contracts, rising wage, healthcare and pension costs will continue to be an important
factor in negotiations.Yielding to demands by these unions may lead to an increase in the operating
costs for the company and may have an adverse effect on future results of operations. Additionally,
such issues may lead to strained relationship with unions. The company has endured labor strikes
in the past and the resistance to incur increased costs may lead to prolonged work stoppages
affecting a substantial number of locations. Rising healthcare and labor costs may therefore affect
Krogers profitability. Furthermore, high unionization of its labor might affect the operations in case
the company and the unions do not reach a consensus.
Increase in food safety regulations

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The company's business operations are subject to regulation by a variety of federal, state, local and
foreign laws and regulations regarding manufacturing, marketing and distribution of food products.
In 2009, a new legislation was passed requiring more frequent inspections of processing plants and
giving the government authority to order the recall of tainted foods. According to several organizations,
the present food safety regulations are inadequate and these organizations have recommended
stricter regulations. For instance, in 2009, the American Public Health Association recommended
legislative changes to establish a new authority to strengthen the food safety system. In April 2013,
the US Food and Drug Administration (FDA) requested a budget of $4.7 billion for fiscal 2014 (October
1, 2013 through September 30. 2014). Of these, $295.8 million would be spent on food safety
regulations. Increased food safety measures, although beneficial, will increase the burden of specific
compliances for Kroger and may increase the related expenditure for the company.

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