One Grocer Continues to Impress

By Erin McBride - September 18, 2012 | Tickers: SWY, SVU, KR, WMT, WFM | 0 Comments

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I live in a large-for-a-small town. Kroger (NYSE: KR) is our main grocer. We have one Wal-Mart that sells groceries, one Food Lion, and one Fresh Market for organic and high-end foods. There are (according to the Kroger website) 7 different Kroger locations within 5 miles of my home. This explains why I swear we have one on nearly every corner.

Of all the stores, technically Food Lion is closest to me. However, I almost never shop there. Rumor has it that in order to keep up with Kroger (and to overcome its unfortunate geography hidden from the main road), Food Lion offers the lowest prices in town, and exceptional deals. In spite of all the reasons I may choose to shop at Food Lion, I still drive right past it to Kroger every week.

I enjoy the customer service at Kroger. A while back I bought a small jar of minced garlic. I got it home and put in the pantry where it sat for several months. When I finally got around to using it, I could not open it. I tried all of the usual tricks- hot water, special grips, etc. Nothing worked. It became a game of sorts in my home. Anyone who came to visit attempted to open this $2 jar of garlic. Finally I took it back to the store. By this point it had been submerged in boiling water and attacked by dozens of hands. The paper was peeling off of it, and it looked battered. I took it to customer service and dared them to open it.

As Murphy's Law would have it, it opened right up. I told the manager the ordeal the little jar had been through, and we had a good laugh. I was willing to take it home with me now that it was open. But the manager insisted that I swap it for a new one off the shelf. (He also opened it for me in the store, lest I got home and had the same problem again.) That one little act of customer service is why I drive right past another Kroger, and the Food Lion to go to his store.

In July I shared how Kroger was generating a profit and bringing back customers by following simple common sense business practices, like better customer service, cutting losses, and investing in the obvious places. Those same tactics continue to pay off for the nation's largest traditional grocer. Kroger (operating under other names including Smith's, Gerbes, Ralph's, Food 4 Less, and Fry's) reported that for the fiscal third quarter its expenses increased in accounting, operating, general and administrative, and interest paid. However, in spite of increased costs, the company reported a profit of $279.1M, or 51 cents per share, compared to $280.8M, or 46 cents per share, over the previous year.

Sales increased 3.9% to $21.7B. The company increased customer traffic, increased sales 3.9%, and increased its dividend payout 30%. Flat returns are not something to be concerned about when a company performs this well and are consistently outperforming the competition.

Traditional grocery chains have struggled in recent quarters as competitors become more specialized and diverse. Mass retailers such as Wal-Mart provide convenient one-stop shopping that other chains like Safeway (NYSE: SWY) cannot compete with. But mass market stores like Wal-Mart and Supervalu (NYSE: SVU) cannot compete with the in-demand organic chains like Whole Foods Market (NASDAQ: WFM).

But this is where Kroger stands apart from the competition (like Safeway). In some states the chain can compete against mass retailers like Wal-Mart with Smith's Marketplace, Fry's Marketplace, or Kroger Marketplace. The Marketplace models offer everything from eggs and milk to cocktail dresses and lawn mowers. (Some even have Fred Meyer Jewelry stores inside.)

Competition has made Kroger stronger and leaner, forcing it to perform well, or get knocked out. Not only must it compete against the low prices and diverse products of mass retailers, it must also compete with the prices and quality of traditional supermarkets, and with the organic offerings of specialty stores. Whole Foods is still able to offer organic food products cheaper than Kroger, because it buys in larger quantities. Whole Foods still has the “first in the market” edge on organic groceries. The company has a $17.9B market cap, and a P/E of $41.72. There are only approximately 300 Whole Foods stores as compared to 2,425 Kroger’s locations. Whole Foods may be competition in some neighborhoods; it is not competition for Kroger in all neighborhoods.

Like so many other industries, grocers are at the mercy of the economy. But people have to eat, and few people can live off the land without at least a little assistance from grocers. Other grocers have struggled, including Supervalu; who had to cut its dividend, fire its CEO, and is currently looking for a buyer.

The SVU P/E was 17.32 compared to Safeway's 9.02, and Kroger's 20.97. The company had $35.5B in revenue, but a negative $1B in earnings. Its market cap is $502.1M.

Meanwhile, Safeway's most recent quarterly revenue was up 1.8% from the year previous. The company has a market cap of $3.9B. As of 2010 the company operated 1,702 stores across the U.S. and Canada. Kroger has a market cap of $13B.

Things are good at Kroger, in spite of competition in an unfriendly market. But everything isn't perfect. The company's debt grew another $1.2B in the past year, for a total of $8.1B. If the pending “fiscal cliff” happens, the company could feel fast repercussions. And all grocers will feel the fall-out of the drought soon enough. With thin margins, both Safeway and Kroger have something to worry about.

But Kroger's Customer 1^st strategy of passing on benefits to customers, lower prices, personalized coupons, and fuel pump rewards, keeps customers loyal and happy. This is one company to keep shopping with and keep investing with.

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