Kroger: In Event of No Takeover

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Kroger (NYSE: KR) shareholders might be licking their chops as they hear the current takeover talk. BLOOMBERG BUSINESS WEEK reports that Point View Wealth Management Inc. estimates an offer for Kroger could be 30 percent over its current stock price.  During the downturn, Kroger lost about $4.7 billion or 10 percent of its market capitalization, which now stands at $13.70 billion.  In contrast, during the same time frame, Whole Foods's (NASDAQ: WFM) stock price has increased tenfold. Its current market cap of $13.72 billion makes it the largest traditional grocer.

Of course, shareholders could take the money and run. But, a takeover might not happen. After all, Kroger carries $7.47 billion in debt. The traditional supermarket model has come undone.  It's an old story how Wal-Mart’s (NYSE: WMT) SuperCenter, launched in 1988, created the new business model: big box discount groceries.  That's where the action has been. Target (NYSE: TGT) added touches of the experience economy.  Then Aldi took the leaders on with even steeper discounting. More recently the small boxes like the dollar stores such as Family Dollar (NYSE: FDO) are expanding their groceries. Meanwhile extreme couponing eats into all the players’ profits. Foreign buyers or domestic private equity funds would have to do plenty of restructuring of Kroger to make the investment pay off.

Yet, Kroger could survive and even thrive.  For one thing, as the economy picks up, the middle-class could return to lifestyle shopping in Kroger. Target's success has proved out that low prices and having fun shopping are not mutually exclusive.

Secondly, research is showing that Kroger’s pricing is competitive or even lower than the big boxes and the small boxes. Teri Gault of TheGroceryGame.com, reports WMCTV, comparison shopped for the same items in the Memphis area.  The findings: Kroger came in at $10.01 with the lowest prices, versus Wal-Mart at $19.26, Target at $29.62, Aldi at $18.37, and Dollar General at $18.31.  Kroger can re-brand itself as the affordable but upscale hybrid.

Third, location matters in grocery shopping, points out investment advisor Jason Kelly.  Kroger, with almost 2500 supermarkets, has established itself as a neighborhood store.  One of its tactics is increasing its local presence.  For example, it has bought up six Schnucks stores in Memphis, bringing its number of stores in that metro area to 43.   

And, fourth, Kroger is aggressive with its own branded products which can beat out competitor pricing such as P&G’s by as much as 50 percent.  The packaging simulates the labeling of national brands.  As long as Kroger keeps on the legal side of trademarks, that's a smart move.

A rising tide lifts all boats.  The recovering economy could lift Kroger’s significantly.


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