Kroger reacts to supercenter threat - company to launch Food4Less concept in Chicago - Brief Article

DSN Retailing Today, Jan 7, 2002 by Mike Duff

CINCINNATI -- Kroger has launched a major corporate shakeup that will improve its competitive position in a market shaken by supercenter growth and, if all goes according to plan, reinvigorate its results.

Additionally, Kroger is rolling out Food4Less in Chicago. In a conference call Dec. 11, Kroger executives said the company plans to open three to five Food4Less stores in the Windy City next year. The company is currently acquiring locations.

Company executives said an analysis of the top 100 MSA in the United States revealed Chicago was the best new market for its price-impact format. Food4Less stores are predominantly located in the southwestern United States.

In conference calls, supermarket executives regularly insist they are competing successfully against Wal-Mart, but in the Dec. 11 call discussing third quarter results, Kroger came close to admitting its Bentonville-based rival was having an impact.

Chairman and ceo Joe Pichler still managed to qualify the admission to a degree. He asserted that, rather than hurting Kroger directly, Wal-Mart had created an environment in food retailing that had caused major supermarket operators to cut prices.

Price cutting by Kroger's direct competitors was what was forcing the company to slash jobs and institute other cost-cutting measures, including folding the company's Nashville, Tenn.-based division into those operated out of Louisville, Ky., and Atlanta, and centralizing more of its vendor contact elements at its corporate headquarters in Cincinnati.

Kroger is eliminating the division under a strategic plan that includes accelerating the roll out of best practices across the company and developing a $500 million war-chest through cost-cutting measures, including the elimination of 1,500 management and administrative jobs.

The goal in the purist sense is to improve financial performance, particularly top-line growth. Kroger's initiative has been designed to generate, by fiscal 2004, identical store sales growth of 2% to 3% annually above product cost inflation, and earnings growth of between 13% and 15%. Kroger will incur a pretax charge of between $85 million and $100 million to reflect severance and other costs associated with implementing its growth strategy

In the practical sense, Kroger's effort will reposition it to better meet the demands of a marketplace heavily impacted by the growth of supercenters, particularly Wal-Mart supercenters.

To do so, Kroger will alter its pricing structure in markets where it is significantly out of line with supercenters. One thing Kroger will not do, however, is become an everyday-low-pricer. "We're a feature merchant and we'll be an even better feature merchant," Pichler said.

Kroger has seen the largest slide in market share over the past five years.

The company controlled 22.18% of the overall market in 2001 compared to 24.01% in 1996, Deborah Weinswig, a Bear Stearns analyst, noted in a recent report. The declining market share can be explained, in part, by its overlap with Wal-Mart supercenters, she stated, although warehouse clubs are another relevant factor.

At 65%, Kroger has the largest market overlap with Wal-Mart supercenters among the Big Three grocers.

Despite this, she stated, "Kroger has stood up extremely well in its head-on competition with Wal-Mart supercenters."

Its adoption of best practices from Fred Meyer, solid fundamentals in increasing penetration of categories, such as gasoline, ethnic foods and private label, are all factors that should boost the supermarket operator's performance, she concluded.

Still, supermarket operators seem to suffer from a degree of denial when it comes to Wal-Mart, and the way it is fundamentally altering food retailing, said Shelly Hale, an analyst with Banc of America.

Any action today by supermarket operators may only be the first step as this retail channel transforms.

"Wal-Mart is going to affect the grocery industry the same way it affected the department store industry," she said. "They need to take a look at the department store industry It's hard to find a profitable department store these days."

Yet, Pichler insists opportunities for growth continue to exist in the supermarket industry for major players.

As bigger food retailers gain greater economies of scale, they will press their advantage over smaller competitors. Kroger's latest initiatives, he said, will improve the company's outlook as it pursues them. "The rapid pace of supermarket consolidation is releasing market share into the system," Pichler said, adding, "and we will go after it."

Looking at the third quarter, Pichler said results were satisfactory on some measures but demonstrated poor top-line growth.

Kroger posted earnings of 32 cents per diluted share in the third quarter, excluding merger-related costs and one-time expenses, up 14.3% over the third quarter of 2000 on a like basis. Total sales increased 3.8% to $11.4 billion. Total food store sales increased 4.3%, while comparable food store sales, which include relocations and expansions, increased 1.4% for the quarter and identical food store sales rose 0.8%.