EUR 850.00 For Business Accounts Only

Morningstar | KR Updated Star Rating from 19 Oct 2018

Despite a changing grocery landscape, we believe Kroger's local market scale and strong brands should protect returns. Kroger is the largest U.S. traditional grocer by revenue at $123 billion in fiscal 2017 sales, about double the level generated by number-two player Albertsons ($60 billion). Kroger holds a number-one or -two position in around 100 of 120 major and minor markets which, paired with its national and local scale, gives it a cost advantage over smaller foes. It also benefits from strong data analytics, amassed over decades, which enables it to tailor mix and promotions to align with customer preferences. We believe the combination of its cost edge and intangible assets positions it well to compete with other mass merchants as well as alternative outlets including digital retailers and hard discounters (Aldi and Lidl).In terms of its physical units, Kroger expands methodically; organic gross square footage has ticked up around 1% a year, but closing underperforming stores has held total square footage to sub-1% growth. We believe the firm will slow its organic growth but continue to fill in existing markets and occasionally acquire competitors to enter new markets. Kroger acquired Roundy’s in 2015 for $800 million and Harris Teeter in 2013 for $2.5 billion, both of which we saw as prudent uses of shareholder capital. Kroger’s customer-first mantra is focused on extracting costs to enable low prices, evident by steady gross margins despite fixed cost leverage. We don’t think the firm will shift its strategy, though improving its e-commerce/digital experience should be a focus. It has over 1,000 click-and-collect stores (order online and pickup), with plans to double the number of locations in fiscal 2018. Further, we think efforts to test meal kits in select markets and home delivery (872 locations at the end of fiscal 2017) and furthered by its purchase of Home Chef could win over consumers who favor the convenience of online shopping. In combination, we think these efforts should enable Kroger to benefit from the attractive growth of online grocery (an effort boosted by its 2018 exclusive partnership with Ocado) and withstand competitive headwinds.