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Morningstar | Kroger Should Be Able To Use Its Scale and Data Capabilities to Fend Off Intensifying Competition

Of the traditional grocers, we believe Kroger is uniquely positioned to defend its returns against a competitive onslaught that should intensify as Amazon, hard discounters, and mass merchandisers price aggressively to boost volume. Though industry factors are diminishing its competitive standing, we contend that Kroger still benefits from enduring intangible assets and cost advantages.Grocers use price as a primary lever to drive traffic, which we believe necessitates efficiency and cost leverage (spurred by high traffic) to deliver returns. We expect this environment to endure as the industry changes, with an omnichannel experience likely to prevail as customers use a combination of deliver-to-home, click-and-collect, and in-store shopping, particularly since most American consumers drive past grocers on their commutes and home delivery can be inconvenient for buyers with uncertain schedules. In physical retail, we anticipate that shoppers will use a variety of sellers to meet their needs based on convenience, price, and breadth of assortment, demanding high value as well as a compelling store environment.We believe Kroger should be able to capitalize on the changing landscape. We maintain that Kroger's local market scale allows it to derive cost leverage that fuels competitive pricing as well as the investments needed to build on its already-considerable presence in each of the emerging channels. In our view, its progress should be accelerated by partnerships (with Ocado, Walgreens, Microsoft, and others) that we do not believe are available to smaller rivals because they cannot deliver the same value to counterparts.Kroger's data-related efforts should play a large role in its embrace of the new grocery landscape, fueling promotional efforts and customer engagement while informing assortment and providing salable insights that can create alternative revenue streams. We expect data to play a key role in retailers' efforts to drive traffic, efficiency, and conversion, and anticipate that Kroger's long, intimate relationship with its numerous customers (96% of sales are tied to a loyalty card) has created a monetizable asset that few rivals can match.