What are the likely threats for Kroger?
Food retail (XRT) is characterized by low margins, high fixed costs, and fierce competition. The competition in this segment is set to increase, mainly due to several trends.
Increasing food share of general retailers
Big retail players like Costco Wholesale Corp. (COST), Walmart (WMT), and Target Corp. (TGT) have been increasing their food-related revenue. Food accounts for 56% of Walmart’s US revenue, 35% of Costco’s revenue, and 21% of Target’s revenue.
These large retailers benefit from the economies of scale and can increase competition further by cutting prices. Their increasing presence might translate into a smaller share of the pie for Kroger.
Online platform owners and big retailers
Although the development of online platforms for grocery sales provides an opportunity to retailers, it possesses a threat to traditional grocers like Kroger (KR). These grocers face competition from traditional online stores like Amazon.com Inc. (AMZN), which are expanding their presence in the still-nascent online grocery market.
On the other hand, big retailers like Walmart Stores Inc. (WMT), which have the capital and skills to change the market, are expanding their home delivery and drive grocery formats.
Gross profit margin pressure
Kroger currently operates at a gross margin that is among the lowest in its peer group. In fiscal 2015, Kroger’s gross margin was 21% as compared to 35% of WFM, 30% of Sprouts Farmers Market (SFM), and 25% of Walmart (WMT). Further price competition might put more pressure on the company’s margins and hinder its growth.
These companies have various dates to end their fiscal 2015 period:
- Whole Foods Market: September 28, 2014
- Sprouts Farmers Market: December 28, 2014
- Kroger: January 31, 2015
- Walmart: January 31, 2015
- SuperValu: February 28, 2015
In the final part of this series, we’ll explore Porter’s Five Forces Model as it relates to Kroger (KR).