Kroger Co., the nation’s largest pure player supermarket retailer and a growing presence in the Mid-Atlantic region, unveiled its long-term strategy for enhanced growth at its investor conference in New York last month.
Building on strong momentum over the past five years that has been gained from its “Customer 1st” strategy, the Cincinnati based retailer said it will invest in a targeted expansion strategy to increase square footage and store penetration in its existing markets and will look to enter new markets.
While chairman and chief executive David B. Dillon provided no specifics about new market penetration, obviously certain Supervalu assets become a potential destination, especially the Jewel division in the Chicago area, which currently represents a nice geographic hole in the Kroger donut. Even companies like Farm Fresh and Shoppers Food & Pharmacy would fit the “new and existing expansion” approach Kroger is targeting.
Seeking new market growth would represent a marked change from Kroger’s very conservative growth profile which typically has focused on building local market share through price and customer service.
And nobody can argue with the results – for the past five years, no other pure supermarket chain has performed at a higher level. However, much like other supermarket operators, Kroger’s stock price has languished ($24.54 per share) and it has remained planted its established market (its last major market expansion was in 1998 when it acquired Fred Meyer, giving the chain a major West Coast presence).
Kroger also announced that it raised its long term, fully-diluted earnings per share growth target from 6-8 percent to 8-11 percent, plus a current dividend of 2.5 percent. To support its growth strategy, Kroger expects to increase capital spending by an incremental $200 million annually and increase return on invested capital.
At the meeting, Kroger’s board of directors approved a $500 million share repurchase program, replacing the existing authorization that had approximately $340 million remaining.
During the conference, senior Kroger executives highlighted the significant opportunities the company sees across the broad food retailing market, which extends beyond traditional supermarkets and includes discount stores, drug stores, restaurants and many others.
“Our proven strategy and market position provide a tremendous platform to accelerate growth and increase value creation for Kroger shareholders,” Dillon said. “We are confident that Kroger’s unmatched knowledge of the customer and disciplined approach to deploying capital will drive growth at attractive levels of return. We will continue to use our strong free cash flow to deliver shareholder value through actions such as our recent 30 percent dividend increase and the continuation of our substantial share repurchase program.”
Other Kroger executives who participated in the conference included: Cindy Holmes, director of investor relations; J. Michael Schlotman, chief financial officer and senior VP; W. Rodney McMullen, president and chief operating officer; Jeffrey D. Burt, group VP-perishables merchandising and procurement; and Michael J. Donnelly, senior VP-merchandising.
Kroger said that, during the past five years, its customer-centric strategy has resulted in a 200 basis point increase in market share – defined as overall share of the products Kroger sells in the markets where the company operates – to 21.1 percent, according to Nielsen Homescan data. Today, nearly half of all U.S. households hold a Kroger loyalty card, and that figure increases to 85 percent in the markets where Kroger operates. The company has reported an industry-leading 35 consecutive quarters of positive identical store sales.
“Even through the worst of the recession, Kroger created 29,000 new jobs during the last five years. We are going to invest to grow and expand our store base, which will create more job opportunities over the next five years, and beyond,” Dillon asserted.
In addition to selectively expanding its store base and the markets it serves, Kroger said it will pursue other initiatives to drive growth, including: finding new customer channels – the retailer hopes to enhance the company’s digital and mobile platforms by leveraging its customer insights program; and testing new store formats designed to provide greater access and shopping flexibility to customers.
The company will measure its progress across several key performance metrics including return on invested capital (ROIC), identical sales excluding fuel, FIFO operating margin excluding fuel, and market share growth.
Kroger also reconfirmed sales and earnings guidance for the current fiscal year today.
On a regional level, Kroger announced that it will open its long-awaited 120,000 square foot Marketplace next month in Richmond (Chesterfield County) on December 11. No other retailer in any channel has increased its market share more than Kroger in the Richmond market over the past five years.
And in Hampton Roads, Kroger has big plans, too. Last month, the chain announced it will add 10 new stores in Tidewater over the next five years including a 124,000 square foot Marketplace at the site of an old Super Kmart in Virginia Beach which is slated to open in June 2013.