Kroger Co (NYSE:KR) stock has fared just about as well as one would imagine in the face of the market’s concern about a permanent structural decline in the food retail and distribution industry—which is to say, extremely poorly. In fact, KR stock has actually severely underperformed the broader Food Retail & Distribution index, which is down a modest 15% compared to KR’s brutal 40% decline.
Unsurprisingly, most of that decline occurred in the wake of Amazon.com, Inc.’s (NASDAQ:AMZN) acquisition of Whole Foods, wherein the stock immediately fell of a cliff.
I take the position that with its scale and experience dealing with downward pricing pressure, KR remains in good shape to be a strong player in grocery’s future. This is not likely the case of a retailer becoming Amazon’s lunch.
The headline risk has been substantial. At first glance, the AMZN deal seems to be a big negative to KR. This has led to an opportunity to look more closely at what seems to be a very viable competitor in the space.
KR Knows How to Deal with Pricing
With Amazon cutting prices on numerous products, all the mega grocery centers are feeling the heat. But then, it’s nothing new. Price wars existed before Amazon came along, and they will likely continue. The question is how well KR can withstand these pressures.
And the answer is, pretty well. At least, based on recent history.
Before people even started speculating about Amazon’s move into the space, Kroger has been regularly facing off with the likes of Aldi and Wal-Mart Stores Inc (NYSE:WMT). A study conducted by Cheapism indicates that while Kroger was not able to undercut pricing by the aforementioned competitors, it made up for it in the overall customer experience and benefits from the loyalty program.
Using the Kroger Plus Card gets loyal shoppers lower prices on groceries and fuel. The program has kept in step with technological changes, incorporating digital coupons and shopping lists right into the mobile app. The data surrounding recipes and purchases will give Kroger invaluable data about customer habits. Personalization is the key to not only upselling additional products but also improving the user experience. The end result is a more satisfied customer and higher revenues.
Amazon may have its own Prime members to datamine, but so does Kroger. And Kroger is doing a good job of fostering customer loyalty by creating a differentiated experience for shoppers. Compared to Aldi and WMT, Kroger is the only large scale chain with a fresh meat and seafood counter. The study concluded that “Kroger’s strong suit is the overall shopping experience and generous loyalty program.”
KR’s Tech Edge
It’s a bit bizarre to use tech edge against such a tech focused competitor like Amazon, but KR is certainly doing what it can on this end. They are piloting ClickList, a promising development for online ordering and store pickup.
The future for retailers has been shifting toward this trend, and KR can leverage its physical scale and couple that with an online innovation.
Amazon isn’t the first to angle this way, they just get more hype than a “traditional” grocer.
KR’s Leader
Lastly, a quick word on management. The captain of this ship is Rodney McMullen who became CEO in 2014. Interestingly, he had commented that he was not surprised about the AMZN deal. He has been preparing Kroger for such a disruption and additional competitive pressures.
Since he’s become CEO, he’s been laser-focused on improvements on the operations side as well as selective M&A opportunities. They bought Harris Teeter in 2013 and Roundy’s in 2015, which gave KR presence in the more upscale category in geographies that KR has lagged in. Strategically sound.
The vast majority of McMullen’s compensation package comes in the form of stock, so he of all people is highly motivated to get the market comfortable with KR’s strengths and future. He has skin in the game, and that’s exactly the kind of ally investors are looking for.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
