Kroger Co (NYSE:KR) will be the U.S. home for robotic logistics technology from Ocado Group PLC (OTCMKTS:OCDGF), an online grocer in the U.K., with a 5% stake costing $247 million, valuing the smaller company at nearly $5 billion.
Shares in Ocado leapt over 50% after the announcement, putting its market cap at $7.42 billion. Kroger rose just 3% and is still getting no respect from the market.
The press release on the announcement said the two companies will build three new warehouses to Ocado specifications this year, and 20 over the next three years, but Kroger said the deal won’t change its earnings guidance.
Restock Kroger
Kroger is filing Ocado under its “Restock Kroger” program, announced last October, which reads like a corporate rebranding exercise.
That may be why the company is still not exciting Wall Street. There was a vogue for the shares in the middle of this decade, even a 2015 stock split, but the shares now trade over 40% off those highs.
Kroger has a market cap of under $22 billion, about two-thirds a single quarter’s sales, which came in at $31 billion for the three months ending in February. Groceries are a low-margin business, and Kroger earned just $854 million on that business during the quarter.
But Amazon.com, Inc. (NASDAQ:AMZN) paid $13.7 billion for Whole Foods Market last year, when that chain had just $16 billion in annual sales volume. At the time Whole Foods’ growth rate was also less than Kroger’s.
The market assumption at the time was that there was hidden data value in Whole Foods’ operation, and that this data could be turned into enormous profits.
This just in: Groceries remain a low-margin business. Walmart Inc (NYSE:WMT) brings 2% of sales to its net income line. Kroger does the same, $1.9 billion in net income last year on $122 billion in revenue.
Either Kroger is the greatest bargain in stock market history or Amazon got hosed.
Kroger’s Problem
I shop at Kroger and the chain has two problems.
First is demographics. Kroger is a middle-class store serving people who are less likely to have Amazon Prime accounts or use pre-packaged mealkits than Whole Foods shoppers. Many still clip paper coupons.
Second is identity. Kroger does business under dozens of brands around the country, from Harris Teeter to Fred Meyer to Dillon’s and Ralph’s. The company maintains brand loyalty in local markets but has no national identity.
Reporters praised Kroger’s latest move, extrapolating beyond Kroger’s own announcement about what it means.
For instance, Kroger has a Clicklist program in 1,000 stores that lets people order groceries for pick-up. But Ocado’s technology won’t be in the stores. Ocado pulls merchandise from warehouses for delivery. In the U.K., Ocado is the back-end delivery system for a local chain called Waitrose.
But the U.K. is tiny compared with the U.S., and even 20 warehouses won’t result in same-day delivery of perishables to most of America. Amazon is still testing a two-hour grocery delivery service, but it’s out of Whole Foods stores, not its warehouses, because perishables are, well, perishable.
The Bottom Line on Kroger
Kroger remains a slow-moving company in a fast-moving, low-margin business.
Blowing up its dozens of brands and going to market under one could be risky in local markets but would at least reveal to Wall Street just how strong the country’s second-largest food chain is.
Kroger had $3.4 billion in operating cash flow last year, so it sells at less than 7 times cash flow. It remains, even now, a sleeping giant.
If it ever truly awakens watch out. But don’t buy the stock until it does.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
