A Strategic Management Case Study
Monday, April 7, 2008
® 2008, Tony Gauvin, UMFK
1
Overview
Who we are,
What we sell,
Where we are
A Brief history of Kroger
Value Statement
Mission and Vision
External Assessment
- EFE Matrix
- CPM Matrix
Internal Assessment
- Financial Condition
- IFE Matrix
7-Apr-08
Strategy Formulation
- SWOT Matrix
- Space Matrix
- IE Matrix
- Grand Strategy Matrix
- Matrix Analysis
- QSPM Matrix
Strategic Planning for the
Future
EPS/EBIT
Decisions/Implementation/Eval
uation
Kroger 2006 Update
® 2008, Tony Gauvin, UMFK
2
Who we are
•
•
•
•
•
Headquartered in Cincinnati, Ohio, The Kroger Co. is one of the largest retailers in the United States based on
annual sales, holding the #26 ranking on the Fortune 100 list. Kroger was founded in 1883 and incorporated in
1902.
At the end of fiscal 2006, Kroger operated (either directly or through its subsidiaries) 2,468 supermarkets, 631 of
which had fuel centers. Approximately 39% of these supermarkets were operated in Company-owned facilities,
including some Company-owned buildings on leased land. See Section II of this Fact Book for more information
about our supermarket operations, and Section III for more information about our supermarket fuel centers.
In addition to supermarkets, Kroger operates (either directly or through its subsidiaries) 779 convenience stores
and 412 fine jewelry stores. Subsidiaries operated 687 of the convenience stores, while 92 were operated through
franchise agreements. Approximately 44% of the convenience stores operated by subsidiaries were operated in
Company-owned facilities.
The Company also manufactures and processes some of the food for sale in its supermarkets. As of February 3,
2007, the Company operated 42 manufacturing plants.
All of the Company’s operations are domestic.
7-Apr-08
® 2008, Tony Gauvin, UMFK
3
Key facts
• Kroger operates
– 2468 supermarkets
• 631 have fuel centers
• 1900 have pharmacy
– 779 Convenience Stores
– 412 fine Jewelry stores
– 42 Manufacturing plants
•
•
•
•
15 Daires,3 ice cream plants and 2 cheese plants
7 Bakeries
3 Beverage plants
3 Meat Packing plants
– 44 Distribution Centers in 3 tier
• Local (200 mile)
• Higher value slow turn, H&BA items (350 mile)
• Seasonal and promotions
7-Apr-08
® 2008, Tony Gauvin, UMFK
4
What We Sell
7-Apr-08
® 2008, Tony Gauvin, UMFK
5
Where We Are
7-Apr-08
® 2008, Tony Gauvin, UMFK
6
Brand Strategy
• Private Selections
– Gourmet and upscale
• Meet or beat national brands
• Banner Brand
– “Try It, Like, It or get the National Brand Free”
• Equal or better to corresponding consumer goods
• Value
– Good quality at an affordable price
7-Apr-08
® 2008, Tony Gauvin, UMFK
7
History
1883: Bernard H. Kroger and B.A. Branagan open the Great Western Tea Co., the beginning of the Kroger Co. empire.
Kroger is the first grocer to advertise in newspapers.
1884: Branagan sells Kroger his share of the business for $1,500.
1885: The company expands to four stores in Cincinnati, making the company one of the first chain store operations in
America.
1901: It becomes the first store to bake its own bread.
1902: With 40 stores and a factory in Cincinnati, Kroger incorporates and changes the company's name to Kroger
Grocery and Baking Co. Kroger buys Nagel Meat Markets and Packing House, and makes the grocery stores the
first to include meat departments.
1912: Kroger makes his first long-distance expansion, buying 25 stores in St. Louis, Missouri. The company buys a
fleet of trucks, enabling Kroger to move into Detroit, Michigan, Indianapolis, Indiana, and Springfield and Toledo,
Ohio.
1920: The company purchases Piggly-Wiggly stores in Ohio, Tennessee, Michigan, Kentucky, Missouri, and Oklahoma
and buys most of Piggly-Wiggly's corporate stock. The public begins to accuse food chains of driving small
merchants out of business by using unfair business practices.
1928: Kroger sells his shares in Kroger for more than $28 million. William Albers becomes president.
1929: Kroger stores number 5,575.
1930: Morrill introduces the Kroger Food Foundation, making it the first grocery store company to test food scientifically
in order to monitor the quality of products. Kroger manager, Michael Cullen, suggests opening bigger self-service
supermarkets, but Kroger executives disagree.
1930: Cullen leaves Kroger and forms the first supermarket, King Kullen, in Jamaica, New Jersey. It introduces frozen
foods and shopping carts. The Kroger Food Foundation invents a way of processing beef without chemicals so
that it remains tender, calling the product "Tenderay" beef.
1940: Kroger sells its stock in Piggly-Wiggly stores.
1946: The company changes it’s name to the Kroger Co.
7-Apr-08
® 2008, Tony Gauvin, UMFK
8
History
1947: Kroger opens its first egg processing plant in Wabash, Indiana, to further ensure egg quality. Hall merges the 45
private-label brands into one Kroger brand, and introduces the blue and white logo.
1948: Kroger joins six other firms to establish the Top Value Stamp Co., trying to bring customers into the stores with
stamp collecting promotions.
1952: Kroger sales top $1 billion.
1960: The company begins its expansion into the drugstore business. It buys Sav-on drugstore chain and makes its
owner, James Herring, the head of the drugstore division.
1961: The first SupeRx drugstore opens next to a Kroger food store in Milford, Ohio.
1963: Sales reach $2 billion.
1971: Enforcing antitrust laws, the Federal Trade Commission proposes a consent order that requires the company to
divest itself of three discount food departments. Kroger settles without admitting any violation of antitrust laws, but
sells three food departments. FTC prohibits company from purchasing any food store or department in nonfood
stores in which the purchase would lessen the competition in that city or county. The government begins to control
prices of products.
1972: To increase the accuracy and speed of checkout systems, Kroger, in partnership with RCA, becomes the first
grocery company to test electronic scanners to read prices on products under actual working conditions. Kroger
introduces an advertising promotion that compares their prices with its competitors' on 150 products a week; the
figures are based upon surveys of housewives.
1974: Net profits of the top food chains are up 57%, despite government controlled prices. The FTC reveals illegal
business practices of several chains, including Kroger. The company settles out of court on an antitrust claim for
fixing beef prices. The FTC sues Kroger for violations of its 1973 trade rule, which forces stores to stock a
sufficient supply of specials to meet anticipated demand and to give rainchecks when supplies run out.
1977: Kroger consents to the FTC order.
1978: The FTC rules that Kroger slogans like "Documented Proof: Kroger leads in lower prices" are unfair and
deceptive because the items surveyed excluded meats, produce, and house brands. A controversy ensues when
the Council of Wage and Price Stability expresses concern that tougher standards for Kroger might prevent the
dissemination of food price information in the future.
7-Apr-08
® 2008, Tony Gauvin, UMFK
9
History
1981: The company acquires Treasury Drug Stores from J.C. Penney Co. Kroger begins marketing its Cost Cutter
brand products.
1983: Absorbs Dillion Companies, Inc. and begins to operate stores coast-to-coast. Kroger settles out of court with the
FTC.
1984: Kroger and Wetterau form a grocery wholesaler for Michigan called FoodLand Distributors.
1985: Hook Drugs, Inc. merges with Kroger. Acquires Price Savers Wholesalers, Inc. and M&M Supermarkets, Inc..
Dillion Cos., Inc. purchases Turkey Hill Dairy, Inc.
1986: The company sells most of its interest in Hook and SupeRx drug chains to Hook-SupeRx, Inc. (HSI), a privately
held company, for approximately $415 million.
1987: Kroger sells more of its drug stores to Hook-SupeRx, Inc for $88 million. In total, the company has sold
approximately 658 stores.
1988: Kroger faces takeover bids from the Dart Group Corp. and from Kohlberg Kravis Roberts, whose highest bid tops
$5 billion. Kroger rejects the bids. To ward off the buyout, CEO Everingham and president Joseph Pichler borrow
$4.1 million to pay a special dividend to stockholders and to buy additional shares for an employee stock plan,
which is increased by 30%.
1990: The company sells to K-Mart its equity interest in Price Savers Wholesale, Inc. Kroger makes its first major
acquisition since 1988 by purchasing Great Scott! supermarkets in Michigan.
1991: Kroger now operates 1,263 food stores and 940 convenience stores, and owns 37 processing plants, including
11 bakeries, 15 dairies, and facilities for processing cheese and various other dairy products. Sales reach $21.3
billion, and net income is $101 million.
1993: Kroger, seeking to capitalize on positive views of low-interest credit cards, begins issuing its own co-branded
credit cards. Acquires 11 Houston-area supermarkets from AppleTree Markets Inc. Kroger loses $12.2 million for
the year.
1994: Kroger secures a credit agreement for a seven-year $1.75 billion revolving loan, increasing available monies for
capital expenditures from $500 million to $650 million annually. Sell seven of its stores to Delchamps Inc., and
buys two from Delchamps. Earns $242 million on sales of $22.9 billion.
7-Apr-08
® 2008, Tony Gauvin, UMFK
10
History
1995: David B. Dillion is named president, CEO, and a director of Kroger. Annual earnings rise to $302 million on sales
of $23.9 billion.
1996: Kroger is the largest supermarket chain in the U.S.
1998: Kroger and Fred Meyer Inc. announce plans to merge into Kroger-Fred Meyer, the first coast-to-coast food retail
operation in the U.S. The $12 billion deal will result in the creation of a $43 billion industry giant with 3,400 stores,
including supermarkets, convenience stores, jewelry stores, and supercenters, spanning 31 states.
1999 July: Kroger announces its plans to partner with US Bancorp to introduce a new co-branded credit card for Kroger
customers.
1999: Kroger completes its merger with Fred Meyer, a former grocery powerhouse with a combined $43 billion in
annual sales.
2000 May: Kroger announces its plans to partner with PlanetU, the online promotions network for the consumers good
industry, to offer U-pons, Internet coupons for dozens of popular national brands, on Kroger's Web site.
2000: Kroger teams up with Priceline Webhouse Club to let customers use the Internet to name their own price for
groceries at more than 2,300 Kroger-owned stores around the country.
2001: Sales exceed $50 billion for the first time ever. Kroger launches a restructuring that includes 1,500 layoffs and
the consolidation of division operations in Nashville, Tennessee, into offices in Louisville, Kentucky, and Atlanta,
Georgia.
2002: Kroger acquires 18 Raley's units, which it plans to convert to Food 4 Less or Smith's units; 17 Albertson's stores
in the Houston, Texas, and surrounding areas; and seven Winn-Dixie supermarkets in Dallas, Texas. The firm is
largest retail grocery store operator in the U.S.
2004: Kroger begins construction on new Kroger Marketplace stores in Ohio and Smith Marketplace stores in Utah. The
Marketplace format, which includes general merchandise, is intended to allow the firm to better compete with retail
giants like Wal-Mart.
2005 Jan.: The firm posts a fiscal year loss of $100 million, despite a 5% increase in revenues to $56.4 billion.
2005 Oct.: Kroger enters a bidding war for Albertsons, a struggling chain that put itself up for sale two months ago.
7-Apr-08
® 2008, Tony Gauvin, UMFK
11
Values
•
Honesty :
–
•
Integrity :
–
•
Reflecting a workplace that includes a variety of
people from different backgrounds and cultures,
diversity of opinions and thoughts.
Safety :
–
•
Valuing opinions, property and perspectives of others.
Diversity :
–
•
Living our values in all we do, unified approach to
how we do business and treat each other.
Respect for Others :
–
•
Doing the right things, telling the truth.
Watching out for others, being secure and safe in your
workplace.
Inclusion :
–
7-Apr-08
Your voice matters, working together works,
encouraging everyone’s involvement, being the best
person you can be.
® 2008, Tony Gauvin, UMFK
12
Mission Statement
Actual
“OUR MISSION is to be a leader in the distribution and merchandising of food, health, personal care, and
related consumable products and services. By achieving this objective, we will satisfy our responsibilities
to shareowners, associates, customers, suppliers, and the communities we serve.
We will conduct our business to produce financial returns that reward investment by shareowners and
allow the Company to grow. Investments in retailing, distribution and food processing will be continually
evaluated for their contribution to our corporate return objectives.
We will constantly strive to satisfy the needs of customers as well as, or better than, the best of our
competitors. Operating procedures will increasingly reflect our belief that the organization levels closest to
the customer are best positioned to serve changing consumer needs.
We will provide all associates and customers with a safe, friendly work and shopping environment and will
treat each of them with respect, openness, honesty and fairness. We will solicit and respond to the ideas
of our associates and reward their meaningful contributions to our success.
We value America’s diversity and will strive to reflect that diversity in our work force, the companies with
which we do business, and the customers we serve. As a Company, we will convey respect and dignity to
all individuals.
We will encourage our associates to be active and responsible citizens and will allocate resources for
activities that enhance the quality of life for our customers, our associates and the communities we serve.”
7-Apr-08
® 2008, Tony Gauvin, UMFK
13
Vision Proposed
Our vision is to be America’s supermarket,
and to continue to provide innovation and
unparalleled value to our customers,
employees, and shareholders.
7-Apr-08
® 2008, Tony Gauvin, UMFK
14
External Assessment
7-Apr-08
® 2008, Tony Gauvin, UMFK
15
Opportunities
1.
2.
3.
4.
5.
6.
7.
Supermarket sales of drugs grew 6.9% to $27 billion in
2004.
Wal-Mart has a large, recruitable low-paid, nonunion
workforce.
Organic food sales are up 19.5% annually over the last
5 years.
Hispanic shoppers spend $117/week vs. $87/week
average on groceries.
Hispanic population growth rate = 13% = 4X average.
Margins for private-label products are 35-45% vs. 27%
for national brands.
87% of consumers have tried private-label products.
7-Apr-08
® 2008, Tony Gauvin, UMFK
16
Threats
1.
2.
3.
4.
5.
6.
7.
8.
Traditional drugstores are focusing on customer service and
merchandising.
Mail-order pharmacies are the fastest-growing format in the
industry (up 17.9%).
Health plans allow larger supplies of drugs for Mail-order
pharmacies.
Drug price inflation has led to illegal drug importation.
Supercenters are dominating the market share of grocery sales.
Wal-Mart is tops in logistics technology.
Labor costs account for >50% of operating expenses.
Price pressure was the cause of the Southern California strikes.
7-Apr-08
® 2008, Tony Gauvin, UMFK
17
EFE Matrix
Weight
Rating
Weighted
Score
Supermarket sales of drugs grew 6.9%.
0.07
3
0.21
Large, low-paid Wal-Mart workforce.
0.05
1
0.05
Organic food sales are up 19.5% annually.
0.05
3
0.15
Hispanics spend 34.5% more than average on groceries.
0.10
2
0.20
Hispanic population growth rate is 4 times the average.
0.08
2
0.16
Higher margins for private-label products.
0.05
4
0.20
87% of consumers have tried private-label products.
0.05
4
0.20
Key External Factors
Opportunities
7-Apr-08
® 2008, Tony Gauvin, UMFK
18
EFE Matrix
Threats
Drugstores focusing on service and merchandise.
0.10
2
0.20
Mail-order pharmacies are the fastest-growing format.
0.08
3
0.24
Mail-order pharmacies can dispense larger prescriptions.
0.07
2
0.14
Drug price inflation has led to illegal drug importation.
0.05
1
0.05
Supercenters are dominating grocery sales.
0.10
3
0.30
Wal-Mart is tops in logistics technology.
0.10
4
0.40
Labor costs account for >50% of operating expenses.
0. 10
2
0.20
Price pressure caused Southern California strikes.
0.05
2
0.10
TOTAL
1.00
7-Apr-08
® 2008, Tony Gauvin, UMFK
2.80
19
CPM
Kroger
Critical Success
Factors
Albertsons
Safeway
Wal-Mart
Weight
Rating
Weighted
Score
Rating
Weighted
Score
Rating
Weighted
Score
Rating
Weighted
Score
Market share
0.10
3
0.30
2
0.20
2
0.20
4
0.40
Financial position
0.10
3
0.30
1
0.10
3
0.30
4
0.40
Growing markets
0.05
3
0.15
2
0.10
3
0.15
4
0.20
Multiple formats
0.05
4
0.20
3
0.10
2
0.10
2
0.10
Customer database
0.05
4
0.20
3
0.15
3
0.15
1
0.05
Price competitive
0.15
3
0.45
2
0.30
2
0.30
4
0.60
Name recognition
0.10
3
0.30
2
0.20
2
0.20
4
0.40
Organized labor
0.15
2
0.30
2
0.30
2
0.30
4
0.60
Distribution system
0.05
3
0.15
2
0.10
2
0.10
4
0.20
Customer service
0.10
4
0.40
3
0.30
3
0.30
1
0.10
Consumer loyalty
0.05
4
0.20
3
0.15
3
0.15
1
0.05
Employee
satisfaction
0.05
3
0.15
4
0.20
3
0.15
1
0.05
TOTAL
1.00
7-Apr-08
3.10
2.25
® 2008, Tony Gauvin, UMFK
2.40
3.15
20
Key Points
• Increasing organic and natural food selections helped to exploit that
opportunity (growth in Hispanic populations)
• Kroger’s strong private-label brands are a real boon to the bottom
line
• Kroger has online prescription fulfillment and mail order of
prescriptions
• Kroger must partner with drug makers to help reduce drug costs in
order to curb importation
• Kroger has maintained its market share against low-priced
supercenters,
• Kroger’s 3-tiered logistics system is a strong rival to the Wal-Mart
machine
• The overall score of 2.8 indicates an above-average job in
responding to external forces.
7-Apr-08
® 2008, Tony Gauvin, UMFK
21
Internal Assessment
7-Apr-08
® 2008, Tony Gauvin, UMFK
22
Stock Performance
7-Apr-08
® 2008, Tony Gauvin, UMFK
23
Income Statement (Jan, 2006)
(In millions, except per share amounts)
Sales
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 28, 2006, January 29, 2005, and
January 31, 2004
2005
(52 weeks)
$
60,553
2004
(52 weeks)
$
2003
(52 weeks)
56,434
$
53,791
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below
45,565
42,140
39,637
Operating, general and administrative
11,027
10,611
10,354
661
680
657
Depreciation and amortization
1,265
1,256
1,209
Goodwill impairment charge
—
904
471
Asset impairment charges
—
—
120
Operating Profit
2,035
843
1,343
Interest expense
510
557
604
1,525
286
739
567
390
454
Rent
Earnings before income tax expense
Income tax expense
Net earnings (loss)
$
958
$
(104
)
$
285
Net earnings (loss) per basic common share
$
1.32
$
(0.14
)
$
0.38
Average number of common shares used in basic calculation
Net earnings (loss) per diluted common share
724
$
Average number of common shares used in diluted calculation
7-Apr-08
1.31
731
® 2008, Tony Gauvin, UMFK
736
$
(0.14
736
747
)
$
0.38
754
24
Balance Sheet (Jan, 2006)
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
January 28,
2006
(In millions)
January 29,
2005
ASSETS
Current assets
Cash and temporary cash investments
$
210
$
144
Deposits In-Transit
488
506
Receivables
680
661
6
167
4,886
4,729
Receivables - Taxes
FIFO Inventory
LIFO Credit
(400
)
(373
Prefunded employee benefits
300
300
Prepaid and other current assets
296
272
6,466
6,406
11,365
11,497
2,192
2.191
459
397
Total current assets
Property, plant and equipment, net
Goodwill, net
Other assets
Total Assets
7-Apr-08
$
® 2008, Tony Gauvin, UMFK
20,482
$
20,491
25
Balance Sheet (2005)
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under capital leases and financing obligations
Accounts payable
$
554
$
71
3,550
3,598
Accrued salaries and wages
742
659
Deferred income taxes
217
286
Other current liabilities
1,652
1,721
Total current liabilities
6,715
6,335
6,651
7,830
27
70
6,678
7,900
843
841
1,856
1,796
16,092
16,872
Long-term debt including obligations under capital leases and financing obligations
Face value long-term debt including obligations under capital leases and financing obligations
Adjustment to reflect fair value interest rate hedges
Long-term debt including obligations under capital leases and financing obligations
Deferred income taxes
Other long-term liabilities
Total Liabilities
7-Apr-08
® 2008, Tony Gauvin, UMFK
26
Balance Sheet (2005)
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
SHAREOWNERS’ EQUITY
Preferred stock, $100 par, 5 shares authorized and unissued
—
—
Common stock, $1 par, 1,000 shares authorized: 927 shares issued in 2005 and 918 shares issued in 2004
927
918
2,536
2,432
Additional paid-in capital
Accumulated other comprehensive loss
(243
Accumulated earnings
(202
4,573
Common stock in treasury, at cost, 204 shares in 2005 and 190 shares in 2004
(3,403
Total Shareowners’ Equity
$
® 2008, Tony Gauvin, UMFK
20,482
)
3,620
)
(3,149
4,390
Total Liabilities and Shareowners’ Equity
7-Apr-08
)
3,619
$
20,491
27
)
Financial Ratios
November 2005
KR
ABS
SWY
WMT
Industry
Market Cap:
13.93B
8.79B
10.38B
204.01B
893.98M
Employees
289,000
241,000
191,000
1,700,000
6.47K
Qtrly Rev Growth (yoy):
6.80%
0.20%
7.20%
10.10%
5.30%
Revenue (ttm):
58.36B
41.30B
37.76B
305.37B
2.58B
Gross Margin (ttm):
23.81%
27.97%
29.03%
23.02%
27.08%
EBITDA (ttm):
3.10B
2.44B
2.26B
22.70B
147.21M
Operating Margins (ttm):
3.13%
3.12%
3.52%
5.87%
3.41%
-15.00M
510.00M
590.40M
10.80B
27.98M
EPS (ttm):
-0.021
1.374
1.313
2.569
1.16
P/E (ttm):
N/A
17.36
17.6
19.08
17.76
PEG (5 yr expected):
1.5
2.57
1.88
1.19
1.86
P/S (ttm):
0.24
0.21
0.28
0.68
0.25
Net Income (ttm):
ABS = Albertson's Inc.
SWY = Safeway Inc.
WMT = Wal-Mart Stores Inc.
Industry = Grocery Stores
7-Apr-08
® 2008, Tony Gauvin, UMFK
28
Financial Ratios
Entity
Market Cap
ROE %
Debt/
Equity
Price to
Book
Net Profit Margin
(mrq)
Grocery Stores
53.17B
10
0.012
5.46
1.1
Kroger Co.
14.19B
-0.367
1.842
3.635
1.414
Safeway Inc.
10.48B
13.47
1.35
2.211
1.369
Whole Foods Market Inc.
9.84B
11.682
0.014
7.275
0.812
Albertson's Inc.
8.76B
9.455
1.222
1.59
1.05
Distribucion y Servicio S.A.
2.23B
7.436
0.733
2.425
1.112
The Great Atlantic & Pacific Tea Co.
1.22B
79.924
0.371
1.596
27.302
Casey's General Stores Inc.
1.14B
10.294
0.287
2.341
2.427
Weis Markets Inc.
1.13B
10.382
0
1.902
2.553
7-Apr-08
® 2008, Tony Gauvin, UMFK
29
Financial Ratios
• Trending not Done
– I ran out of time!
7-Apr-08
® 2008, Tony Gauvin, UMFK
30
Net Worth Analysis
(Jan, 2006)
1. Stockholders’ Equity + Goodwill = 4,390 + 2,191
$ 6,581
2. Net income x 5 = 958 x 5=
$ 4,790
3. Share price = $18.47/EPS 1.32 = 0.76 x Net Income 958 =
$ 13,404
4. Number of Shares Outstanding x Share Price = 731 x $18.47 =
$ 13,502
$9,569
Method Average
7-Apr-08
® 2008, Tony Gauvin, UMFK
31
Strengths
1.
2.
3.
4.
5.
6.
7.
A high-quality asset base with leading market shares in many of
the nation’s largest and fastest growing markets.
Broad geographic diversity and multiple retail formats that allow
Kroger to meet the needs of virtually every customer.
An extensive collection of consumer data generated from our
customer loyalty cards plus a unique partnership with dunnhumby.
A successful track record of competing head-to-head against
supercenters.
Outstanding private-label products that have earned industryleading market share.
The financial strength and resources to build Kroger’s business
for the future.
A prominent reputation in charitable giving and community
involvement.
7-Apr-08
® 2008, Tony Gauvin, UMFK
32
Weaknesses
1.
2.
3.
4.
Operates under two dozen banners.
Only owns 35% of store property.
Workforce is 71% unionized.
Jewelry stores are 11% of stores, but account
for less than 1% of revenue.
5. Has not issued dividends since 1988.
6. Negative net income in 2004.
7-Apr-08
® 2008, Tony Gauvin, UMFK
33
IFE Matrix
Key Internal Factors
Weight
Rating
Weighted Score
A high-quality asset base with leading market shares in many of the
nation’s largest and fastest growing markets.
0.05
3
0.15
Broad geographic diversity and multiple retail formats that allow Kroger to
meet the needs of virtually every customer.
0.10
4
0.40
An extensive collection of consumer data generated from our customer
loyalty cards plus a unique partnership with dunnhumby.
0.10
4
0.40
A successful track record of competing head-to-head against
supercenters.
0.05
3
0.15
Outstanding private-label products that have earned industry-leading
market share.
0.10
4
0.40
The financial strength and resources to build Kroger’s business for the
future.
0.05
4
0.20
A prominent reputation in charitable giving and community involvement.
0.05
4
0.20
A high-quality asset base with leading market shares in many of the
nation’s largest and fastest growing markets.
0.10
3
0.30
Broad geographic diversity and multiple retail formats that allow Kroger to
meet the needs of virtually every customer.
0.05
3
0.15
An extensive collection of consumer data generated from our customer
loyalty cards plus a unique partnership with dunnhumby.
0.05
3
0.15
Strengths
7-Apr-08
® 2008, Tony Gauvin, UMFK
34
IFE Matrix
Key Internal Factors
Weight
Rating
Weighted Score
0.1
1
0.10
0.05
2
0.10
0.1
1
0.10
Jewelry stores are 11% of stores, but account for less than 1% of revenue.
0.05
2
0.10
Has not issued dividends since 1988.
0.05
2
0.10
TOTAL
1.00
Weaknesses
Operates under two dozen banners.
Only owns 35% of store property.
Workforce is 71% unionized.
7-Apr-08
® 2008, Tony Gauvin, UMFK
2.90
35
Matrix Analysis
7-Apr-08
® 2008, Tony Gauvin, UMFK
36
SWOT Matrix
Strengths – S
1.
A high-quality asset base
2.
Broad geographic diversity and multiple retail formats
3.
An extensive collection of consumer data
4.
A successful track record of competing head-to-head against
supercenters.
5.
Outstanding private-label products
6.
Financial strength and resources
7.
Reputation for charitable giving and community
involvement.
Weaknesses – W
1.
Operates under two dozen banners.
2.
Only owns 35% of store property.
3.
Workforce is 71% unionized.
4.
Jewelry stores are 11% of stores, but account
for less than 1% of revenue.
5.
Has not issued dividends since 1988.
6.
Negative net income in 2004.
Opportunities – O
1. Supermarket sales of drugs up
2. Low-paid Wal-Mart workforce
3. Organic food sales growth
4. High level of Hispanic spending
5. Hispanic population growth rate
6. High Margins for private-labels
7. High demand for private labels
SO Strategies
1. More pharmacies in stores (S1,O1)
2. Organic private-label (S9,O3-6-7)
3. Hispanic private-label (S9, O4-5)
4. Hispanic format (S4-5, O4-5)
5. Take Wal-Mart’s best employees (S10, O2)
6. New stores in Hispanic hot spots (S4, O5)
WO Strategies
1. Hybridize banners & push Kroger brands (W1,
O6-7)
2. Replace some jewelry stores with organic
markets (W4, O3)
Threats – T
1. Drugstore service/merchandise focus
2. Growth of mail-order pharmacies
3. Larger prescription rules for MOP’s
4. Illegal drug importation
5. Supercenters dominate grocery sales
6. Wal-Mart logistics technology
7. Labor >50% of operating expenses
8. Price pressure caused labor strikes
ST Strategies
1. Match drugstore offerings of service & merchandise. (S1-5, T1)
2. Grow online pharmacy business (S6-10, T2)
3. New stores in non union areas (S4, T7)
4. VP of unions (S10, T7-8)
5. Stress customer service in all operations (S6-7, T1-5-7)
WT Strategies
1. More hybrid banner supercenter-type stores (W1,
T5)
2. Buy store property and save money (W2, T7-8)
3. Divert jewelry store funds into online pharmacy
(W4, T2)
7-Apr-08
® 2008, Tony Gauvin, UMFK
37
Space Matrix
Financial Strength ( FS)
Net Income
Current Ratio
Los s in E PS in 2005
High deb t to capital ratio
Low bookvalue per s hare
Financial Strength ( FS) Average
Competitive Advantage ( CA)
#1 or #2 in mos t major markets
Dive rs ified w ith four diffe ren t op erations
Priva te label s hare of sales is 24.6%
W ebsite pharmacy sales grew 1 8% in 2004
Control over Sup pliers a nd Distributors
Competitive Advantage ( CA) Average
1
3
1
1
1
Environmental Stability (ES)
Hisp anic gro th rate is 14%
High ene rgy prices
Aggress ive labor unions
Mail order pharmacie s increasing sales
Supercenters dominate grocery sales
-1
-5
-6
-6
-6
1.4
Environmental Stability (ES) Average
-5
-2
-1
-1
-1
-2
-1.4
Industry Strength (IS)
Retail drug chains strong go wth
Superma rket dru g sales con tinue to grow
O rga nic food sales up 19% in last 5 years
Custome rs continue to use private brands
Labo r cost total >50% of op erating expens es
6
6
6
5
1
Industry Strength (IS) Average
5
y-axis = FS + ES = 1.4 + (-5.0) = -3.6
x-axis = CA + IS = -1.4 + (+5.0) = 3.6
7-Apr-08
® 2008, Tony Gauvin, UMFK
38
Space Matrix
FS
Conservative
Aggressive
6
5
4
3
2
1
CA
-6
-5
-4
-3
-2
-1
1
2
3
4
5
6
IS
-1
-2
-3
-4
-5
-6
Defensive
7-Apr-08
ES
® 2008, Tony Gauvin, UMFK
Competitive
39
GSM
Rapid Market Growth
Quadrant II
Quadrant I
Weak
Competitive
Position
Strong
Competitive
Position
Albertsons
Kroger
SafeWay
Wal-Mart
Quadrant III
Quadrant IV
Slow Market Growth
7-Apr-08
® 2008, Tony Gauvin, UMFK
40
BCG data
All of the Company’s operations are domestic.
The Kroger Co.
# of Stores
% of Revenue
Supermarkets
Convenience Stores
Jewelry Stores (A)
Other (B)
Total
2,468
779
412
N/A
3,659
94%
5%
<1%
<1%
100%
Market Share
1
0.1
0.1
?
(A) Includes 122 locations operated inside our supermarkets and
290 in shopping malls.
(B) Represents sales by Kroger’s manufacturing plants to outside
customers.
7-Apr-08
® 2008, Tony Gauvin, UMFK
41
BCG Matrix
Relative Market Share Position
Industry Sales Growth Rate
High
1.0
Medium
.50
Low
0.0
High
+20
Stars
II
Question Marks
I
Cash Cows
III
Dogs
IV
Medium
0
Low
-20
7-Apr-08
® 2008, Tony Gauvin, UMFK
42
IE Matrix
Hold and Maintain
EFE
Scores
High
3-4
Medium
2-2.99
Low
1-1.99
7-Apr-08
Strong
3-4
I
IV
VII
IFE Scores
Average
2-2.99
1
Weak
1-1.99
II
III
V
VI
VIII
IX
® 2008, Tony Gauvin, UMFK
43
Matrix analysis
Alternative Strategies
BCG
IE
SPACE
GRAND
COUNT
Forward Integration
x
x
2
Backward Integration
x
x
2
Horizontal Integration
x
x
2
Market Penetration
x
x
3
Market Development
x
x
2
Product Development
x
x
3
x
x
Concentric Diversification
x
1
Conglomerate Diversification
x
1
Horizontal Diversification
x
1
x
2
Joint Venture
x
Retrenchment
Divestiture
Liquidation
7-Apr-08
® 2008, Tony Gauvin, UMFK
44
QSPM
Strategic Alternatives
A - Diversification of Private Label Natural and Ethnic Products
B - Replace Convenience & Jewelry Stores with Fuel Centers
Opportunities
Key Factors
A
B
Weight
AS
TAS
AS
TAS
Supermarket sales of drugs growth
0.07
---
---
---
---
Large, low-paid Wal-Mart workforce
0.05
---
---
---
---
Organic food sales are up
0.05
4
0.20
1
0.05
Hispanics spend more than average
0.10
4
0.40
1
0.10
High Hispanic pop. growth rate
0.08
4
0.32
2
0.16
High margins for private-label
0.05
4
0.20
1
0.05
Popularity of private-label products
0.05
4
0.20
1
0.05
Threats
1.32
0.41
Drugstore focus on service and merchandise
0.10
---
---
---
---
Mail-order pharmacy (MOP) growth
0.08
3
0.24
1
0.08
MOP’s dispense larger prescriptions
0.07
---
---
---
---
Illegal drug importation
0.05
---
---
---
---
Supercenters dominate grocery sales
0.10
3
0.30
4
0.40
Wal-Mart logistics technology
0.10
2
0.20
3
0.30
Labor >50% of operating expenses
0.10
2
0.20
4
0.40
Labor strikes
0.05
2
0.10
4
0.20
7-Apr-08
® 2008, Tony Gauvin, UMFK
1.04
1.38
45
Strenghts
QSPM
Quality asset base
0.05
---
---
---
---
Leading market shares
0.10
4
0.40
3
0.30
In large and growing markets
0.10
4
0.40
3
0.30
Geographic diversity
0.05
4
0.20
3
0.15
Multiple retail formats
0.10
4
0.40
2
0.20
Consumer database
0.05
4
0.20
3
0.15
Dunnhumby partnership
0.05
---
---
---
---
Competitive with supercenters
0.10
3
0.30
4
0.40
Outstanding private-label products
0.05
4
0.20
1
0.05
Financial strength
0.05
4
0.20
2
0.10
Weaknesses
2.30
1.65
Too many banners
0.1
---
---
---
---
Too much leased property
0.05
---
---
---
---
Unionized workforce
0.1
2
0.20
4
0.40
Many low-revenue jewelry stores
0.05
1
0.05
4
0.20
No dividends in nearly 20 years
0.05
---
---
---
---
Sum Total Attractiveness Score
7-Apr-08
® 2008, Tony Gauvin, UMFK
0.25
0.60
4.91
4.04
46
EPS/EBIT
• EPS-EBIT Analysis for Kroger Company
(assume $1,000 million is needed)
• Figures in millions (fiscal year: 2002)
• $ Amount Needed: $ 3,000M
– Stock Price: $ 18
– Tax Rate: 40%
– Interest Rate: 5%
– # Shares Outstanding: 725.5M
7-Apr-08
® 2008, Tony Gauvin, UMFK
47
EPS/EBIT Analysis
EBIT
Interest
EBT
Taxes
EAT
# Shares
EPS
EBIT
Interest
EBT
Taxes
EAT
# Shares
EPS
Common Stock Financing
Recession
Normal
Boom
$500,000,000
$1,500,000,000
$3,000,000,000
0
0
0
500,000,000
1,500,000,000
3,000,000,000
200,000,000
600,000,000
1,200,000,000
300,000,000
900,000,000
1,800,000,000
892,166,667
892,166,667
892,166,667
0.34
1.01
2.02
70 Percent Stock - 30 Percent Debt
Recession
Normal
Boom
$500,000,000
$1,500,000,000
$3,000,000,000
45,000,000
45,000,000
45,000,000
455,000,000
1,455,000,000
2,955,000,000
182,000,000
582,000,000
1,182,000,000
273,000,000
873,000,000
1,773,000,000
842,166,667
842,166,667
842,166,667
0.32
1.04
2.11
Recession
$500,000,000
150,000,000
350,000,000
140,000,000
210,000,000
725,500,000
0.29
Debt Financing
Normal
$1,500,000,000
150,000,000
1,350,000,000
540,000,000
810,000,000
725,500,000
1.12
Boom
$3,000,000,000
150,000,000
2,850,000,000
1,140,000,000
1,710,000,000
725,500,000
2.36
70 Percent Debt - 30 Percent Stock
Recession
Normal
Boom
$500,000,000
$1,500,000,000
$3,000,000,000
105,000,000
105,000,000
105,000,000
395,000,000
1,395,000,000
2,895,000,000
158,000,000
558,000,000
1,158,000,000
237,000,000
837,000,000
1,737,000,000
775,500,000
775,500,000
775,500,000
0.31
1.08
2.24
Conclusion: Kroger Company should use debt financing to raise the $ 3,000 million on the
High EBIT estimate; however, should consider using stock financing on the Low EBIT.
7-Apr-08
® 2008, Tony Gauvin, UMFK
48
Recommendations
1. Diversification of Private Label
Natural and Ethnic Products
1. Combination of Market Penetration &
Product Development
2. Replace Convenience & Jewelry Stores
with Fuel Centers
1. Get rid of the dogs and build a new star
3. Bomb Wal-Mart (Just Joking!)
7-Apr-08
® 2008, Tony Gauvin, UMFK
49
Implementation
• Build new factories and retool existing to
manufacture Ethnic (Hispanic) and Natural
foods in desired locations close to targeted
geographic markets
– 10 @ $250 Million
• Create a new national marketing
campaign to inform public on new product
– $500 Million
7-Apr-08
® 2008, Tony Gauvin, UMFK
50
Evaluation
Quarterly & Yearly Financial Statements
Annual strategic meetings of division
management and corporate management
7-Apr-08
® 2008, Tony Gauvin, UMFK
51
Kroger 2006
• Number 26 on Fortune 500 (US Companies)
– Dropped from 18
– Wal-Mart is Number 2
• 183th largest Company in the World
– Wal-Mart is 10th
– Carrefour is 88th
• Sales projected at $65 Billion
– Steady increases
• Net Profit Margin 1.7%
– Better than last year but still down from 2.5% in 2002
•
7-Apr-08
® 2008, Tony Gauvin, UMFK
52
Impact of Fuel Centers
7-Apr-08
® 2008, Tony Gauvin, UMFK
53
Questions?
7-Apr-08
® 2008, Tony Gauvin, UMFK
54
Sources of Information
• The 2006 Kroger Fact Book
– http://www.thekrogerco.com/finance/financialinfo_reportsandstat
ements.htm
• Kroger Case study notes
– Alen Badal: The Union Institute
– Henry Jackson McGill, Francis Marion University
• History from Notable Corporate Chronologies, Online
Edition, Thomson Gale, 2006
• Datamonitor
– The Kroger Co.
– Food Retail in the United States
– Global Food Retail
7-Apr-08
® 2008, Tony Gauvin, UMFK
55