Is Kroger Gearing Up For 2018 Grocery War With AMZN & WMT?

Industry experts believe that the competition in the U.S. grocery market is going to intensify further in 2018, and supermarket chains will have to constantly revisit their strategy in order to withstand it. This means either you “shape up or ship out.” It seems that The Kroger Co. (NYSE:KR) has taken the stock of the situation and is on its way to give itself a complete makeover.

The Background

The grocery industry has been grappling with stiff competition, volatility in food prices, aggressive promotional environment and declining store count. The industry witnessed a major shake-up when the news of Whole Foods takeover by Amazon (NASDAQ:AMZN) surfaced. This amalgamation of online marketplace with physical stores caused a tectonic shift in the grocery landscape.

Amazon can now leverage Whole Foods’ fresh foods procurements expertise with its own data mining techniques. Experts see this acquisition as a major step by Amazon to thwart any threat coming from Wal-Mart (NYSE:WMT) , which holds a dominant position in the $700-$800 billion U.S. food market and has been gradually building up its e-commerce strength.

Wal-Mart has been proactive in expanding in the fast-growing online grocery space. The company, which competes with Amazon Fresh, extended alliance with last mile logistics entity, Deliv, to support same-day delivery for groceries. Walmart also acquired delivery start-up company, Parcel Inc. to extend same-day deliveries.

Target (NYSE:TGT) has also made a concerted effort on the front of same-day delivery services by recently acquiring internet-based grocery delivery service, Shipt. Previously, the company had acquired Grand Junction in order to improve supply chain and expand delivery capabilities.

What’s Kroger’s Strategy?

Kroger has been trying all means to overcome competition, which has intensified with the entrance of Amazon. The company remains well on track to boost market share by expanding store base, introducing new items, digital coupons, and order online, pick up in store initiative. The company introduced an entirely new brand, HemisFares that give customers access to best foods from all around the globe and is expanding Prep+Pared Meal Kits.

The company’s “Restock Kroger” program is gaining traction. Kroger commenced “We Are Local” campaign; launched and opened a new restaurant concept, Kitchen 1883; and added two new product lines under “Our Brands” — an apparel brand to be launched in 2018 and a floral line, BLOOM HAUS, which is available in stores.

As part of the program management is considering the sale of convenience store business, and expects to generate $400 million in incremental operating margin by 2020 and over $4 billion of free cash flow in the next three years. The company in collaboration with Chase Pay will offer mobile payments in select markets beginning next year.

Kroger is looking to expand its “Scan, Bag, Pay & Go and Self-CheckOut” program — piloted at 20 stores — to nearly 400 locations in 2018. Further, Ralphs — a unit of grocery giant — in partnership with Instacart is offering home delivery at select locations in Southern California. Kroger remains optimistic about the acquisitions of Vitacost.com, an online retailer of vitamins and health-oriented products; Harris Teeter, a grocery chain, and the merger of Modern HC Holdings with Axium Pharmacy Holdings Inc., a specialty pharmacy. Kroger also acquired Roundy's, the grocery store operator.

Kroger’s Customer 1st strategy that enriches the consumers shopping experience and convinces them of returning to the store is also benefiting the company. We believe that the company's operational strategies present enormous opportunities to augment identical supermarket sales, alleviate gross margin pressure, improve operating margin and enhance return on invested capital.

Certainly, Kroger is leaving no stone unturned to attract consumers and attain incremental revenues. We believe that these strategies are likely to bolster the company’s performance and drive the stock further. In the past three months, shares of this Zacks Rank #3 (Hold) have surged 33.3%, outperforming the industry’s growth of 23.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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