Kroger.ppt - Tony Gauvin's Web Site by wuxiangyu

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									A Strategic Management Case Study




Monday, April 7, 2008   ® 2008, Tony Gauvin, UMFK   1
                   Overview
                                      Strategy Formulation
Who we are,                              - SWOT Matrix
  What we sell,                          - Space Matrix
    Where we are                         - IE Matrix
                                         - Grand Strategy Matrix
A Brief history of Kroger                - Matrix Analysis
Value Statement                          - QSPM Matrix
Mission and Vision                    Strategic Planning for the
External Assessment                      Future
   - EFE Matrix                       EPS/EBIT
   - CPM Matrix                       Decisions/Implementation/Eval
Internal Assessment                      uation
   - Financial Condition
   - IFE Matrix                       Kroger 2006 Update


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                                    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.




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                              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

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           What We Sell




7-Apr-08     ® 2008, Tony Gauvin, UMFK   5
           Where We Are




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                   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

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                                              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.



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                                               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.


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                                             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.


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                                               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.



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                                            Values
•   Honesty :
     –     Doing the right things, telling the truth.
•   Integrity :
     –     Living our values in all we do, unified approach to
           how we do business and treat each other.
•   Respect for Others :
     –     Valuing opinions, property and perspectives of others.
•   Diversity :
     –     Reflecting a workplace that includes a variety of
           people from different backgrounds and cultures,
           diversity of opinions and thoughts.
•   Safety :
     –     Watching out for others, being secure and safe in your
           workplace.
•   Inclusion :
     –     Your voice matters, working together works,
           encouraging everyone’s involvement, being the best
           person you can be.




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                        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.”
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           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.




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           External Assessment




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                  Opportunities
1.     Supermarket sales of drugs grew 6.9% to $27 billion in
       2004.
2.     Wal-Mart has a large, recruitable low-paid, nonunion
       workforce.
3.     Organic food sales are up 19.5% annually over the last
       5 years.
4.     Hispanic shoppers spend $117/week vs. $87/week
       average on groceries.
5.     Hispanic population growth rate = 13% = 4X average.
6.     Margins for private-label products are 35-45% vs. 27%
       for national brands.
7.     87% of consumers have tried private-label products.


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                            Threats
1.     Traditional drugstores are focusing on customer service and
       merchandising.
2.     Mail-order pharmacies are the fastest-growing format in the
       industry (up 17.9%).
3.     Health plans allow larger supplies of drugs for Mail-order
       pharmacies.
4.     Drug price inflation has led to illegal drug importation.
5.     Supercenters are dominating the market share of grocery sales.
6.     Wal-Mart is tops in logistics technology.
7.     Labor costs account for >50% of operating expenses.
8.     Price pressure was the cause of the Southern California strikes.



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                                   EFE Matrix

                                                                             Weighted
 Key External Factors                                      Weight   Rating    Score
 Opportunities


 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




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                                   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        2.80




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                                                  CPM
                                      Kroger              Albertsons            Safeway             Wal-Mart

 Critical Success      Weight   Rating   Weighted   Rating     Weighted   Rating   Weighted   Rating    Weighted
 Factors                                  Score                 Score               Score                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               0.05      3        0.15       4          0.20       3        0.15       1         0.05
 satisfaction
 TOTAL                  1.00               3.10                  2.25                2.40                 3.15

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                       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.



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           Internal Assessment




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           Stock Performance




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        Income Statement (Jan, 2006)
                                                            THE KROGER CO.                                                 2005               2004                   2003
(In millions, except per share amounts)                     CONSOLIDATED STATEMENTS OF OPERATIONS                       (52 weeks)         (52 weeks)             (52 weeks)
                                                            Years Ended January 28, 2006, January 29, 2005, and
Sales                                                       January 31, 2004                                        $         60,553   $        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

Rent                                                                                                                             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

Earnings before income tax expense                                                                                             1,525                286                    739

Income tax expense                                                                                                               567                390                    454

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                                                                        724                736                    747

Net earnings (loss) per diluted common share                                                                        $           1.31   $          (0.14   )   $           0.38

Average number of common shares used in diluted calculation                                                                      731                736                    754

  7-Apr-08                                                             ® 2008, Tony Gauvin, UMFK                                                                               24
                Balance Sheet (Jan, 2006)
                                      THE KROGER CO.
                                      CONSOLIDATED BALANCE SHEETS


                                                                          January 28,               January 29,
(In millions)                                                                    2006                      2005

ASSETS
Current assets
Cash and temporary cash investments                                   $           210           $           144
Deposits In-Transit                                                               488                       506
Receivables                                                                       680                       661
Receivables - Taxes                                                                     6                   167
FIFO Inventory                                                                  4,886                     4,729
LIFO Credit                                                                      (400       )              (373
Prefunded employee benefits                                                       300                       300
Prepaid and other current assets                                                  296                       272
Total current assets                                                            6,466                     6,406
Property, plant and equipment, net                                            11,365                    11,497
Goodwill, net                                                                   2,192                     2.191
Other assets                                                                      459                       397
Total Assets                                                          $       20,482            $       20,491


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                        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   $     554    $      71
 Accounts payable                                                                                              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
 Long-term debt including obligations under capital leases and financing obligations
 Face value long-term debt including obligations under capital leases and financing obligations                6,651        7,830
 Adjustment to reflect fair value interest rate hedges                                                           27           70
 Long-term debt including obligations under capital leases and financing obligations                           6,678        7,900
 Deferred income taxes                                                                                          843          841
 Other long-term liabilities                                                                                   1,856        1,796
 Total Liabilities                                                                                            16,092       16,872


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                       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

Additional paid-in capital                                                                                    2,536            2,432

Accumulated other comprehensive loss                                                                           (243   )         (202   )

Accumulated earnings                                                                                          4,573            3,620

Common stock in treasury, at cost, 204 shares in 2005 and 190 shares in 2004                                 (3,403   )       (3,149   )

Total Shareowners’ Equity                                                                                     4,390            3,619



Total Liabilities and Shareowners’ Equity                                                                $   20,482       $   20,491




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                         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%
           Net Income (ttm):             -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


           ABS = Albertson's Inc.
           SWY = Safeway Inc.
           WMT = Wal-Mart Stores Inc.
           Industry = Grocery Stores



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                               Financial Ratios
                                                                Debt/        Price to     Net Profit Margin
Entity                                 Market Cap   ROE %       Equity        Book                 (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


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              Financial Ratios
• Trending not Done
     – I ran out of time!




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                 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


Method Average                                                    $9,569



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                         Strengths
1.     A high-quality asset base with leading market shares in many of
       the nation’s largest and fastest growing markets.
2.     Broad geographic diversity and multiple retail formats that allow
       Kroger to meet the needs of virtually every customer.
3.     An extensive collection of consumer data generated from our
       customer loyalty cards plus a unique partnership with dunnhumby.
4.     A successful track record of competing head-to-head against
       supercenters.
5.     Outstanding private-label products that have earned industry-
       leading market share.
6.     The financial strength and resources to build Kroger’s business
       for the future.
7.     A prominent reputation in charitable giving and community
       involvement.



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              Weaknesses
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.



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                                                 IFE Matrix
Key Internal Factors                                                          Weight   Rating   Weighted Score

Strengths

A high-quality asset base with leading market shares in many of the            0.05      3           0.15
      nation’s largest and fastest growing markets.
Broad geographic diversity and multiple retail formats that allow Kroger to    0.10      4           0.40
     meet the needs of virtually every customer.
An extensive collection of consumer data generated from our customer           0.10      4           0.40
      loyalty cards plus a unique partnership with dunnhumby.
A successful track record of competing head-to-head against                    0.05      3           0.15
     supercenters.
Outstanding private-label products that have earned industry-leading           0.10      4           0.40
      market share.
The financial strength and resources to build Kroger’s business for the        0.05      4           0.20
      future.
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            0.10      3           0.30
      nation’s largest and fastest growing markets.
Broad geographic diversity and multiple retail formats that allow Kroger to    0.05      3           0.15
     meet the needs of virtually every customer.
An extensive collection of consumer data generated from our customer           0.05      3           0.15
      loyalty cards plus a unique partnership with dunnhumby.

7-Apr-08                                            ® 2008, Tony Gauvin, UMFK                                    34
                                               IFE Matrix
Key Internal Factors                                                         Weight   Rating   Weighted Score
Weaknesses
Operates under two dozen banners.                                             0.1       1           0.10

Only owns 35% of store property.                                              0.05      2           0.10

Workforce is 71% unionized.                                                   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                  2.90




7-Apr-08                                           ® 2008, Tony Gauvin, UMFK                                    35
           Matrix Analysis




7-Apr-08      ® 2008, Tony Gauvin, UMFK   36
                                          SWOT Matrix
                                         Strengths – S                                                       Weaknesses – W
                                         1.    A high-quality asset base                                     1.   Operates under two dozen banners.
                                         2.    Broad geographic diversity and multiple retail formats        2.   Only owns 35% of store property.
                                         3.    An extensive collection of consumer data                      3.   Workforce is 71% unionized.
                                         4.    A successful track record of competing head-to-head against   4.   Jewelry stores are 11% of stores, but account
                                               supercenters.                                                      for less than 1% of revenue.
                                         5.    Outstanding private-label products                            5.   Has not issued dividends since 1988.
                                         6.    Financial strength and resources                              6.   Negative net income in 2004.
                                         7.    Reputation for charitable giving and community
                                               involvement.
Opportunities – O                        SO Strategies                                                       WO Strategies
1. Supermarket sales of drugs up         1. More pharmacies in stores (S1,O1)                                1. Hybridize banners & push Kroger brands (W1,
2. Low-paid Wal-Mart workforce           2. Organic private-label (S9,O3-6-7)                                O6-7)
3. Organic food sales growth             3. Hispanic private-label (S9, O4-5)                                2. Replace some jewelry stores with organic
4. High level of Hispanic spending       4. Hispanic format (S4-5, O4-5)                                     markets (W4, O3)
5. Hispanic population growth rate       5. Take Wal-Mart’s best employees (S10, O2)
6. High Margins for private-labels       6. New stores in Hispanic hot spots (S4, O5)
7. High demand for private labels
Threats – T                              ST Strategies                                                       WT Strategies
1. Drugstore service/merchandise focus   1. Match drugstore offerings of service & merchandise. (S1-5, T1)   1. More hybrid banner supercenter-type stores (W1,
2. Growth of mail-order pharmacies       2. Grow online pharmacy business (S6-10, T2)                        T5)
3. Larger prescription rules for MOP’s   3. New stores in non union areas (S4, T7)                           2. Buy store property and save money (W2, T7-8)
4. Illegal drug importation              4. VP of unions (S10, T7-8)                                         3. Divert jewelry store funds into online pharmacy
5. Supercenters dominate grocery sales   5. Stress customer service in all operations (S6-7, T1-5-7)         (W4, T2)
6. Wal-Mart logistics technology
7. Labor >50% of operating expenses
8. Price pressure caused labor strikes



    7-Apr-08                                          ® 2008, Tony Gauvin, UMFK                                                                   37
                                    Space Matrix
Financial Strength (FS)                                    Environme ntal Stability (ES)
Net Income                                           1     Hispanic groth rate is 14%                    -1
Current Ratio                                        3     High energy prices                            -5
Loss in EPS in 2005                                  1     Aggressive labor unions                       -6
High debt to capital ratio                           1     Mail order pharmacies increasing sales        -6
Low bookvalue per share                              1     Supercenters dominate grocery sales           -6

Financial Strength (FS) Average                     1.4    Environme ntal Stability (ES) Average         -5




Competitive Adv antage (CA)                                Industry Strength (IS)
#1 or #2 in most major markets                       -2    Retail drug chains strong gowth               6
Diversified with four different operations           -1    Supermarket drug sales continue to grow       6
Private label share of sales is 24.6%                -1    Organic food sales up 19% in last 5 years     6
Website pharmac y sales grew 18% in 2004             -1    Customers continue to use private brands      5
Control over Suppliers and Distributors              -2    Labor cost total >50% of operating expenses   1

Competitive Adv antage (CA) Average                 -1.4   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                                                                                       IS
                -6   -5         -4       -3     -2   -1         1   2     3        4        5   6
                                                          -1

                                                          -2

                                                          -3

                                                          -4

                                                          -5

                                                          -6
                           Defensive                                          Competitive
                                                           ES




7-Apr-08                                      ® 2008, Tony Gauvin, UMFK                                  39
                                                        GSM
                                         Rapid Market Growth


                  Quadrant II                                        Quadrant I




      Weak                                                                           Strong
    Competitive                                                                    Competitive
     Position                                                                       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     Market Share

   Supermarkets               2,468               94%            1
   Convenience Stores         779                 5%             0.1
   Jewelry Stores (A)         412                 <1%            0.1
   Other (B)                  N/A                 <1%            ?
            Total             3,659               100%

     (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
                                    High                       Medium                          Low
                                     1.0                         .50                            0.0

                             High
                             +20
Industry Sales Growth Rate




                                             Stars                       Question Marks
                                               II                               I
                             Medium
                               0


                                           Cash Cows                          Dogs
                                               III                             IV
                              Low
                        7-Apr-08                  ® 2008, Tony Gauvin, UMFK               42
                              -20
                             IE Matrix
                                          IFE Scores
   Hold and Maintain
                        Strong            Average              Weak
                        3-4               2-2.99               1-1.99

         High     I                 II                   III
         3-4
Scores




                  IV                V                    VI
EFE




         Medium         1
         2-2.99


                  VII               VIII                 IX
         Low
         1-1.99

     7-Apr-08                ® 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          x                      3
Market Development              x                   x                      2

Product Development             x        x          x                      3
Concentric Diversification                                         x       1
Conglomerate Diversification                                       x       1

Horizontal Diversification                                         x       1
Joint Venture                                       x              x       2

Retrenchment
Divestiture
Liquidation




7-Apr-08                             ® 2008, Tony Gauvin, UMFK                   44
                                                                    QSPM
Strategic Alternatives
A - Diversification of Private Label Natural and Ethnic Products
                                                                                                      A                B
B - Replace Convenience & Jewelry Stores with Fuel Centers
                                                   Key Factors                         Weight   AS        TAS    AS        TAS
                  Supermarket sales of drugs growth                                     0.07    ---       ---    ---       ---
                  Large, low-paid Wal-Mart workforce                                    0.05    ---       ---    ---       ---
  Opportunities




                  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
                                                                                                          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    ---       ---    ---       ---
  Threats




                  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
                                                                                                          1.04             1.38
7-Apr-08                                                         ® 2008, Tony Gauvin, UMFK                                  45
                                                         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
Strenghts




                 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

                                                                                         2.30         1.65
                 Too many banners                                           0.1    ---    ---   ---    ---
                 Too much leased property                                   0.05   ---    ---   ---    ---
    Weaknesses




                 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   ---    ---   ---    ---

                                                                                         0.25         0.60
                 Sum Total Attractiveness Score                                          4.91         4.04


7-Apr-08                                              ® 2008, Tony Gauvin, UMFK                          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
                           Common Stock Financing                                     Debt Financing
                 Recession          Norm al         Boom                Recession          Norm al            Boom
EBIT           $500,000,000    $1,500,000,000 $3,000,000,000          $500,000,000    $1,500,000,000    $3,000,000,000
Interest               0                0              0               150, 000,000     150, 000,000      150, 000,000
EBT             500, 000,000    1, 500,000,000 3, 000,000,000          350, 000,000    1, 350,000,000    2, 850,000,000
Taxes           200, 000,000     600, 000,000  1, 200,000,000          140, 000,000     540, 000,000     1, 140,000,000
EAT             300, 000,000     900, 000,000  1, 800,000,000          210, 000,000     810, 000,000     1, 710,000,000
# Shares        892, 166,667     892, 166,667   892, 166,667           725, 500,000     725, 500,000      725, 500,000
EPS                  0. 34            1. 01          2. 02                  0. 29            1. 12             2. 36

                         70 Percent Stock - 30 Percent Debt                    70 Percent Debt - 30 Percent Stock
                    Recession           Norm al           Boom            Recession           Norm al           Boom
    EBIT          $500,000,000     $1,500,000,000 $3,000,000,000        $500,000,000     $1,500,000,000 $3,000,000,000
    Interest        45,000,000        45,000,000       45,000,000        105, 000,000      105, 000,000     105, 000,000
    EBT            455, 000,000     1, 455,000,000   2, 955,000,000      395, 000,000     1, 395,000,000   2, 895,000,000
    Taxes          182, 000,000      582, 000,000    1, 182,000,000      158, 000,000      558, 000,000    1, 158,000,000
    EAT            273, 000,000      873, 000,000    1, 773,000,000      237, 000,000      837, 000,000    1, 737,000,000
    # Shares       842, 166,667      842, 166,667     842, 166,667       775, 500,000      775, 500,000     775, 500,000
    EPS                 0. 32             1. 04            2. 11              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

								
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