The Kroger Company Essay

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Abstract

The Kroger Company grew in 128 years from one store to over 3,500 stores of various banners and products. The Kroger Company is the largest food and drug retailer in the United States and is growing constantly with diversity in the retail market, dealing in food, pharmacies, apparel, jewelry and fuel. Kroger is governed by a 14 member Board of Directors including a Chief Executive Officer. Kroger is a leader in Corporate Social responsibility by maintaining environmental consciousness, social awareness and energy conservation awareness. Kroger is committed to customers, builds diversity and focuses on growth.

The company operates a large part of it’s own manufacturing and distribution to increase profit and efficiency. Kroger is a strong competitor in a highly competitive market. Kroger is a very survivable company that should make a few minor adjustments to improve survivability such as debt liquidation and horizontal and vertical integration.

Overview

The Kroger Company was founded in Cincinnati, Ohio by Mr. Barney Kroger. Mr. Kroger opened a grocery store at 66 Pearl Street, using his life savings of $372. His motto for running the business was: “Be particular. Never sell anything you would not want yourself. ” (Kroger, History 2011).

Over 128 years later, the store has grown from a family, neighborhood store to the largest, pure grocery retailers in the United States (Kroger History, 2011). It operates under 36 different banners and provides several different store formats offering anything from food and apparel to diamonds and medicines.

Mission and Objectives Mission, Vision and Objectives

The Kroger Company has evolved a long way since Mr. Kroger opened the doors of his grocery back in 1883. But, even back then, he realized he needed a mission and vision statement. While his was basic and rudimentary, the basic can be found in today’s mission and vision statement.

Today a mission is not just how the company is to be run, but rather a statement of what will set it apart from its competition (Pierce, Robinson 2011). The stated Kroger mission is: “Our mission is to be a leader in the distribution and merchandising of food, pharmacy, health and personal care items, seasonal merchandise, and related products and services. ”(Kroger, Mission, 2011) The values of the company guide the company on how they’re going to conduct business. Kroger operates using six core values; honesty, integrity, respect for others, diversity, safety, and inclusion.

Kroger considers honesty as telling the truth and doing the right things, while integrity is defined as living the Kroger values in all the employees do, and a unified approach to doing business. Respect for others refers to valuing opinions, property and perspectives of others. Diversity speaks to including a variety of people, backgrounds, cultures and opinions. Kroger wants safety to mean watching out for others and being safe and secure in the workplace. Finally, Inclusion gives a voice to all employees and urges teamwork and encouragement.

Kroger has some overarching measurable outcomes that they wish to achieve. These are stated in the form of objectives. The Kroger Co. operates with three simple objectives (Kroger, Mission 2011):

  1. Improve customers shopping experiences in three areas; service, selection and value.
  2. Increase the market share.
  3. Increase shareholder profits.

Corporate Social Responsibility

In addition to mission, vision statement and objectives, Kroger is guided by their corporate social responsibility. As part of its governance structure, Kroger has a Public Responsibilities Committee as part of the board of directors.

Part of the committee mandate is to “examine and review the practices of the company affecting its responsibility as a corporate citizen… (Kroger, Sustainability Report 2009). Some of the subjects that fall under the committee’s prevue are: community relations; charitable contributions; supplier diversity; safety of food, pharmacy, employees, and customers; and media relations. The committee is required to adjust the Kroger corporate responsibility policies in accordance with changes to the environment, public issues and issues affecting the business.

The committee has excelled by developing outstanding policies in waste reduction, energy conservation and social responsibility. In the realm of waste reduction, Kroger’s recycling program enabled them to recycle over one billion tons of corrugated cardboard in 2007. Efforts have increased since then. They have reduced the use of plastics and paper by introducing and encouraging the use of reusable bags. Additionally, the reusable bags themselves are made from 25% recycled material. Kroger has also reduced paper usage by using more electronic and digital communications and some paperless administration operations.

This has saved over 91 million sheets or 455 tons of paper since inception. Kroger also reduced the waste of food by rescuing food prior to spoilage and donating what is termed “not for retail” food. Kroger has reduced energy consumption by over 30% since 2000. Their stores and manufacturing plants use low energy light bulbs wherever practical and they have increased the inventory and sales of compact fluorescent light bulbs by 25%. Kroger owns most of their commercial truck fleet (one of the largest privately owned fleets in the world) and drives over 100 million miles a year.

They have managed to reduce their mileage by over 2%, thus reducing emissions; which is the equivalent of planting over 250,000 trees. This was accomplished by designing more efficient routes through state of the art mapping tools, multi-temperature trucks (increasing load versatility), standardizing top speeds and using renewable E-85 fuel. Socially, Kroger has improved food safety, increased vendor standards and diversity, and improved business ethics. Kroger continues to advertise and encourage family meals and markets products to make family dining a more attractive option to the customer.

They are also involved in animal welfare initiatives as well as customer and vendor diversity. Current Situation Corporate Structure Kroger is led by a Chief Executive Officer and a Board of Directors. The current CEO is David B. Dillon and he is elected by the Directors. “The purpose of the Board of Directors is to serve the company’s shareholders and other constituencies by its direction of corporate policy; its election of the chief executive and other officer; and its continuing oversight of management. ”

The board is presided over by a lead director and the size of the board is no less than nine, but no more than twenty-one directors (Kroger, Proxy Statement 2009). The board is currently comprised of 14 members. Currently, 12 of the Directors are independent with only two management directors and the CEO. Under the Board of Directors are 18 Division Managers who are responsible for the management and performance of their divisions and 18 Executive Officers. The Board of Directors is also broken down into five committees; audit, compensation, corporate governance, financial policy and public responsibility.

Corporate Culture Kroger is committed to their customers. The company is dedicated to build customer loyalty and has been very successful at building a loyal customer base. Kroger is true to its value of diversity as it has one of the most diverse set of vendors and employee populations in the industry. They also market their products to build and maintain a diverse customer base. Kroger also sticks to the inclusion theme of their values by ensuring employees have several means to communicate their ideas and in turn, their ideas are evaluated and implemented by management.

The company has grown substantially over the last 12 years and in 2009 rewarded shareholders with $450 million. Products and Services As previously stated, Kroger maintains a diverse product line by selling food, apparel, home products, pharmacy, jewelry and fuel. They are the largest, pure grocery chain in the United States; however they have not only a diverse product line, but 36 different banners under which they operate. Kroger has several store formats including; combination food and drug, multi-department stores, marketplace stores, price impact warehouses and supermarkets. They also have convenience stores and jewelry stores.

They currently operate 2,468 supermarkets, 777 convenience stores and 374 jewelry stores in 32 of the 50 United States. All of their operations are domestic. Additionally, they operate retail fuel operations at 705 of their convenience stores and 893 of their supermarkets. Kroger is the fifth-largest pharmacy operator in the United States in number of locations, operating retail pharmacies in over 1,900 of their food stores (Kroger, Fact Book 2009), In addition to their retail products, Kroger is heavily involved in manufacturing many of their own products. Currently, Kroger manufactures 14,400 of their own labels of various products.

This accounts for roughly 43% of the corporate brand units sold by Kroger (USSEC, 10k, 2009). Kroger’s 40 manufacturing plants are spread over 17 states with dairy and bakery products being the largest manufactured (Kroger, Fact Book 2009). Although Kroger does not sell the services of its store delivery fleet, it is worthy of discussion here as it provides for a service whose cost would otherwise be passed on to the customer. Kroger owns a fleet of 1,800 tractors and 8,200 trailers which account for approximately 90% and 60% (respectively) of the transportation assets required for all deliveries.

The fleet makes almost 3,000 deliveries daily and, in 2009, logged nearly 300 million miles. Kroger pays very much attention to their trucking operation and continually makes improvement in areas such as aerodynamic, multi-temperature trucks, improved insulation, idling protocols and other innovative areas to help lower costs, increase efficiency and reduce the impact on the environment. Mergers and Acquisitions Acquisitions were key to Kroger’s growth over their 128 years of existence. Exactly 100 years after Barney Kroger opened his first store, Kroger merged with Dillon Companies Inc.

Dillon’s was a Kansas based operation and the merge made Kroger a coast-to-coast retailer of food, drugs, and convenience stores for the first time in its history. The second and biggest merge in Kroger history came in 1999 when they merged with Fred Meyer Inc. Two key benefits happened with this $13 billion deal: they became the supermarket chain with the largest geographic footprint in the industry and they became the chain with the widest variety of formats in the food retail industry. Since the 1999 merger only smaller acquisitions have taken place.

In all, 51 stores have been acquired. Kroger obtained one Winn-Dixie in 2005, one Buehler Food Markets in 2006 and 18 Scotts Food and Pharmacy in 2007. Also in 2007, they acquired 20 Farmer Jack’s, two other individual stores in 2008, nine other individuals the next year, and one Associated Wholesale Grocers in 2010. External Environment Operating Economy Kroger operates purely in the U. S. domestic economy. The current economy has declined into recession, however there are some indications that a slow recovery has begun. Due to the recession, credit availability is a negative factor.

The lack of availability not only affects Kroger, it negatively affects Kroger’s vendors and customers. Increased fuel prices have increased shipping and distribution costs. The cost of fuel results in less money for consumer to spend on higher end groceries and items other than necessities. Consumers have become more cautious on spending as a whole. With the difficulties in the financial sector, it is harder for Kroger to obtain low cost financing. Banks are more discerning on who they are lending to, the purpose and the price.

Technology

Kroger is not dependent on a lot of technology; however, they do rely on some technology to operate more cost effectively and efficiently. The biggest reliance of technology is on information software. Kroger relies heavily on software to keep track of inventory both in the store, at distribution centers, as it is manufactured and delivered. They use information technology to track sales, order merchandise and communication. Finally, information technology is used in the administration functions of the company such as the financial, human resources and operations arenas.

Transportation technology is another area that Kroger relies. Technology is used in mapping and dispatching as well as automotive and trucking. Kroger has purchased one of the most aerodynamic fleets of tractor trailers to reduce fuel costs. They have also invested in idler control technology for their trucks to reduce costs, increase safety and improve emissions. Political/Legal Kroger currently carries $8. 1 billion in debt. Their current debt/equity ratio is 1. 49. This means that most of their assets are financed. Conversely, this means that Kroger is still a growing company.

However, in the current economy, this could become a huge negative for the company because the economy has not completely stabilized and could easily take another down turn. I am reluctant to call this a red flag as they are still rated as a moderately strong pick on Wall Street and the company is very stable. It should be noted as a concern, and monitored over the long term. Aside from their debt, Kroger does have three prominent outstanding actions currently in litigation. Kroger has yet to settle a mutual strike agreement filed in 2004 by the State of California against Safeway and Ralph’s Grocery Co.

Ralph’s Grocery also has a U. S. Tax Court Petition pending as a re-determination of their deficiencies. If the ruling goes against Ralph’s the payment owed would be $436 million, plus interest. There is also a patent infringement case that was filed in March of 2010 by the Kroger Company against Excentrus. Aside from those three cases, there are only various claims and lawsuits pending that arise from the normal course of doing business (10k, 2009). Competition Kroger primarily competes in 44 major market areas, which is defined as areas where there are seven or more stores.

Their major competition is the super-center stores with Wal-Mart being their toughest competitor with Costco second and Kroger third. Kroger faces more threat from the super-center market as it is an expanding market at this time. As far as pure food and drug retailers go, Kroger leads the herd. Aside from super-center stores, Kroger faces a threat from non-traditional retailers. These retailers capture a smaller market share but, they operate in the same markets that Kroger does, and they offer similar value. Their arketing strategy centers more around customer service, and specialized product selection and in some cases, pricing. The competitive operating environment for the food retailing industry continues to be characterized by intense price competition (10k, 2009). Analysis of Strategic Factors Situational Analysis Overall, Kroger maintains a relatively strong situation. Their strengths and opportunities outweigh their weaknesses and threats providing they are all properly monitored and prudent adjustments are made in a timely manner. This will be illustrated by use of the SWOT Analysis matrix, followed by a brief discussion.

SWOT Analysis | |STENGTHS |WEAKNESSESS | |Strong market position | | |Diversified inventory, labeling, branding |Largely unionized workforce (expense) | |Proficient manufacturing ability |Outstanding lawsuits | |Trusted Brands |Aging real estate | |Customer loyalty |High operating expenses | |OPPORTUNITIES |OPPORTUNITIES | | | | |New market expansion |New market expansion | |In-store health clinics |In-store health clinics | |Expanding customer base |Expanding customer base | |Growing pharmacy market |Growing pharmacy market |

One of Kroger’s strengths is the fact that it is strong in the market. They are already the leader in the food and drug retail sector and compete well with the super-center retailers. They are “dug in” for now and it would take a very strong effort to unseat them from their current market position. Their diversified inventory is another one of their strengths.

They are leaders in branding as they have 14,400 of their own private labels accounting for 43% of their inventory. The private labels sales profit margin is higher than selling other brands due to cost savings in the manufacture and outsourcing of the products. The private labels also build customer loyalty. Their ability to manufacture products is also considered a strength of the company for much the same reasons as branding. The Kroger brands are well manufactured and they are trusted brands in the food retail industry. Kroger has a few weaknesses as well. One weakness is their unionized workforce. Being founded in a unionized state, this was difficult to overcome. Many of their operations are in unionized states as well.

This is not meant to be and indictment against unions, however, union labor is more costly than non-union labor. Unions usually negotiate better entitlement and benefit packages for their members and union members often contribute less to pension funds as well. It also costs Kroger money in terms of administration and legal fees. The company has to pay for attorneys and labor specialists for negotiations and settling employee disputes and grievances. These costs eat into net profits and could be saved with a non-union labor force. Another weakness is the outstanding legal issues. The issues are costing legal fees and attorney’s fees. The pending $436 million settlement against Ralph’s grocery chain could more than double with interest charges.

Kroger also has a very aging real estate base that must be upgraded if it is to keep pace with the competition. People like to shop in nice, new, clean stores and Kroger must not fall behind the competition. Finally, another weakness is their high operating costs. Kroger has to find a way to keep costs lower, be it in the manufacturing, transportation or in the retail. The large operating costs are incurred primarily from the overhead involved in the manufacturing aspects of the company. Opportunities for Kroger are new market expansion, in-store health clinics and optical, and an expanding customer base. There are plenty of new markets for Kroger as they become stronger.

Kroger no longer needs to stick to the large metro areas and can begin to expand in outlying areas where the major competition refuses to go. This gives the customer an option from traveling to the larger populated area and remaining in their own area to obtain the same benefits. In-store health and optical clinics will enable Kroger to compete better with the super-center market. Customers prefer one-stop convenience shopping over driving from store to store in search of specialty items. The in-store clinics will also enhance the Kroger pharmacy operations and make them stronger competitors over the competition from CVS and Walgreens drug stores. All of the above opportunities will expand the Kroger customer base and weaken the customer base of the competition.

The loss of customer base would be more strongly felt by the non-traditional retailers and the small food and drug retailers such as Publix and Food Lion. The threats faced by Kroger are primarily poor economic outlook, rising labor costs and outstanding debt. The poor economy puts negative pressure on the growth of a company. A company needs money to grow and in an era when the financial industry is cautious about lending and the lending opportunities are scarce, that makes growing difficult. Additionally, people are more cautious about investing in a market that is not entirely stable. Strong investment in a company provides capital for growth and strengthens it. Lack of investors in the company threatens stagnation of growth.

We spoke of rising labor costs at length. Costs of benefits such as healthcare and retirement packages increase operating costs and take money from the company’s bottom line. With the current uncertainty of where health care costs are heading, it is difficult to determine what type of benefits should be offered in the first place. This strengthens the negotiating platform for labor and puts Kroger in the reactionary mode. The last threat is the $8. 1 billion in outstanding debt. Although Kroger is paying on the debt and debt shows growth in a company, their debt/equity ration is rather high at 1. 43. This is almost twice the ration of their biggest competitor (Wal-Mart) at . 73.

The large debt/equity ratio could scare off potential investors and affect the ability to obtain debt financing needed for future growth. Strategic Alternatives and Recommendations Strategic Alternatives Kroger could stay the course and continue business as usual. However, this alternative would stagnate Kroger’s growth while its competitors grew at the expense of Kroger’s market share and profits. They could, adopt this strategy for the short term. Kroger could also expand and grow. They could do this by acquiring or merging with their smaller competitors such as Publix, Food Lion or IGA. This horizontal integration strategy would automatically expand their market share and simultaneously reduce their competition.

Kroger could also practice a vertical integration strategy by acquiring or merging with other manufacturing and transportation companies. They are already familiar with the production and distribution ventures so this would not contain a lot of risk as the underlying infrastructure template is already in place in the organization. A joint venture or alliance strategy might also benefit in the manufacturing and transportation areas. This strategy would limit the amount of assets and financing required by Kroger and share the risk with another company. This strategy would not add to the already large debt/equity ratio and make Kroger look more attractive to investors. Recommended Strategies I would strongly recommend both horizontal and vertical integration for Kroger.

Kroger can expand their customer base, reduce their competition and become a stronger competitor against the large cost-center retailers by becoming a larger threat. The ability to manufacture and move more products will increase to the diverse inventory already enjoyed by the company. In addition, horizontal and vertical integration will grow the Kroger Company and enable expansion. The larger company will be able to reinvest their increased profits into better infrastructure and updates to their aging real estate. Doing this in a timely matter will allow Kroger to fix the aging real estate now, while it is comparatively less expensive to build than it was pre-recession. Once they acquire some of their competition, they can also move into markets where their competitors aren’t operating in.

Doing this keeps the local customer in their local area to shop by making the trip to the cost-center stores seem unattractive and worthless. This will deprive the larger competition of a portion of their customer base and weaken their market position. Kroger should also consider liquidating as much debt as possible to improve their debt/equity ratio. This is easier to accomplish while their market position is strong and their sales are high. This strategy requires a little belt tightening and may even mean less shareholder profits for the short term. However, the loss in profits now would be made up when the debt/equity ratio improves and investor confidence is restored. Functional Tactics and Action Plans

The first action that should take place is an audit to determine the underperforming stores and market locations. These should be liquidated immediately and the money saved should go toward reducing debt and acquiring the competition. Simultaneously, Kroger needs to insure all stores project a cutting edge appearance by updating the old infrastructure. In the short term (3-5 years) shareholder profits should be reduced and the surplus put towards debt liquidation. The next phase should be the acquiring or merging with other manufacturing and distribution ventures. This will provide Kroger the flexibility to provide more of its own products for less cost.

The manufactured products and labels can also be sold to competitors for sale in their stores as well. Selling to other retailers increase sales considerably as well as giving their labels brand recognition beyond the walls of Kroger stores. Evaluation and Control Two forms of evaluation are increased sales and increased market share and customer base. The true measure of whether the strategy is working is if there are more people shopping at your stores. More customers and higher sales mean that there is more recognition of the Kroger name, more trust in the company and desire for their products. Another item to be evaluated for success is the reduction of the debt/equity ratio.

A decrease in the ratio proves that fewer assets are being financed and the company is in a better position to grow and is more survivable. A lower ratio will allow Kroger to invest some of its own funds into growth and make Kroger more attractive for investors. It will help secure their position in the industry and make them less of a target for takeover by larger competitors. The Board of Directors can control the strategy through quarterly reviews of the financial statements of the company. They have to monitor the external environment and make swift adjustments to the strategy at the slightest signs of change. Management must review the strategy often and provide accurate reviews of the outcomes.

Kroger is a strong company with a good market position and strong loyal customer base. It is a diverse and forward thinking company with versatile assets that enhance its operations and make it unique to its smaller competitors. There is little need for major overhauls or retooling of the Kroger Company. For the most part, Kroger is on the right track to staying successful for a long time. However, there are little minor tweaks that need to occur to improve the company’s position. They need to eliminate non-producing waste, increase their market position and reduce their competitors. Kroger can do this by expansion by both horizontal and vertical integration.

Once they make minor improvements to the organization and manipulate the environment they work in, Kroger will be in a position to not just compete with the large cost-center stores, but challenge them and position them for global expansion.

References

  • Kroger Company. (2009). Proxy Notice of Annual Meeting of Shareholders. Proxy Statement and 2009 Annual report. Cincinnati, Oh. : Board of Directors Kroger Company. (2009).
  • The Kroger Company, 2009 Fact Book. Retrieved from: http://www. thekrogercts/2009_KrogerFactBook. pdf Kroger Company. (2009).
  • Doing Our Part. 2009 Sustainability Report. Retrieved from: http://www. csr-news. net/directory/ebook/8527/files/8527. pdf Kroger Company (2011).
  • Mission and Values. Retrieved from: http://www. thekrogerco. com/corpnews/corpnewsinfo_values. htm Kroger Company (2011).
  • History. Retrieved from: http://www. thekrogerco. com/corpnews/corpnewsinfo_history. htm McShane, Steven L. , ; Von Glinow, Mary Ann (2010).
  • Organizational Behavior (5 ed). New York. McGraw-Hill Irwin MSN Money. (2011). Kroger Stock Quote, Earnings and Analysis. Retrieved from: http://investing. money. msn. com/investments/company-report? Symbol=US%3aKR Pierce, John A. ; Roninson, Richard B. (2011).
  • Strategic Management (12 ed). New York. McGraw-Hill Irwin U. S. Securities and Exchange Commission, Kroger. (2009).
  • Form 10-K. The Kroger Company. Retrieved from:http://www. sec. gov/Archives/edgar/data/56873/000110465910017258/a09-36165_110k. html

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