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The Kroger Co. (KR): Loyalty Cards and Organic Food Will Drive Growth for This Grocer

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The Kroger Co. (NYSE:KR) will continue to invest in pricing discounts with its loyalty cards to improve the price positioning of its products. It has a 50% stake in Dunnhumby USA, which will helps it to move ahead with loyalty cards and other strategic plays. The company also focuses on wellness of customers and one of its fastest growing segments -Natural & Organic food- will drive same store sales growth. Its changed capital allocation process for new store openings and remodeling is expected to generate quick returns and to fuel bottom-line growth. Now, let’s discuss these points in detail.

The Kroger Co. (NYSE:KR)

Loyalty card and its partnership with Dunnhumby will drive sales

In the current scenario, companies are coming up with different loyalty schemes through aggressive digital and social media use. Its joint venture with Dunnhumby provides it with more opportunities through services like customer data analysis and direct mail offers. Dunnhumby sends 8.5-9 million mailings per quarter and 90% of the coupons are unique for the household. It has already produced a The Kroger Co. (NYSE:KR) app which enables customers to download coupons and redeem loyalty points directly. Dunnhumby also provides assistance on vendor management, store level management and design promotion. This partnership with Dunnhumby and the loyalty cards scheme are expected to drive sales in the future.

Natural & Organic food with value proposition will be the opportunity to explore

The Kroger Co. (NYSE:KR) believes in the wellness of the customer, and it will look for more opportunity in the Natural & Organic foods segment. This is one of the fastest growing segments with improved perishables offerings and a highly evolved pharmacy. Its private label Simple Truth and its rollout have helped this segment to reach 4%-5% of sales. It has also achieved wellness with more value offerings in perishables. Improved freshness with process enhancement in the dairy category has helped it to keep products fresh for nine or more days. These categories provide a good opportunity for future growth.

New store expansion strategy will ensure returns in the long term

Store expansion has been a key growth driver for the company over the years. In the old system, capital was allocated for all geographies for new stores and remodeling. Now onwards, it will keep check on the average age of stores of that particular geography, number of competitor’s stores and maintain newness of the stores with remodeling. Allocation will be done across all geographies and the company is targeting 45-50 new stores this year. The result of this new approach can be seen in quick returns from new stores than the returns it has achieved historically.

Peer Analysis

In traditional grocery stores, the other two players which are competitors of The Kroger Co. (NYSE:KR) are SUPERVALU INC. (NYSE:SVU) and Safeway Inc. (NYSE:SWY). Supervalu took a step back to move forward this year, when it made the decision to divest its business. In March 2013, the company closed a $3.3 billion deal with a Cerebus-led investors’ consortium. It sold off five Albertsons banners and related Osco and Sav-on pharmacies to AB Acquisition LLC, an affiliate of the consortium. It has reduced its workforce and will be focusing on its three business units i.e. Independent business, Save-A-Lot retail business and five regional retail banners. The newly appointed president and CEO Sam Duncan indicated that they will achieve growth with decentralized and autonomous leadership in its three business units. Its efforts are expected to increase its sales in the future, but it will take time to get back the investor’s confidence.

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