COMPANY ANALYSIS- THE KROGER CO. 12
CompanyAnalysis: The Kroger Company
CompanyAnalysis: The Kroger Company
Missionand vision statement analysis
“Tobe a leader in the distribution and merchandising of food, pharmacy,health and personal care items, seasonal merchandise, and relatedproducts and services” (The Kroger Company, 2016).
“Ourmission is to utilize cutting-edge technologies in the distributionand sale of food, pharmacy, health and personal care items, seasonalmerchandise, and related products and services to ensure that wereach both the old and young in the whole of the US. Based on ourcore values of integrity, respect for workplace diversity andinclusion, we strongly believe that our dream is attainable”.
Asseen in the above statement, Kroger clearly outlines the products aswell as services it offers to its customers, which is one of the keyfeatures of winning mission statements (Ogbor, 2009). Nonetheless,the statement does not specify the customer segments that the companyintends to reach through its products, nor does it specify thegeographical locations in which the company competes. As such, it isnot clear whether or not the company operates within the globalmarket. Similarly, the mission does not communicate Kroger’sfundamental beliefs and values neither does it show the degree towhich the firm is committed towards employee needs as well asenvironmental sustainability.
A crucial point made in the foregoing section is that the Kroger Company provides diversified products that include healthcare products, products for personal care, and food.
Closely connected with this point is that modern consumers are developing an increasing liking for retail clinics, which basically refer to walk-in clinics that are located within grocery stores or pharmacies (MarketLine, 2016). The increasing popularity of retail clinics is attributed to the perception that such facilities are affordable and convenient, especially when compared to conventional healthcare facilities like hospitals.
Owing to the above observation, it is hypothesized that the growing popularity of such clinics provides an opportunity for Kroger, primarily in light of the projection that increased demand will cause growth in the industry. A report prepared by MarketLine (2016) suggests that by the year 2017, more than 2,750 retail clinics will have been established in the US.
Being America’s fifth-biggest pharmacy operator (MarketLine, 2016), Kroger stands to benefit in terms of market growth due to the mounting popularity of retail clinics.
Growth in e-commerce
A key attribute of modern consumers is that they prefer online shopping to traditional shopping. This is because online shopping gives customers an opportunity to experience products or services before purchasing them (MarketLine, 2016).
Online shopping is also advantageous to firms because it involves minimal infrastructure costs, hence resulting in cost savings.
Kroger has already acquired Vitacost.com, a key online retailer in health products (MarketLine, 2016). Subsequently, the company will take advantage of Vitacost.com’s broad e-commerce platform to offer convenient and personalized services to its clients, thus improving the quality of service delivery while simultaneously reaching more people.
Increased organic products’ demand
Many consumers today understand the health benefits of eating natural foods, and it is expected that natural foods’ consumption will increase significantly in coming years (MarketLine, 2016).
This trend offers an opportunity for further growth in Kroger, which already sells various organic foods. According to MarketLine (2016), Kroger has an organic products category known as Simple Truth and Simple Truth Organic brands. Considering that these products have obtained certification from the relevant authorities, there is plenty of opportunities for Kroger to take advantage of this increased demand to make more revenues.
America’s food retailing business is defined by intense competition, which causes price wars. One of the common competitive strategies used by firms is to lower prices and offer discounts.
The fact that Kroger competes with Wal-Mart, a company that is known for its low prices, is a key threat to Kroger’s profitability and survival.
This threat is further reinforced by a weakening economy, which affects consumers’ purchasing power. Consequently, Kroger’s scale advantages might soon be trumped by competitors using cost-leadership strategies for survival.
Competition is also posed by online retailers, such as Amazon, who are now offering grocery services (MarketLine, 2016).
All these could affect Kroger’s expansion activities and profitability.
Increased labor costs as a result of unionization
The US federal government, together with a number of state governments, recently raised the wage rates that employers are supposed to pay their workers. At the same time, more workers are becoming unionized, and this imposes additional costs to employers (MarketLine, 2016).
One of the impacts of unionization is that employers are now forced to pay higher wages to workers, besides granting them benefits such as pension and healthcare allowances. As a result of these costs, the future profitability of firms may be jeopardized.
Tighter regulations regarding food safety
Owing to its nature, Kroger`s business is subjected to various regulations that touch on product manufacture, distribution, and marketing (MarketLine, 2016).
In as much as these regulations are beneficial, they could act as a threat to Kroger, especially when viewed from the perspective of the burden that they are likely to cause with regards to compliance. In short, complying with these regulations may call for unplanned for expenditure, which affects profits.
The financial statements of Kroger indicate that since 2012, the company’s financial performance has taken a positive trend, at least from the net income point of view. In 2012, the net income was US $602 million, and this figure increased by a very large margin to reach US $1,497 million the following year. As of January this year, Kroger’s net income was US $2,039 million (Morningstar Investment Research Center, 2016).
However, the firm’s earnings per share have been fluctuating over the same period, increasing from US $0.51 in 2012 to US $1.39 in 2013. Between 2014 and 2015, the figure dropped from US $2.90 to US $ 1.72.
Source:CNN Money (2016)
Similarly, the company’s asset turnover ratio has declined, albeit slightly, during the last three fiscal years. According to Morningstar Investment Research Center (2016), the ratio dropped from 3.65 to 3.41 between 2014 and 2016. This means that the volume of revenue that Kroger generates using its assets has declined slightly, which could signal that something is wrong within the company’s internal environment.
Nonetheless, the return on equity and return on investment give a positive image of the firm’s performance. According to the latest financial statements, both the ROE and ROI have increased significantly over the last three years, meaning that the company is using its assets and shareholders’ funds wisely.
Despite the above report, it is unfortunate that Kroger’s financial performance lags behind that of a key competitor, Wal-Mart. Both in terms of net income and earnings per share, Wal-Mart outshines Kroger. Interestingly, though, Kroger seems to outdo Wal-Mart on the aspects of asset turnover and return on equity.
Besides the financial ratios described above, Kroger’s financial performance may also be understood using industry-specific metrics such as customer traffic, retail conversion rate, and the number of items bought in a single purchase.
A huge market presence
Kroger belongs to the list of America’s biggest retail grocery stores, hence commanding a big share of the market (MarketLine, 2016).
This market share creates several advantages to the firm, including economies of scale and pricing power.
An effective differentiation strategy
Kroger uses various strategies to drive customer traffic and build customer loyalty. For instance, the firm has built more stores that contain fuel centers, the aim being to drive more customer traffic into the company’s stores. Similarly, Kroger runs a loyalty program that has helped to enhance the firm’s customer base(MarketLine, 2016).
A multi-format structure
Kroger reaches various customer segments using a variety of formats, which include combo stores, marketplace stores, price impact warehouses, and multi-department stores (MarketLine, 2016).
Each of these stores offers different products that meet the needs of different customers.
Subsequently, Kroger has been capable of catering to diverse customer segments, which is important for growth.
According to the Morningstar Investment Research Center (2016), Kroger’s debt-equity ratio is more than 100%, and has remained so for the past five financial years. This suggests that the level of indebtedness in the company is very high, as supported by MarketLine (2016).
This state of affairs suggests danger because it implies that the company`s ability to obtain extra finance to support expansion activities is limited
Additionally, a high level of indebtedness means that the company will be forced to channel its cash flows towards debt repayment, and this affects its ability to meet its long-term goals.
Huge market presence
Effective differentiation strategy
Increased demand for natural/organic products
Growth of e-commerce
Increased labor costs
Ashinted in the internal factor evaluation section above, Krogeremploys the differentiation strategy as a way of responding to thechallenge of stiff competition in the food retailing business. Thecompany uses loyalty programs to reward regular customers.Additionally, its stores are differentiated such that they offerdiverse products and services to cater for shopping needs ofdifferent clients.
Itis laudable that Kroger deals in a range of products, which gives thecompany considerable competitive advantage in a market that is highlycompetitive. Likewise, the differentiation strategy used by the firmis a wise decision, especially given that key competitor likeWal-Mart use cost-leadership. Nonetheless, it is imperative that thecompany focuses on ways that will help it to counter the stiffcompetition in the industry. Precisely, it is suggested that Krogershould:
Consider forming a partnership with one or multiple players in the industry. This move will provide a solution to the problem of indebtedness, while at the same time helping the firm to mount powerful competition to rivals.
Beef up its distribution network, with the target being corner stores and any other centers from where most customers conduct their shopping. This way, Kroger will put up substantial barriers to competitors.
MarketLine.(2016). CompanyProfile: The Kroger Co.Retrieved from <<http://web.b.ebscohost.com.ezproxy.ohiodominican.edu/ehost/pdfviewer/pdfviewer?vid=1&sid=accedbeb-4b36-4c38-8993-95cf832961a8%40sessionmgr106&hid=102>> on 5 November 2016.
MorningstarInvestment Research Center. (2016). TheKroger Co.Retrieved from<<http://library.morningstar.com.ezproxy.ohiodominican.edu/stock/key-ratios?t=KR&region=USA&culture=USA>>on 5 November 2016.
MorningstarInvestment Research Center. (2016). Wal-MartStores Inc.Retrieved from<<http://library.morningstar.com.ezproxy.ohiodominican.edu/stock/key-ratios?t=WMT&region=USA&culture=USA>>on 5 November 2016.
Ogbor,J. O. (2009). Entrepreneurshipin Sub-Saharan Africa: A strategic management perspective.Bloomington (Indiana, US: AuthorHouse.
TheKroger Company. (2016). Vendors& Suppliers.Accessed at <<http://www.thekrogerco.com/vendors-suppliers>>on 5 November 2016.
Linkto Kroger Co’s financials:http://library.morningstar.com.ezproxy.ohiodominican.edu/stock/key-ratios?t=KR&region=USA&culture=USA
Linkto Wal-Mart Stores’ financials:http://library.morningstar.com.ezproxy.ohiodominican.edu/stock/key-ratios?t=WMT&region=USA&culture=USA