Kroger takes Aim at Whole Foods with new Concept

Kroger (NYSE: KR) has opened a new front in its escalating war on Whole Foods Market (NASDAQ: WFM) and Trader Joe’s. The grocery giant is testing out a new supermarket concept that could give both Whole Foods and Sprouts Farmers Market (NASDAQ: SFM) some serious competition.

The company has converted an old QFC (Quality Food Centers) store in Gig Harbor, a Seattle suburb, into something called Main & Vine, which is Kroger’s first new supermarket brand in a while. It combines Kroger’s low prices with large amounts of organic produce, a new open floor plan, and an emphasis on fresh food cooked in the store, The Seattle Times reported.

In other words, Kroger has built something that looks a lot like a Whole Foods without the high prices. Kroger’s secret weapon at Main & Vine is centralized buying and a distribution system, which enables the company to offer much lower prices than Whole Foods. This also helps it compete directly with the upstart Trader Joe’s, which rivals Kroger in its ability to offer deep discounts.

Inside Kroger’s Effort to Kill Whole Foods

There’s also some impressive new technology at Main & Vine, including computer terminals that let customers place orders for items to be delivered to their homes, The Times reported. That lets Kroger expand its business without expanding its floor space. Such a capability helps Kroger integrate its growing ecommerce and delivery capabilities with its stores.

Like Sprouts or Whole Foods, Main & Vine is also designed to be a community hub. People can hang out at a tow level café and even sit around in lounge chairs. Kroger would apparently like it to be a destination store that is fun to shop at.

Yet Kroger is also deploying some of the most traditional weapons in its arsenal at Main & Vine. They include the availability of popular brands such as Tide laundry detergent, Kroger’s every popular shopper loyalty cards, and deep discounting. Other Kroger weapons Whole Foods lacks are gasoline sales and pharmacies.

Should Whole Foods be Worried about Kroger?

Whole Foods management team should definitely be worried about Kroger. The Cincinnati-based behemoth has launched a major new offensive into the high end area of the grocery business.

Most worrying for Whole Foods should be the fact that Main & Vine is only part of Kroger’s broad push into its sector. In recent years, Kroger has purchased the online vitamin retailer Vitacost, bought Harris Teeter a well-respected high-end grocer in the mid-Atlantic region, and acquired Roundy’s, the Milwaukee-based company that owns the upscale Mariano’s supermarkets in the Chicagoland region.

Kroger has also used its leverage with suppliers to create some very profitable new brands. Sales of its Simple Truth private label of organic and natural products hit $1.2 billion in 2014. Simple Truth has been one of Kroger’s biggest successes in recent years; its sales increased by 10% during the second quarter of 2015, Chief Financial Officer Michael Schlotman told analysts in September.

Would Fresh Market Add Value to Kroger?

There has also been speculation that Kroger will try to buy out Fresh Market (NASDAQ: TFM). Fresh Market is a Southern specialty high-end grocer that operates around 183 stores in 27 states. Fresh has been struggling lately and its management team has been talking of selling out.

Fresh Market would be a relatively cheap acquisition for Kroger. It had a market capitalization of $1.07 billion and an enterprise value of $1.069 billion on Feb. 22, 2016, but would it add value. That’s hard to say because Fresh Market reported an income of just $62.81 million and a revenue of $1.818 billion on Oct. 31, 2015.

Like Roundy’s, Fresh Market has experienced impressive revenue growth that has not translated into cash. Fresh Market reported a TTM revenue of $1.465 billion in October 2013 that grew to $1.698 billion in October 2014 and $1.818 billion in 2015, yet it reported just $150.34 million in cash from operations and a free cash flow of just $1.82 million for the third quarter of 2015.

It looks as if Fresh Market simply lacks the resources or the cash needed to survive and compete in today’s grocery business. Fresh Market had just $37.33 million in cash and short-term investments on Oct. 31, 2015, meaning it might be teetering on the verge of collapse.

Why Kroger does not Need Fresh Market

Yet Kroger might want to acquire Fresh Market because its operations overlap with its existing chains like Harris Teeter. The only state where Fresh Market operates that lacks a major Kroger presence is Florida. Fresh Market has around 40 stories in the Sunshine State, which does seem like the kind of footprint that Kroger likes.

The success of Simple Truth demonstrates that Kroger can compete aggressively in the organic and natural segment without specialist stores. Kroger does not need Fresh Market, even though Fresh Market obviously needs a deep pocketed benefactor like Kroger to survive.

Instead of buying Fresh Market, Kroger will probably concentrate upon expanding its existing brands and new concepts like Main & Vine. If it expands again, Kroger will probably buy up more troubled regional grocers to expand its footprint, and a likely target is Winn Dixie, which would give Kroger a major presence in Florida.

Another possibility is that Kroger will take over select Fresh Market locations. Main & Vine could be the prototype for transforming those stores into something more successful. Whole Foods had better keep a close watch on Kroger; the nation’s largest grocer could soon be in a position to steal most of its business. Main & Vine proves that Kroger can successfully copy Whole Paycheck’s business model and do a better job of executing it.

Disclosure the blogger owns shares of Kroger.