Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Good Stocks

Alco’s Demise Reveals Kroger’s Incredible Ability to Discount

America’s second largest retailer and largest grocer, Kroger Inc. (NYSE: KR), has quietly become one of the largest and most effective discounters in the United States.

I came face to face with Kroger’s discounting ability on a recent shopping trip to the small town of Buena Vista, Colorado, where there are three chain retailers: Family Dollar Stores (NYSE: FDO), City Market (a local Kroger’s subsidiary), and Alco, a publicly-traded small box discount chain based in Texas. The entire Alco chain has gone bankrupt and is being liquidated in going-out-of-business sales before shutting down completely.

After visiting both Alco’s going-out-of-business sale and City Market, I made a startling discovery: many of the everyday prices at City Market were lower than Alco’s going out of business sale. Alco was selling its house brand tomatoes at $1.29 for a 14.5-ounce can with a 30% liquidation discount, so the final price came out to 90¢ a can. The normal price of a comparable can of tomatoes at City Market was 75¢. A recent special at City Market lowered the price of a 14.5-ounce can of tomatoes to 50¢ for persons with a Kroger loyalty card.

Family Dollar does sell tomatoes for around 77¢ a can, but its cans are 10 ounces. In other words, a shopper gets more for less at City Market. Kroger’s grocery prices now rival Walmart Stores Inc. (NYSE: WMT) and often best them.

Alco’s demise also shows how potent a force Kroger has become in retail. Alco was hardly a small chain; it operated 198 stores in 23 states and was a publicly traded company, yet it could not compete.


Kroger’s Incredible Rate of Growth

This discounting seems to be driving Kroger’s rather incredible rate of growth. Between October 2013 and October 2014 the grocery giant’s revenue grew from $99.17 billion to $106.48 billion, an increase of $7.31 billion. As I’ve pointed out elsewhere, Kroger’s revenue is now approaching that of Costco Wholesale (NASDAQ: COST), which reported a TTM revenue of $114.49 billion on Nov. 30, 2014.


Kroger’s rate of year to year quarterly TTM revenue growth, 11.2% growth, actually exceeded Costco’s 7.39%. That indicates that Kroger seems to be growing faster than Costco. It also means that the size of Kroger’s revenue could rival Costco’s at some point in the next year or two.

What’s also interesting is that Kroger appears to be taking market share from other stores, including Target (NYSE: TGT), Safeway (NYSE: SFWY) and Walmart. Safeway, which has been acquired by AB Acquisition LLC, will be combined with Albertson’s in an attempt to create a rival to Kroger. Target’s TTM revenue actually fell slightly between October 2013 and October 2014. Target reported a TTM revenue of $73.81 billion in October 2013 and $73.7 billion in October 2014. also reported that Target’s share of the U.S. retail market fell slightly between 2012 and 2013, dropping from 2.5% to 2.4%.
Safeway actually did fairly well; after years of falling revenue, it displayed significant growth. In September 2013 Safeway reported a TTM revenue of $34.63 billion in September 2013, which increased to $36.77 billion in September 2014, an increase of $2.14 billion.

Both Walmart and Target are also plagued by falling store visits. Foot traffic at Target stores fell by 2.3% in the first quarter of 2014 and 1.3% in the second quarter. In November 2014 Walmart announced that its same-store sales were finally rising again after seven straight quarters of decline. Walmart’s same store sales grew by .5% in Third Quarter 2014.

It looks as if both Walmart and Target are losing significant market share to Kroger. One reason for that may be that Americans have figured out that they don’t have to drive all the way to the Supercenter to find low prices. They can find them at the neighborhood Kroger’s store.

Kroger Is Now the 800-Pound Gorilla

Walmart and Target certainly have their work cut out for them if they want to maintain their positions in the retail market. Safeway will have even more work to do if it wants to become a credible rival to Kroger.

One other thought here: Around 20 years ago, when I was working as a local newspaper reporter here in Colorado, a City Market executive once told me that Walmart was an 800-pound gorilla his company could not compete with. The executive whose name I forget even said that City Market was afraid to open stores in towns where Walmart was operating. Times have certainly changed; Kroger has grown into an 800-pound gorilla in its own right that is capable of taking on Walmart at its own game and beating it. Today it’s probably Walmart managers who are scared that Kroger might come to town.


One wonders how other supermarket chains are supposed to compete with something like Kroger. Its sheer revenue and ability to discount makes it one of the great American retail success stories. It’s also in a position to do some real damage to both Target and Walmart and to drive a lot of smaller chains out of business. In particular, Kroger is in a position to destroy so-called store operators like Family Dollar, Dollar General (NYSE: DG), and Dollar Tree Stores (NASDAQ: DLTR) and to wreak a lot of havoc upon drug store chains like Walgreen, now part of the Walgreen Boots Alliance (NASDAQ: WBA), if it wants to.