Market Mad House

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

Grocery Wars

Can Kroger Keep Growing?

The winning streak at Kroger (NYSE: KR) appears to be over. The grocery giant just reported its fourth straight quarter of declining income.

The deflation of food and fuel prices caused Kroger’s net income to drop from $2.1 billion in April 2016 to $2.05 billion in July, to $2.013 billion in October to $1.96 billion on January 31, 2017. That marks the first time since 2014 that Kroger’s net income has declined.

Also falling off was Kroger’s cash from operations. Kroger started 2016 with $4.833 billion in cash from operations that fell to $4.272 billion in January 2017, according to ycharts data. That indicates Kroger is holding its’ own, but its’ business model is highly vulnerable to price fluctuations.

Kroger is Doing Better than Walmart and Target

Although Kroger is stumbling in other areas, its revenue is still growing steadily. Revenues hit an all-time high of $115.34 billion on January 31, 2017. That means Kroger’s revenues grew by $5.51 billion which is far better than the glacial rate of growth at Walmart (NYSE: WMT) and the revenue collapse at Target (NYSE: TGT).

Walmart’s revenues grew by $3.74 billion in 2016 rising from $482.13 billion to $485.87 billion. Target’s fell by $4.28 billion 2016, it started the year with $73.78 billion in revenues and finished with $69.5 billion in revenues. It looks as Kroger has managed to hurt Target badly and take some business away from the discounter.

More importantly, Kroger is in a very good position if grocery prices recover. The additional revenues will lead to more cash flow when food price prices start increasing again. The company has managed to capture a large piece of the grocery business and that piece will grow.

Strangely enough food deflation helps Kroger in the long run by helping it gobble up a larger share of the grocery business. Unlike smaller regional grocers, Kroger can afford to deep discount and invest in acquisition and new sales channels.

Kroger is poised to grow with Uber’s Help

One opportunity that Kroger is well-poised to take advantage of is delivery. Its Harris Teeter subsidiary is testing delivery by Uber in the Newport News, Virginia area, The Daily Press reported.

Harris Teeter has added Delivery with Uber to its app and website. Customers get a one hour delivery window and the ability to track orders.

This service enables Kroger to reach groups that might avoid traditional grocery stores such as Millennials who do not own cars, and residents of fast growing urban areas far from suburban supermarkets. It also taps shoppers with more disposable income; who are more likely to order higher priced goods, which can compensate for food deflation.

Another advantage to the service is that it lets Kroger compete in the take out meal market. Uber Eats can deliver ready cooked entrees from Kroger’s delis and the cafés in its larger Marketplace stores.

That helps Kroger counter Amazon (NASDAQ: AMN) and Walmart; which has tested its own Uber delivery service in Phoenix. It also lets Kroger ramp up delivery fast without having to hire a lot of new drivers or buy new vehicles.

Kroger is also in a good position to grow by acquisition. It just bought Murray’s Cheese; the New York company that runs the specialty cheese stores found in many Kroger supermarkets including Colorado’s King Soopers. That brings Kroger into the Big Apple for the first time, because Murray’s flagship location is on Bleecker Street in Manhattan’s Greenwich Village.

Kroger is a Pretty Good Investment

All this makes Kroger’s stock a pretty good investment because it is cheap. Kroger shares were trading at $29.63 on March 3, 2017.

Those shares were also paying off for investors, shareholders received a 29.59% return on equity on January 31, 2017. They also got a 12¢ dividend on February 13, 2017, that was a 2.05¢ increase over 2016 when Kroger paid a 10.05¢ dividend.

If you are looking for a low cost but fast growing retailer that’s poised for a lot of growth you should check out Kroger. The company’s food service, delivery and deep discounting capabilities put in a good position to profit from Amazon’s growth.

One way Amazon helps Kroger is by eliminating customers’ need to go to big box stores like Walmart. They shop at the grocery store instead, because many of them are ordering items like clothes and small appliances online.

Another is by getting people used to the idea of ordering stuff online. People who order their clothes from Amazon are likely to order their groceries, prescription and dinners from Kroger.

If one retailer; besides Amazon, is poised to thrive in the midst of the retail apocalypse it is Kroger. This grocer will get bigger and bigger as Amazon grows and swallow many of its smaller competitors. So Kroger will keep growing, even as other grocers struggle to survive.