Kroger Is Winning the Grocery Wars

It looks like Kroger (NYSE: KR) has won a major victory in the never ending grocery wars. News reports indicate that Kroger’s archrival, the privately held Safeway, which merged with Albertsons last year, is closing stores and selling large numbers of locations.

The shrinkage at Safeway includes:

• The sale of 146 stores in Arizona, Nevada, Oregon, California and Washington State to Haggen, a privately-held chain based in Washington State. The Arizona Republic reported that Haggen plans to convert the stores into farmer’s market type locations comparable to Sprouts Farmers Market (NASDAQ: SFM) or Whole Foods Market (NASDAQ: WFM).

 

• The closing of nine Safeway stores in the Denver area. Safeway spokeswoman told Kris Staaf told The Denver Post that stores were closing because they were unprofitable. Denver is a highly competitive grocery market dominated by Kroger subsidiary King Soopers. Walmart Stores Inc. (NYSE: WFM), Whole Foods Market and Sprouts compete heavily in the Denver market. Trader Joes recently entered the Denver grocery as well. Most of the stores were located in middle class suburbs.

 

• Safeway’s Vons subsidiary is closing a number of stores in Central California. Two Vons in Fresno are scheduled to close by June 12, TV station KFSN reported. Two Vons in the Bakersfield area are scheduled to close by May 16, according to a report from TV Station KERO.

• Safeway/Albertsons is closing stores elsewhere in Colorado. At least one Safeway near Grand Junction, Colorado, is scheduled to shut down by June 4. An Albertsons in Colorado Springs closed on March 23. Albertsons spokesman Dennis McCoy told The Colorado Springs Gazette the closing had nothing do with the merger.

 

• “That store basically has not been profitable for quite some time, despite the best efforts of our company and associates there and the location,” McCoy said. “We just don’t think (we’re) going to be able to reposition it to better compete in the marketplace. That’s why we’re closing it.”

Like Denver, Colorado Springs is a highly competitive grocery market where Safeway and Albertsons compete directly with Kroger’s King Soopers, Costco Wholesale (NASDAQ: COST), Sprouts and Walmart. In Grand Junction, Safeway competes with another Kroger subsidiary, City Market.

Is Safeway Competitive?

It looks as if Safeway is having trouble competing directly with Kroger. One reason for this could be Kroger’s deep discounting, which is becoming more aggressive. When I recently visited City Market’s website, I noticed that Kroger was not only allowing me to load digital coupons to my rewards card account but to use select coupons up to five times.

The strategy seems to be paying off; when my brother and I stopped at a Safeway store in Canon City, Colorado, which competes directly with City Market, he commented that Safeway seemed empty. In contrast, the City Market location just a block away was crowded.

Safeway, it seems, is having a difficult time adjusting to a changing grocery business. It also seems to be burdened with a lot of profitable stores. My guess is that the current round of closing at Safeway is only the beginning. Its owners, Cerberus Capital Management, will probably shut down a lot of stores and sell off many others.

This will occur because Safeway/Albertsons simply is not that profitable. Financial figures indicate that it simply is not capable of generating cash like Kroger is.

Safeway and Albertsons currently have around 2,230 stores—almost as many as Kroger—but they had combined revenues of $60 billion in 2014, The San Francisco Chronicle reported. In contrast, Kroger, which operates 2,619 supermarkets, reported a TTM revenue of $108.47 billion on January 31, 2015. Kroger’s TTM revenue grew by 8.55% in 2015.

One reason why Kroger’s revenues have grown so fast is its willingness to diversify into other areas, including filling stations, convenience stores, and jewelry stores. Kroger also operates a large number of marketplace stores that sell a wide range of merchandise comparable to that found in a Walmart Supercenter.

Safeway and Albertsons, in contrast, have concentrated on the grocery business, which has lower profits. Another problem facing Safeway is that the supermarket business in the United States is saturated. There might be no room for additional markets even with the massive expansion that chains like Trader Joes, Walmart, Sprouts and Whole Foods are engaged in.

My prediction is that we are about to see large numbers of closings in the grocery business followed by consolidations. One interesting possibility is that Safeway/Albertsons will end up selling a lot of stores to chains like Sprouts or even Kroger.

It looks like Safeway/Albertsons will have to make substantial changes to its business model if it wants to hold a profitable IPO. There are rumors that Cerberus is planning for a Safeway IPO sometime this year. One has to wonder if that company will be able to match Kroger’s level of efficiency.

The blogger and author of this piece proudly owns shares of Kroger and plans to keep them for a long term.