Kroger Co (NYSE:KR) said at its annual investor conference that it is looking at selling off its gas station convenience store business, including KwikShop, Loaf’N Jug, and Turkey Hill Minit Markets. The supermarket giant has been facing increased competition from Wal-Mart Stores Inc (NYSE:WMT), Amazon.com, Inc. (NASDAQ:AMZN), and Costco Wholesale Corporation (NASDAQ:COST) and is hoping to take advantage of the wave of mergers taking place right now in the field.
Kroger to Sell Nearly 800 Convenience Stores in 18 States
Cincinnati-based Kroger gave investors reason to cheer when it announced it might sell its convenience store business in an effort to fight off stiff competition from Amazon–which recently purchased Whole Foods Market Inc. this past summer for $13.7 billion–Walmart, and Costco.
After an internal review, the company found that it might have more value outside of Kroger. Kroger has hired Goldman Sachs Group Inc (NYSE:GS) to identify and review the process.
“Our convenience stores are strong, successful and growing with the potential to grow even more,” said Michael Schlotman, the company’s executive vice president and chief financial officer. “We want to look at all options to ensure this part of the business is meeting its full potential.”
“Considering the current premium multiples for convenience stores, we feel it is our obligation as a management team to undertake this review,” Schlotman’s statement also said.
The company’s convenience store operations includes more than 780 stores and 11,000 employees, spanning 18 states (with 68 franchise operations). A sales of the convenience store business would leave Kroger, which is one of the world’s largest food retailers, with 2,800 supermarkets.
In 2016, Kroger’s convenience store business generated $1.4 billion in inside sales. Including fuel, Kroeger’s convenience store operations generated $4.0 billion in total sales in 2016.
If Kroger decides to sell its convenience store business, it will have a large number of potential suitors. The biggest names include 7-Eleven and Casey’s General Stores Inc (NASDAQ:CASY) Canadian convenience store chain Alimentation Couche Tard Inc (TSE:ATD.B) could also be in the running. Couche Tard recently purchased Texas-based CST Brands, Inc. for $3.4 billion.
In the U.S., Couche-Tard operates under the Circle K brand. The company is now the second-largest convenience store operator in the U.S (behind 7-Eleven) with more than 5,300 locations.
Kroger has been under serious pressure to prove that it can adapt to the ever-changing retail landscape. On the day Amazon announced it purchased Whole Foods, Kroger lost more than $2.0 billion in market value. This proves that investors appear to have more confidence in Amazon’s ability to be a dominant industry player in the grocery industry than Kroger’s ability to change with the times.
However, Kroger is making baby steps. The company recently said it would expand self-checkout registers to 400 supermarkets from the current 20 by next year. It is expanding the number of store that offer its “click and collect” (online order and pickup) service to more than 1,000 by the end of 2017. Kroger is also expanding its home delivery service, making it available at more than 200 stores by the end of the year.
Kroger Sales a Sign of Increased Competition with Wal-Mart and Amazon
In light of Amazon’s increased market penetration and Wal-Mart’s dominance, grocery store operators like Kroeger are under intense pressure to show investors they can continue to be industry leaders. But that might be tough. Even before Amazon surprised the markets and announced it was acquiring Whole Foods, Kroger had posted two straight quarters of declining same-store sales, the worst retreat in more than a decade. Before that, Kroger had posted an impressive 13-year streak of quarterly same-store sales increases.
Meanwhile, Amazon is the dominant online retailer and is expanding into physical grocery stores. Wal-Mart, on the other hand, already has a big presence in the U.S., with more than 11,000 locations, and is ramping up its online presence.
In the shadows of companies like Amazon, Wal-Mart, and Costco, are struggling retailers that have either had to lay off staff and close stores to stay operable or they have simple shuttered their doors and given up.
So far in 2017, the number of U.S. store closure announcements has increased 203% year-over-year to 6,121. But it’s not all bad news; some brands are opening stores. Wal-Mart expects to open 280 stores in fiscal 2018 and another 280 stores in 2019. Two other brands looking to expand are discount chains Dollar General Corp. (NYSE:DG), with 1,290 planned openings, and Dollar Tree, Inc. (NASDAQ:DLTR), with 650 openings announced this year.
The writing is on the wall for retailers that can’t compete in this new age, and many think traditional grocers are on the same path. So just how will Kroger, a company challenged by already razor-thin margins, compete with Wal-Mart and Amazon?
At its annual investor conference this past week, Kroger provided a multi-pronged approach to success. First, it is boosting its digital and e-commerce efforts. It will also expand partnerships to fund technology and infrastructure upgrades and create additional revenue streams.
As noted, Kroger is looking at selling its convenience store business. Kroger also plans to attract and develop talent by investing $500 million in human capital over the next few years.
There’s more. Despite being the largest grocery store chain in the country, Kroger wants to compete with Whole Foods, which is an organic supermarket chain, by promoting more local vendors. Amazon, meanwhile, it stepping back from doing the same thing.
Kroger will allow food sampling and in-store presentations about local brands. For its part, Amazon has decided to cut back on local initiatives; this includes no longer allowing brand representatives to promote their products in store or ensure their products are in stock and displayed correctly.
Kroger is hoping that this, along with other upgrades, will help it win the grocery war with Amazon and Wal-Mart. In fact, Kroger is pretty optimistic about its long-term future. “It kind of legitimizes what we’re doing,” said Jill McIntosh, vice president of natural foods and merchandising, regarding how Krogers’s move into natural foods will be affected by Amazon’s acquisition of Whole Foods. “They’re getting into brick-and-mortar, and that’s what we already do. We’ll keep doing what we’re doing. We are winning, and we’re doing well in natural foods.”
McIntosh went on to add that Kroger’s natural foods segment is “probably the strongest growth area in the company.” In 2016, total sales of natural and organic products was more than $16.0 billion. Its Simple Truth store brand of natural and organic products brings in $1.7 billion annually in sales.
Kroger might think it’s winning the grocery wars, but the battle is still in its infancy. Amazon, Wal-Mart, and Costo are now big players in a field Kroger once dominated. On top of that, discount grocers, including Aldi, Lidl, and Dollar General are collectively opening thousands of stores.
And with cash-strapped Americans looking to save money, Kroger’s might not be their first choice. A 2014 study found that Aldi’s prices were around 22% cheaper than Kroger’s. Aldi already has more than 1,600 stores in the U.S., but plans to open 600 more over the next couple of years.
German retailer Lidl, meanwhile, has more than 10,000 stores around the world and opened its first store in the U.S. this past June. The company hopes to have 100 stores along the East Coast operational by mid-2018. Grocers in close proximity to Lidl are already lowering their prices to compete.
This comes at a time when retail space devoted to food sales is at record levels and total U.S. grocery sales are on the decline. Moreover, aggressive price cutting wars will also undoubtedly further exacerbate already tight margins at Krogers and elsewhere.
“CLOSER LOOK: Kroger may sell off more than 700 convenience stores,” Dayton Daily News, October 14, 2017.
“Couche-Tard could add to empire with purchase of Kroger convenience stores,” The Globe and Mail, October 11, 2017.
“Store Openings and Closings Tracker,” Fung Global Retail Tech, October 13, 2017.
“Amazon Puts Whole Foods on Fast Track to Conventional Supermarket,” The Wall Street Journal, September 21, 2017.
“As Amazon takes Whole Foods national, Kroger thinks local,” CNBC, September 25, 2017.
“We are winning,’ Kroger exec says of Whole Foods battle,” Cincinnati Business Courier, October 17, 2017.
“Cheapest Grocery Store: Walmart, Kroger, or Aldi?” Cheapism, March 26, 2014.
“A German grocery chain with the power to cripple Aldi, Whole Foods, and Trader Joe’s is about to invade America,” Business Insider, February 15, 2017.