The Role of Kroger's Convenience Stores in Future Growth
- By Shudeep Chandrasekhar
Kroger (KR) is one of the few retail giants that has grown its revenue extensively in the last 10 years.
Though the rate of growth has come down over the past year, Kroger kept expanding when every other retailer faced the wrath of soft consumer spending and the market-eroding influence of ecommerce. It's amazing to see that a company with so many different brands under a single roof has managed to keep growing as if nothing is going on around it. But the company is trading at a forward earnings multiple of 13, a low valuation considering its past performance.
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The intrinsic value of KR
Let us take a closer look at Kroger's past to understand how it managed to swim against the tide and why the the market remains underappreciative of its efforts.
There are several factors that have made this company stand out of the retail crowd just a little bit.
Kroger is a big box retailer but not like regular big box stores like Walmart (WMT) and Target (TGT). In a sense it is many retailers in one. One of the biggest contributing factors to Kroger's top line expansion is the company's acquisition strategy. Over the years the company kept buying regional stores and adding it to its offerings but did not attempt to re-brand them the way other big box retailers would.
Since these stores are regional, the untouched brands continued to perform the way they were, but the money now goes into Kroger's coffers. That minor nuance in Kroger's acquisition model has been its biggest winner.
Though many have been skeptical about this strategy of having so many different brands operating under a single roof and calling them "combination stores," Kroger has turned what could have been a disadvantage into a huge differentiating factor between the competition and itself. Preserving the brand names it bought gave it two benefits: the ability to exploit the existing brand value and the avoidance of negative local sentiment (there goes the neighborhood) that Walmart usually receives.
The Kroger stores you will see on the East Coast will be nothing like the ones you see elsewhere, and this is the company's real strength. It buys brands and lets them do their thing, only bringing in their rich expertise in inventory management, logistics and store efficiency initiatives.
The C-Store advantage
From its 2015 Fact Book -
"Kroger operates five convenience store divisions ("C-Stores") using the following
banners: Kwik Shop, Loaf 'N Jug, Quik Stop, Tom Thumb and Turkey Hill Minit
Markets. At the end of 2015, Kroger's 784 convenience stores spanned 18 states; 725
of these locations sold fuel. Subsidiaries operated 711 of the convenience stores, and
73 were operated through franchise agreements.
"In 2015, the convenience stores accounted for 4% of Kroger's total sales. C-Stores
partner (bridge) with Kroger supermarkets to enhance the ability of customers to earn
and redeem fuel rewards. Several of the C-Store banners are in major bridged
markets including Columbus, Ohio; Wichita, Kansas; Colorado Springs, Colorado, and
Memphis, Tennessee. Nearly all of the convenience stores offer the company's
successful loyalty card program. The C-Stores also offer their customers a variety of
Kroger corporate brand products."
This is another key advantage that the company has. With 784 at last count, convenience stores accounted for 4% of the company's revenue. But it can be turned into a huge advantage against the ecommerce onslaught in the future. Kroger has already introduced fresh produce in its C-stores and one can expect the company to use the C-store footprint to expand its reach to local customers.
To draw a parallel, Walmart is building out its network of urban neighborhood stores with the understanding that it needs to get closer to its customers. C-stores have the same objective in mind, and they can play a huge role in Kroger's future. Not only do they serve as convenient shop-and-go locations, but they can ably support Kroger's online initiatives by acting as pickup points. That's what ClickList is all about, and C-stores are going to be a big part of that.
Unfortunately, the market doesn't seem to see that tremendous upside to Kroger's business model, which is exactly what makes it an attractive investment right now.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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This article first appeared on GuruFocus.
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The intrinsic value of KR
