If it ain’t broke, don’t fix it.
That’s the assessment of industry analysts concerning Kroger Co.’s strategy of growing organically rather than through major acquisitions in new markets.
“Kroger’s strategy is to increase returns on current assets, and that’s working,” Andrew Wolf, managing director for BB&T Capital Markets, Richmond, Va., told SN.
“Kroger is growing volume by getting more sales per square foot, which is a time-tested, winning strategy in retail, and that’s enabling the company to outperform all the other major multi-regionals, including Safeway, Supervalu, Ahold and Delhaize.
“Kroger is also focused on driving sales productivity in the markets in which it already operates, and that’s generating strong returns on investment. It’s also allocating capital very well, so that even in these difficult times, it’s generating increased earnings and cash flow.”
One of Kroger’s main concerns in any acquisition would be the cost of the price investment it would have to make in the acquired company, Wolf noted, citing as an example Ukrop’s, the Richmond-based chain that was for sale in 2009. Kroger was regarded as a potential buyer before the chain was sold to Ahold.
“Ukrop’s was a great asset, but it’s shelf prices and gross margins were the highest in the market,” Wolf said. “For Kroger to acquire it and install its own pricing program wouldn’t have made financial sense because of the investment it would have had to make.”
Ahold invested millions to lower the shelf prices at those stores by 7% or 8%, he explained.
“Most companies Kroger could possibly acquire are probably not 7% above the market, but they would probably be priced above Kroger. When Kroger looks at a potential acquisition, it has to take into account the cost of bringing prices down to fit its model in order to drive sales and market share, and that usually negates the value of any acquisition,” Wolf explained.