Kroger Eyes New-Store Growth After Years of Declines

NEW YORK — Kroger Co. said last week that 2012 could mark the reversal of a trend in store-count decline that the company has seen for the past several years.

“Depending on how many stores we wind up closing this year from an operational standpoint, we could have a chance to wind up with a little increase in our store count this year for the first time in a while,” said J. Michael Schlotman, senior vice president and chief financial offer at the Cincinnati-based retailer.

Speaking at the Jefferies Global Consumer Conference here, Schlotman said Kroger has now largely completed a multi-year effort to exit from its least productive locations.

“What we’ve been doing pretty diligently over the last three to four years is trimming some of the deadwood at the bottom, so that the new roots can flourish,” he said. “We’ve been pretty diligent about going through the portfolio of assets, and if a store is underperforming, giving the division a while to try to turn those results around.”

If the division is unable to reverse a store’s performance, Schlotman said Kroger’s strategy has been to “cut our losses and get on with life, and reinvest the dollars that they may have been using into something more profitable.”

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As previously reported by SN, Kroger shed a net total of 25 stores last year, ending 2011 with 2,435 supermarkets. The company has continued to grow its overall revenues despite the string of closures in recent years because of its steady  increases in same-store sales.

The growth is likely to be focused in existing markets, said Scott Mushkin, an analyst at Jefferies, although he noted that Kroger now seems more receptive than it has been recently to exploring expansion in markets adjacent to its current areas of operation.

“After seeing negative square footage growth over the past few years, this [store-count growth] could give a nice lift to sales,” he said. “The company seemed more confident that its model could translate, even outside its current markets, and we would not be surprised if Kroger in the next 18 months were to enter new markets adjacent to current markets.”

Schlotman said Kroger has become confident enough in its operating model — after 34 consecutive quarters of same-store sales growth — that it can look at expanding its footprint.

“We feel pretty comfortable that the overall operating model we have might be something that’s portable,” he said. “We think there is the opportunity to test that theory in markets where we may be under-represented with stores.”

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He cited as an example the company’s expansion a few years ago in Fort Wayne, Ind., where it acquired the 18-store Scott’s Food & Pharmacy chain from Supervalu in 2007. Kroger used the acquisition to augment its own position in the market, replace some older stores and add one of its Marketplace supercenter-style locations.

“Now we’re extremely happy with the results we’re getting out of that market,” Schlotman said.

Mushkin suggested that Kroger was likely to use either the Marketplace format or its Food 4 Less discount format if it does branch out into adjacent markets.

Schlotman noted that Kroger has been pleased with the success of Marketplace, which can be tweaked to be slightly more upscale or downscale depending on the market.

“I can’t think of a market today where we wouldn’t be more than happy to put a Marketplace in,” he said.

Schlotman reiterated that Kroger plans to invest $1.9 billion to $2.2 billion in cap-ex this year.