KROGER SEEN INTEGRATING NONFOOD OPERATIONS

JOEL ELSON / CHAPIN CLARK

CINCINNATI -- Kroger Co. will consolidate its nonfood buying and merchandising operations at its corporate headquarters here, according to industry observers.

The move, which breaks with the chain's tradition of decentralized operations throughout Kroger marketing areas, is expected to have a significant effect on the company's operations and bottom line.

Under the new arrangement, purchase prices, slotting allowances and promotional fees for all general merchandise and health and beauty care, including drugs, will be negotiated centrally, observers said. Extraneous stockkeeping units -- and regional buying staff -- will be eliminated, and penetration of Kroger-brand general merchandise and HBC products will increase.

Kroger officials announced the changes to a meeting of vendors and food brokers in Fort Mitchell, Ky., late last month, but the company declined to confirm the program to SN or provide details. Additional information was provided by industry sources and by financial analyst Mark Husson of Merrill Lynch & Co. Husson and other analysts at the company issued an advisory to investors.

Paul Bernish, Kroger's director of public affairs, said, "We met with our drug and general merchandise vendors and discussed some changes in the way we're operating with them in the future." He declined to elaborate.

According to industry observers, the scope of Kroger's initiative may indicate the supermarket giant is not shopping itself around as an acquisition candidate, contrary to recent industry speculation that a deal with Safeway, Pleasanton, Calif., was imminent.

A spokeswoman at Safeway declined to comment.

The Kroger restructuring will affect the company's Dillon Stores, City Markets, Fry's Food Stores of Arizona and King Soopers divisions, said vendors who attended the meeting.

"It's a step down a road Kroger has been slowly and systematically taking," Husson told SN. "It realized a couple of years ago that Kroger central was just adding up the numbers."

Husson said Kroger in the past had not made a substantial effort to realize the synergies and economies of scale that might benefit a retailer of its size. "Certainly, manufacturers were not bending over backward to provide the best national prices" to individual Kroger marketing areas, he said.

"Manufacturers are under enormous pressure to offer national players something over and above what is available to regional operators."

Noting that Wal-Mart Supercenters, Bentonville, Ark., has long run its buying operations centrally, and that American Stores Co., Salt Lake City, has attempted the same, with rockier results, Husson said, "Kroger is still ahead of the curve. They are ahead of Safeway, for example; they're ahead of Ahold, Fred Meyer."

In a bulletin issued to investors last week, Merrill Lynch praised the changes being made in Kroger's nonfood operations and rated the company a "long-term buy" opportunity.

"Gross margins should improve, labor costs should improve, working capital should reduce, the Kroger brand should be exalted, while there is not much local feel in window cleaners, mascara and scrubbing brushes that needs protecting," the report read. "Above all, the consumer gets better overall prices, clearer ranges and better promotions -- all of which should help to continue to drive Kroger's above-average industry comps."

The report noted general merchandise, HBC and drug categories affected by the changes generate 10% to 12% of total Kroger marketing area sales and between 15% and 20% of profitability.

Husson said Kroger's push to centralize nonfood buying and merchandising indicates the retailer is not looking to be acquired, at least in the short term, as market speculation had intimated.

"I don't think Kroger would bother to do any of this stuff if they didn't intend to be around six months or a year from now," Husson said.

On the contrary, he added, Kroger may be building to an acquisition of its own. "This [initiative] is a real central leverage Kroger could bring to any acquisition."

"Here is a program that can be injected into any target in its entirety in month one," stated the Merrill Lynch report.

According to a broker who attended the Fort Mitchell meeting, Terry Cox, Kroger's vice president of drug, general merchandise, pharmacy and the Peyton nonfood distribution system, spearheaded the retailer's move into centralized nonfood purchasing and initiated the restructuring.

Kroger tapped the Kroger marketing areas and Peyton nonfood distribution centers to fill many of the new corporate HBC and general merchandise management slots.

Corporate nonfood category managers and buyers assumed their new positions at the general office in July and began scheduling buying appointments in late August, said suppliers.

"In realigning drug and general merchandise to a centralized procurement system from its previous decentralized program, Kroger has assembled what it considered its top HBC and general merchandising talent from its various KMAs [Kroger marketing areas]," said a broker who was invited to the Fort Mitchell meeting.

Nonfood buyers and merchandisers at the 11 marketing areas will become more involved with implementing corporate programs, the broker added.

Under the centralized procurement initiative, corporate nonfood category managers will work in concert with marketing areas' nonfood departments to identify any unique or seasonal items the marketing areas might need to incorporate into sales plans, said vendors.

While Kroger previously purchased some nonfood centrally at its general office, final buying decisions for nonfood items and promotions rested with individual marketing areas, another broker explained.

"An item presented to the Kroger general office would either be accepted and recommended to the KMAs or be rejected. But you still had the option of calling on the individual KMAs, and so five or six might purchase it," said the broker.

Kroger's shift is in keeping with "today's predominant model that centralizing administrative functions avoids having to reinvent the wheel again and again in each division, and the wheel you do invent is made up of your better people," said a wholesaler who asked to remain anonymous.