Potential C-Store Sale at Center of Kroger’s New Strategy

By 
Greg Lindenberg, Editor, CSP

Kroger store

CINCINNATI -- Grocer The Kroger Co. thinks that its convenience stores might be more valuable “outside the company.” At the grocery giant’s investor conference at the New York Stock Exchange on Oct. 11, executives outlined a new strategy, dubbed Restock Kroger, to compete with Whole Foods, which was recently acquired by Amazon, as well as Wal-Mart and other grocery players.

That new plan includes the strategic review and possible sale of its nearly 800 c-stores.

Shares of Kroger, which have dropped by more than a third since Amazon unveiled its plan to buy Whole Foods in June, jumped in early trading on Oct. 11, the Financial Times reported. 

Rodney McMullen, Cincinnati-based Kroger’s CEO, addressed the tough climate for grocers. “It’s important for you to understand we are facing reality,” he told investors, according to the report. “Disruption and competition will only continue. It’s here. We know it. We have allowed others to gain market share more than we would be happy with.”

Here are the details unveiled so far of Kroger’s new strategy “to redefine the food and grocery customer experience in America” …

Restock Kroger

Loaf 'n' Jug

The Restock Kroger plan will be fueled by capital investments, cost savings and free cash flow.

The company said it expects the plan to generate $400 million in incremental operating margin by 2020. Kroger will prioritize its estimated $9 billion in capital investments to support Restock Kroger over the next three years. It also expects to generate more than $4 billion of free cash flow over the next three years, nearly double what it generated over the previous three years.

"We know that when we serve America through food inspiration and uplift, we create value for our shareholders, customers and associates," said McMullen. "We understand that today's marketplace is shifting rapidly. Kroger's success has always depended on our ability to proactively address changes by focusing relentlessly on our customers. We have the scale, the data, physical assets and human connection to win. Combining our food expertise and data analytics uniquely positions Kroger to create new and highly relevant customer experiences, delivered both digitally and in stores. Restock Kroger builds on our strengths and strategically repositions Kroger to accelerate our customer-centered efforts in order to create shareholder value."

  • Click here for CSP companion publication Grocery Headquarters’ take on the news.

McMullen also said, "We feel great about our strengths. As America's grocer, we are growing in a fragmented market. Kroger has more data than any of our competitors, which leads to deep customer knowledge and unparalleled personalization. We have incredibly convenient locations and platforms for pickup and delivery within one to two miles of our customers. We have a leadership team that combines deep experience with creative new talent. We have the scale to win with more than 60 million households shopping with us annually. In fact, we've been named America's most beloved grocery store several times. We connect personally with our associates, customers and communities to uplift and improve lives. And, we have a proven track record of consistently returning capital to shareholders through an increasing dividend and share buyback program. We believe our best days are ahead of us.”

C-store suitors?

Kwik Shop

In the most dramatic aspect of the new strategy, Kroger said it intends to explore strategic alternatives for its convenience-store network, including a potential sale.

The decision is the result of a review of “assets that are potentially of more value outside of the company than as part of Kroger,” the company said.

Kroger has hired Goldman Sachs & Co. to identify, review and evaluate the options.

"Our convenience-store management and associates are an important part of our success,” said Mike Schlotman, executive vice president and CFO of Kroger. “We value what they do and thank them for what they will continue to do as we conduct this evaluation.”

"Our convenience stores are strong, successful and growing with the potential to grow even more," Schlotman said. "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."

Kroger owns 2,793 supermarkets, about 1,425 with fuel centers, under a variety of banners in 35 states and the District of Columbia. It operates five convenience-store divisions with a total of 784 convenience stores  (726 with fuel) in 18 states: 129 Kwik Shop c-stores in Iowa, Kansas and Nebraska; 170 Loaf ‘N Jug c-stores in Colorado, Montana, North Dakota, Nebraska, New Mexico, South Dakota and Wyoming; 101 Quik Stop c-stores in California and Nevada; 117 Tom Thumb c-stores in Alabama, Florida, Mississippi and Tennessee; and 267 Turkey Hill Minit Markets in Indiana, Ohio and Pennsylvania.

It also has 2,258 pharmacies, 307 fine jewelry stores, 222 retail health clinics and 38 food production plants including Turkey Hill Dairy. The supermarket fuel centers and Turkey Hill Dairy are not included in the review. Kroger's convenience-store division ranked No. 10 on CSP's 2017 Top 202 list of the largest c-store chains in the United States.

Kroger's c-store business generated revenue of $1.4 billion and sold 1.2 billion gallons of fuel in 2016. The business unit has delivered 62 consecutive quarters of identical-store sales growth, said the company. In 2016, the c-stores accounted for 4% of Kroger’s total sales.

Possible suitors to acquire the c-stores include 7-Eleven Inc., Irving, Texas; Alimentation Couche-Tard Inc., Laval, Quebec.; Casey’s General Stores Inc., Ankeny, Iowa; and Marathon Petroleum Corp., Findlay, Ohio.

Accelerating technology

QuikStop

Kroger said it is uniquely positioned to win with customers by accelerating its digital and e-commerce efforts, applying its customer data and personalization expertise through its 84.51 business-development lab to even more aspects of the business:

  • Kroger will redesign the front end of the stores to maximize them for self-checkout, including expanding its 20-store Scan, Bag, Go pilot to 400 stores in 2018.
  • Kroger already delivers more than 3 billion personalized recommendations to customers annually. The company said it is using shopper data to create different experiences for customers.
  • Kroger will optimize the digital experience by placing the customer at the center of everything it does, providing functional information and “inspiration and personalized discovery” through recipes and product content.
  • Kroger intends to leverage customer science to make space-planning decisions to disrupt shelf, optimize assortment and improve in-stocks.
  • The company plans to use more of its capital to fund technology and infrastructure upgrades, and its intention to create alternative revenue streams.
  • It will continue building its internet of things (IoT) sensor network, video analytics and machine learning networks and complement those innovations with robotics and artificial intelligence (AI) to transform the customer experience.

Investing in brands and people

Kroger Building Cincinnati

Kroger also said it will leverage the growth of the company's portfolio of brands and invest in people:

  • The company will build on 37% growth from 2011 to 2017 (from $15 billion to $20.5 billion in annual sales). Kroger will continue investing to grow its most popular brands. And it will continue investing to avoid losing customers because of price. The company has invested more than $4 billion in price since 2001.
  • Kroger is also accelerating what it calls its “high-performance leadership culture” through talent development, training and a rebalancing of pay and benefits. Kroger plans to invest an incremental $500 million in store associates over the next three years, in addition to the company's continued efforts to rebalance pay and benefits while also focusing on certifications and performance incentives, career opportunities and training.
  • Kroger said it also intends to create shareholder value by expanding its alternative revenue streams, including driving media and advertising revenue.