According to Business Journal, retail grocer The Kroger Company (KR) recently announced the acquisition of 8 Schnuck stores in the Memphis area.
The announcement also marks the exit of St. Louis-based Schnuck Markets Inc. from the Memphis area. Kroger currently has 37 stores in Memphis area and the number would reach 43 after the acquisition. Further, the company also plans to close its two existing stores.
The acquisition was the part of the company’s long-term growth strategy as Kroger continues to focus on multiple store formats to address the varying needs of its customers. The company believes it has a competitive advantage to run multiple store formats in the same market.
Moreover, Kroger has been transforming its business model to meet the changing needs and expectations of its customers. Kroger plans to grow identical sales through merchandising and operating initiatives that improve the shopping experience and build customer loyalty. These initiatives will be funded by operating cost reductions and productivity improvements.
Kroger’s customer-centric business model provides a strong value proposition to consumers, and is well positioned to deliver higher earnings, primarily through strong identical supermarket sales growth (sans fuel). Identical supermarket sales are expected to grow 3.5% to 4.5% in fiscal 2011, up from 3% to 4% forecasted earlier.
However, the recent economic downturn and heavy job losses have transformed the way consumers used to shop. Cash-strapped consumers are now prioritizing their purchases, trading down to cheaper substitute brands and shopping for groceries from low-price leaders like Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corporation (COST).
Further, the grocery business is highly competitive and fragmented, and Kroger faces intense competition from big players, other conventional retailers and specialty gourmet retailers in respect to price, aggressive store expansion, and promotional activities to drive traffic. This may dent company’s sales and margins.
Currently, we have a long-term Neutral rating on the stock. Moreover, Kroger holds a Zacks #3 Rank, translating into a short-term Hold rating, and correlating with our long-term recommendation.
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