Even if you don’t live in any of the 31 states in which Kroger Co. (NYSE: KR) does business, you’ve probably heard of at least one of its grocery store brands, such as Kroger, Ralphs, King Soopers, City Market, Owen’s, Baker’s, Harris Teeter and many more.
You might not know that the Kroger story begins with quite possibly the worst business blunder in the history of grocery stores.
In the 1880s Barney Kroger was the budding manager of a grocery store. He had gotten his start at the age of 13 as a door-to-door coffee salesman. By his early 20s Kroger had risen to manager of the Imperial Tea Company. He felt burned after being denied the opportunity to become a partner in the operation and immediately walked away from the company.
Kroger opened his own grocery store not long after – a single location of The Great Western Tea Co. Soon one location became four. Then 40.
By the time Kroger sold his controlling interest in the company to Lehman Brothers in 1928, his empire had grown to more than 2,000 stores that generated annual sales that would exceed $2 billion in today’s dollars.
Kroger grew his empire by paying attention to two key factors: innovation and margins.
Though the grocery industry has always been a notoriously low-margin, high-volume business, Kroger pioneered the model through which grocery stores cut out the middleman – the producer – as much as possible. His grocery stores became the first to feature their own bakeries, producing huge quantities of affordable bread and cutting out the local bakeries that used to supply them.
Bakeries pushed back, but Kroger had seen the promise and profitability of controlling his own supply. Reporters dubbed the struggle that ensued the “Bread War.” I like to think of it as a major milestone for modern grocery stores. It wasn’t long before Kroger purchased its own meat packing facilities and began selling its own meats to consumers.
Still an Innovator
The company’s reputation as a pioneer lives on. Well after Lehman Brothers purchased Barney Kroger’s controlling interest, the company would lead the way by hiring women as cashiers and introducing the first electronic scanners. By investing in the future and selling many of its own products, Barney Kroger’s focus on margins and innovation is alive and well.
Today, Kroger uses infrared scanners to measure the flow of traffic in a store and real-time analytics to anticipate long lines and adjust staffing levels to meet those needs.
Kroger’s focus on innovation and margins doesn’t stop with technology.
One of the things that I immediately notice when I visit the local King Soopers or City Market is that the company’s private label items are quite good. And this is no accident.
Kroger now operates 37 manufacturing plants that produce 40% of the roughly 12,000 private label goods sold in its stores. It has also been at the forefront of digital coupons and fuel rewards – Kroger owns 1,350 branded gas stations – as well as shifting consumer interest in natural and organic items.
The company recently announced that more than 17 million of its customers have taken advantage of Kroger-branded apps by creating a digital account. It also reported that in certain markets, roughly 20% of its users take advantage of digital coupons.
Kroger is also ready for the next step in grocery innovation with its online ordering platform, largely based on a system developed by Harris Teeter that Kroger adopted after its 2014 merger with the company.
The Grocery Stock Leader
It is this commitment to growth and innovation in the grocery industry that has fueled 54% gains for Kroger shares in 2013, 62% gains in 2014 and 16% gains so far in 2015. We’ve also seen quarterly dividends rise from $0.08 per share to $0.11 per share in that time.
Kroger continues to surpass its peers through solid execution and investments in the future. Though the stock has risen nearly 200% in the past three years it still trades at a reasonable valuation – roughly 19 times 2016 earnings – which is expected to grow at low double digits.
With its commitment to innovation and margins, Kroger has continued to impress investors and customers alike, and the company shows no signs of slowing. Can you imagine if the partners of the Imperial Tea Company had made Barney Kroger a partner when they had the chance?
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