Monday, April 7, 2008® 2008, Tony Gauvin, UMFK1. 7-Apr-08® 2008, Tony Gauvin, UMFK2 Overview Who...

Monday, April 7, 2008 ® 2008, Tony Gauvin, UMFK 1

A Strategic Management Case StudyA Strategic Management Case Study

7-Apr-08 ® 2008, Tony Gauvin, UMFK 2

OverviewOverviewWho we are,

What we sell, Where we are

A Brief history of KrogerValue Statement Mission and VisionExternal Assessment

- EFE Matrix- CPM Matrix

Internal Assessment- Financial Condition- IFE Matrix

Strategy Formulation- SWOT Matrix- Space Matrix- IE Matrix- Grand Strategy Matrix- Matrix Analysis- QSPM Matrix

Strategic Planning for the Future

EPS/EBITDecisions/Implementation/

Evaluation

Kroger 2006 Update


Who we areWho we are• Headquartered in Cincinnati, Ohio, The Kroger Co. is one of the largest retailers in the United States based on

annual sales, holding the #26 ranking on the Fortune 100 list. Kroger was founded in 1883 and incorporated in 1902.

• At the end of fiscal 2006, Kroger operated (either directly or through its subsidiaries) 2,468 supermarkets, 631 of which had fuel centers. Approximately 39% of these supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land. See Section II of this Fact Book for more information about our supermarket operations, and Section III for more information about our supermarket fuel centers.

• In addition to supermarkets, Kroger operates (either directly or through its subsidiaries) 779 convenience stores and 412 fine jewelry stores. Subsidiaries operated 687 of the convenience stores, while 92 were operated through franchise agreements. Approximately 44% of the convenience stores operated by subsidiaries were operated in Company-owned facilities.

• The Company also manufactures and processes some of the food for sale in its supermarkets. As of February 3, 2007, the Company operated 42 manufacturing plants.

• All of the Company’s operations are domestic.


Key facts Key facts

• Kroger operates– 2468 supermarkets

• 631 have fuel centers• 1900 have pharmacy

– 779 Convenience Stores – 412 fine Jewelry stores– 42 Manufacturing plants

• 15 Daires,3 ice cream plants and 2 cheese plants• 7 Bakeries• 3 Beverage plants • 3 Meat Packing plants

– 44 Distribution Centers in 3 tier• Local (200 mile)• Higher value slow turn, H&BA items (350 mile)• Seasonal and promotions


What We SellWhat We Sell

http://www.kroger.com/

http://www.ralphs.com/

http://www.kingsoopers.com/

http://www.citymarket.com/

http://www.dillons.com/

http://www.smithsfoodanddrug.com/

http://www.frysfood.com/

http://www.qfconline.com/

http://www.bakersplus.com/

http://www.calabell.com/

http://www.owensmarket.com/

http://www.jaycfoods.com/

http://www.hilander.net/


Where We AreWhere We Are


Brand StrategyBrand Strategy

• Private Selections– Gourmet and upscale

• Meet or beat national brands

• Banner Brand– “Try It, Like, It or get the National Brand Free”

• Equal or better to corresponding consumer goods

• Value – Good quality at an affordable price


HistoryHistory1883: Bernard H. Kroger and B.A. Branagan open the Great Western Tea Co., the beginning of the Kroger Co. empire.

Kroger is the first grocer to advertise in newspapers. 1884: Branagan sells Kroger his share of the business for $1,500. 1885: The company expands to four stores in Cincinnati, making the company one of the first chain store operations in

America. 1901: It becomes the first store to bake its own bread. 1902: With 40 stores and a factory in Cincinnati, Kroger incorporates and changes the company's name to Kroger

Grocery and Baking Co. Kroger buys Nagel Meat Markets and Packing House, and makes the grocery stores the first to include meat departments.

1912: Kroger makes his first long-distance expansion, buying 25 stores in St. Louis, Missouri. The company buys a fleet of trucks, enabling Kroger to move into Detroit, Michigan, Indianapolis, Indiana, and Springfield and Toledo, Ohio.

1920: The company purchases Piggly-Wiggly stores in Ohio, Tennessee, Michigan, Kentucky, Missouri, and Oklahoma and buys most of Piggly-Wiggly's corporate stock. The public begins to accuse food chains of driving small merchants out of business by using unfair business practices.

1928: Kroger sells his shares in Kroger for more than $28 million. William Albers becomes president. 1929: Kroger stores number 5,575. 1930: Morrill introduces the Kroger Food Foundation, making it the first grocery store company to test food

scientifically in order to monitor the quality of products. Kroger manager, Michael Cullen, suggests opening bigger self-service supermarkets, but Kroger executives disagree.

1930: Cullen leaves Kroger and forms the first supermarket, King Kullen, in Jamaica, New Jersey. It introduces frozen foods and shopping carts. The Kroger Food Foundation invents a way of processing beef without chemicals so that it remains tender, calling the product "Tenderay" beef.

1940: Kroger sells its stock in Piggly-Wiggly stores. 1946: The company changes it’s name to the Kroger Co.


HistoryHistory1947: Kroger opens its first egg processing plant in Wabash, Indiana, to further ensure egg quality. Hall merges the 45

private-label brands into one Kroger brand, and introduces the blue and white logo. 1948: Kroger joins six other firms to establish the Top Value Stamp Co., trying to bring customers into the stores with

stamp collecting promotions. 1952: Kroger sales top $1 billion. 1960: The company begins its expansion into the drugstore business. It buys Sav-on drugstore chain and makes its

owner, James Herring, the head of the drugstore division. 1961: The first SupeRx drugstore opens next to a Kroger food store in Milford, Ohio. 1963: Sales reach $2 billion. 1971: Enforcing antitrust laws, the Federal Trade Commission proposes a consent order that requires the company to

divest itself of three discount food departments. Kroger settles without admitting any violation of antitrust laws, but sells three food departments. FTC prohibits company from purchasing any food store or department in nonfood stores in which the purchase would lessen the competition in that city or county. The government begins to control prices of products.

1972: To increase the accuracy and speed of checkout systems, Kroger, in partnership with RCA, becomes the first grocery company to test electronic scanners to read prices on products under actual working conditions. Kroger introduces an advertising promotion that compares their prices with its competitors' on 150 products a week; the figures are based upon surveys of housewives.

1974: Net profits of the top food chains are up 57%, despite government controlled prices. The FTC reveals illegal business practices of several chains, including Kroger. The company settles out of court on an antitrust claim for fixing beef prices. The FTC sues Kroger for violations of its 1973 trade rule, which forces stores to stock a sufficient supply of specials to meet anticipated demand and to give rainchecks when supplies run out.

1977: Kroger consents to the FTC order. 1978: The FTC rules that Kroger slogans like "Documented Proof: Kroger leads in lower prices" are unfair and

deceptive because the items surveyed excluded meats, produce, and house brands. A controversy ensues when the Council of Wage and Price Stability expresses concern that tougher standards for Kroger might prevent the dissemination of food price information in the future.


HistoryHistory

1981: The company acquires Treasury Drug Stores from J.C. Penney Co. Kroger begins marketing its Cost Cutter brand products.

1983: Absorbs Dillion Companies, Inc. and begins to operate stores coast-to-coast. Kroger settles out of court with the FTC.

1984: Kroger and Wetterau form a grocery wholesaler for Michigan called FoodLand Distributors. 1985: Hook Drugs, Inc. merges with Kroger. Acquires Price Savers Wholesalers, Inc. and M&M Supermarkets, Inc..

Dillion Cos., Inc. purchases Turkey Hill Dairy, Inc. 1986: The company sells most of its interest in Hook and SupeRx drug chains to Hook-SupeRx, Inc. (HSI), a privately

held company, for approximately $415 million. 1987: Kroger sells more of its drug stores to Hook-SupeRx, Inc for $88 million. In total, the company has sold

approximately 658 stores. 1988: Kroger faces takeover bids from the Dart Group Corp. and from Kohlberg Kravis Roberts, whose highest bid

tops $5 billion. Kroger rejects the bids. To ward off the buyout, CEO Everingham and president Joseph Pichler borrow $4.1 million to pay a special dividend to stockholders and to buy additional shares for an employee stock plan, which is increased by 30%.

1990: The company sells to K-Mart its equity interest in Price Savers Wholesale, Inc. Kroger makes its first major acquisition since 1988 by purchasing Great Scott! supermarkets in Michigan.

1991: Kroger now operates 1,263 food stores and 940 convenience stores, and owns 37 processing plants, including 11 bakeries, 15 dairies, and facilities for processing cheese and various other dairy products. Sales reach $21.3 billion, and net income is $101 million.

1993: Kroger, seeking to capitalize on positive views of low-interest credit cards, begins issuing its own co-branded credit cards. Acquires 11 Houston-area supermarkets from AppleTree Markets Inc. Kroger loses $12.2 million for the year.

1994: Kroger secures a credit agreement for a seven-year $1.75 billion revolving loan, increasing available monies for capital expenditures from $500 million to $650 million annually. Sell seven of its stores to Delchamps Inc., and buys two from Delchamps. Earns $242 million on sales of $22.9 billion.


HistoryHistory

1995: David B. Dillion is named president, CEO, and a director of Kroger. Annual earnings rise to $302 million on sales of $23.9 billion.

1996: Kroger is the largest supermarket chain in the U.S. 1998: Kroger and Fred Meyer Inc. announce plans to merge into Kroger-Fred Meyer, the first coast-to-coast food retail

operation in the U.S. The $12 billion deal will result in the creation of a $43 billion industry giant with 3,400 stores, including supermarkets, convenience stores, jewelry stores, and supercenters, spanning 31 states.

1999 July: Kroger announces its plans to partner with US Bancorp to introduce a new co-branded credit card for Kroger customers.

1999: Kroger completes its merger with Fred Meyer, a former grocery powerhouse with a combined $43 billion in annual sales.

2000 May: Kroger announces its plans to partner with PlanetU, the online promotions network for the consumers good industry, to offer U-pons, Internet coupons for dozens of popular national brands, on Kroger's Web site.

2000: Kroger teams up with Priceline Webhouse Club to let customers use the Internet to name their own price for groceries at more than 2,300 Kroger-owned stores around the country.

2001: Sales exceed $50 billion for the first time ever. Kroger launches a restructuring that includes 1,500 layoffs and the consolidation of division operations in Nashville, Tennessee, into offices in Louisville, Kentucky, and Atlanta, Georgia.

2002: Kroger acquires 18 Raley's units, which it plans to convert to Food 4 Less or Smith's units; 17 Albertson's stores in the Houston, Texas, and surrounding areas; and seven Winn-Dixie supermarkets in Dallas, Texas. The firm is largest retail grocery store operator in the U.S.

2004: Kroger begins construction on new Kroger Marketplace stores in Ohio and Smith Marketplace stores in Utah. The Marketplace format, which includes general merchandise, is intended to allow the firm to better compete with retail giants like Wal-Mart.

2005 Jan.: The firm posts a fiscal year loss of $100 million, despite a 5% increase in revenues to $56.4 billion. 2005 Oct.: Kroger enters a bidding war for Albertsons, a struggling chain that put itself up for sale two months ago.


ValuesValues• Honesty :

– Doing the right things, telling the truth. • Integrity :

– Living our values in all we do, unified approach to how we do business and treat each other.

• Respect for Others : – Valuing opinions, property and perspectives of

others. • Diversity :

– Reflecting a workplace that includes a variety of people from different backgrounds and cultures, diversity of opinions and thoughts.

• Safety : – Watching out for others, being secure and safe in

your workplace. • Inclusion :

– Your voice matters, working together works, encouraging everyone’s involvement, being the best person you can be.


Mission StatementMission StatementActualActual

“OUR MISSION is to be a leader in the distribution and merchandising of food, health, personal care, and related consumable products and services. By achieving this objective, we will satisfy our responsibilities to shareowners, associates, customers, suppliers, and the communities we serve.

We will conduct our business to produce financial returns that reward investment by shareowners and allow the Company to grow. Investments in retailing, distribution and food processing will be continually evaluated for their contribution to our corporate return objectives.

We will constantly strive to satisfy the needs of customers as well as, or better than, the best of our competitors. Operating procedures will increasingly reflect our belief that the organization levels closest to the customer are best positioned to serve changing consumer needs.

We will provide all associates and customers with a safe, friendly work and shopping environment and will treat each of them with respect, openness, honesty and fairness. We will solicit and respond to the ideas of our associates and reward their meaningful contributions to our success.

We value America’s diversity and will strive to reflect that diversity in our work force, the companies with which we do business, and the customers we serve. As a Company, we will convey respect and dignity to all individuals.

We will encourage our associates to be active and responsible citizens and will allocate resources for activities that enhance the quality of life for our customers, our associates and the communities we serve.”


Vision ProposedVision Proposed

Our vision is to be America’s supermarket, and to continue to provide innovation and unparalleled value to our customers, employees, and shareholders.


External AssessmentExternal Assessment


OpportunitiesOpportunities

1. Supermarket sales of drugs grew 6.9% to $27 billion in 2004.

2. Wal-Mart has a large, recruitable low-paid, nonunion workforce.

3. Organic food sales are up 19.5% annually over the last 5 years.

4. Hispanic shoppers spend $117/week vs. $87/week average on groceries.

5. Hispanic population growth rate = 13% = 4X average.6. Margins for private-label products are 35-45% vs. 27%

for national brands.7. 87% of consumers have tried private-label products.


ThreatsThreats

1. Traditional drugstores are focusing on customer service and merchandising.

2. Mail-order pharmacies are the fastest-growing format in the industry (up 17.9%).

3. Health plans allow larger supplies of drugs for Mail-order pharmacies.

4. Drug price inflation has led to illegal drug importation.

5. Supercenters are dominating the market share of grocery sales.

6. Wal-Mart is tops in logistics technology.

7. Labor costs account for >50% of operating expenses.

8. Price pressure was the cause of the Southern California strikes.


EFE MatrixEFE Matrix

Key External Factors Weight RatingWeighted

Score

Opportunities

Supermarket sales of drugs grew 6.9%. 0.07 3 0.21

Large, low-paid Wal-Mart workforce. 0.05 1 0.05

Organic food sales are up 19.5% annually. 0.05 3 0.15

Hispanics spend 34.5% more than average on groceries. 0.10 2 0.20

Hispanic population growth rate is 4 times the average. 0.08 2 0.16

Higher margins for private-label products. 0.05 4 0.20

87% of consumers have tried private-label products. 0.05 4 0.20


EFE MatrixEFE Matrix

ThreatsDrugstores focusing on service and merchandise. 0.10 2 0.20

Mail-order pharmacies are the fastest-growing format. 0.08 3 0.24

Mail-order pharmacies can dispense larger prescriptions. 0.07 2 0.14

Drug price inflation has led to illegal drug importation. 0.05 1 0.05

Supercenters are dominating grocery sales. 0.10 3 0.30

Wal-Mart is tops in logistics technology. 0.10 4 0.40

Labor costs account for >50% of operating expenses. 0. 10 2 0.20

Price pressure caused Southern California strikes. 0.05 2 0.10

TOTAL 1.00 2.80


CPMCPMKroger Albertsons Safeway Wal-Mart

Critical Success Factors

Weight Rating WeightedScore

Rating WeightedScore



Market share 0.10 3 0.30 2 0.20 2 0.20 4 0.40

Financial position 0.10 3 0.30 1 0.10 3 0.30 4 0.40

Growing markets 0.05 3 0.15 2 0.10 3 0.15 4 0.20

Multiple formats 0.05 4 0.20 3 0.10 2 0.10 2 0.10

Customer database 0.05 4 0.20 3 0.15 3 0.15 1 0.05

Price competitive 0.15 3 0.45 2 0.30 2 0.30 4 0.60

Name recognition 0.10 3 0.30 2 0.20 2 0.20 4 0.40

Organized labor 0.15 2 0.30 2 0.30 2 0.30 4 0.60

Distribution system 0.05 3 0.15 2 0.10 2 0.10 4 0.20

Customer service 0.10 4 0.40 3 0.30 3 0.30 1 0.10

Consumer loyalty 0.05 4 0.20 3 0.15 3 0.15 1 0.05

Employee satisfaction

0.05 3 0.15 4 0.20 3 0.15 1 0.05

TOTAL 1.00 3.10 2.25 2.40 3.15


Key PointsKey Points• Increasing organic and natural food selections helped to exploit that

opportunity (growth in Hispanic populations)• Kroger’s strong private-label brands are a real boon to the bottom

line• Kroger has online prescription fulfillment and mail order of

prescriptions• Kroger must partner with drug makers to help reduce drug costs in

order to curb importation• Kroger has maintained its market share against low-priced

supercenters, • Kroger’s 3-tiered logistics system is a strong rival to the Wal-Mart

machine• The overall score of 2.8 indicates an above-average job in

responding to external forces.


Internal AssessmentInternal Assessment


Stock PerformanceStock Performance


Income Statement (Jan, 2006) Income Statement (Jan, 2006) (In millions, except per share amounts)

2005(52 weeks)

2004(52 weeks)

2003(52 weeks)

Sales $ 60,553 $ 56,434 $ 53,791

Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below 45,565 42,140 39,637

Operating, general and administrative 11,027 10,611 10,354

Rent 661 680 657

Depreciation and amortization 1,265 1,256 1,209

Goodwill impairment charge — 904 471

Asset impairment charges — — 120

Operating Profit 2,035 843 1,343

Interest expense 510 557 604

Earnings before income tax expense 1,525 286 739

Income tax expense 567 390 454

Net earnings (loss) $ 958 $ (104 ) $ 285

Net earnings (loss) per basic common share $ 1.32 $ (0.14 ) $ 0.38

Average number of common shares used in basic calculation 724 736 747

Net earnings (loss) per diluted common share $ 1.31 $ (0.14 ) $ 0.38

Average number of common shares used in diluted calculation 731 736 754

THE KROGER CO.CONSOLIDATED STATEMENTS OF OPERATIONSYears Ended January 28, 2006, January 29, 2005, and January 31, 2004


Balance Sheet (Jan, 2006)Balance Sheet (Jan, 2006)THE KROGER CO.CONSOLIDATED BALANCE SHEETS

(In millions) January 28,

2006 January 29,

2005

ASSETS

Current assets

Cash and temporary cash investments $ 210 $ 144

Deposits In-Transit 488 506

Receivables 680 661

Receivables - Taxes 6 167

FIFO Inventory 4,886 4,729

LIFO Credit (400 ) (373

Prefunded employee benefits 300 300

Prepaid and other current assets 296 272

Total current assets 6,466 6,406

Property, plant and equipment, net 11,365 11,497

Goodwill, net 2,192 2.191

Other assets 459 397

Total Assets $ 20,482 $ 20,491


Balance Sheet (2005)Balance Sheet (2005)THE KROGER CO.CONSOLIDATED BALANCE SHEETS

LIABILITIES

Current liabilities

Current portion of long-term debt including obligations under capital leases and financing obligations $ 554 $ 71

Accounts payable 3,550 3,598

Accrued salaries and wages 742 659

Deferred income taxes 217 286

Other current liabilities 1,652 1,721

Total current liabilities 6,715 6,335

Long-term debt including obligations under capital leases and financing obligations

Face value long-term debt including obligations under capital leases and financing obligations 6,651 7,830

Adjustment to reflect fair value interest rate hedges 27 70

Long-term debt including obligations under capital leases and financing obligations 6,678 7,900

Deferred income taxes 843 841

Other long-term liabilities 1,856 1,796

Total Liabilities 16,092 16,872


Balance Sheet (2005)Balance Sheet (2005)THE KROGER CO.CONSOLIDATED BALANCE SHEETS

SHAREOWNERS’ EQUITY

Preferred stock, $100 par, 5 shares authorized and unissued — —

Common stock, $1 par, 1,000 shares authorized: 927 shares issued in 2005 and 918 shares issued in 2004 927 918

Additional paid-in capital 2,536 2,432

Accumulated other comprehensive loss (243 ) (202 )

Accumulated earnings 4,573 3,620

Common stock in treasury, at cost, 204 shares in 2005 and 190 shares in 2004 (3,403 ) (3,149 )

Total Shareowners’ Equity 4,390 3,619

Total Liabilities and Shareowners’ Equity $ 20,482 $ 20,491


Financial RatiosFinancial RatiosNovember 2005 KR ABS SWY WMT Industry

Market Cap: 13.93B 8.79B 10.38B 204.01B 893.98M

Employees 289,000 241,000 191,000 1,700,000 6.47K

Qtrly Rev Growth (yoy): 6.80% 0.20% 7.20% 10.10% 5.30%

Revenue (ttm): 58.36B 41.30B 37.76B 305.37B 2.58B

Gross Margin (ttm): 23.81% 27.97% 29.03% 23.02% 27.08%

EBITDA (ttm): 3.10B 2.44B 2.26B 22.70B 147.21M

Operating Margins (ttm): 3.13% 3.12% 3.52% 5.87% 3.41%

Net Income (ttm): -15.00M 510.00M 590.40M 10.80B 27.98M

EPS (ttm): -0.021 1.374 1.313 2.569 1.16

P/E (ttm): N/A 17.36 17.6 19.08 17.76

PEG (5 yr expected): 1.5 2.57 1.88 1.19 1.86

P/S (ttm): 0.24 0.21 0.28 0.68 0.25

ABS = Albertson's Inc.

SWY = Safeway Inc.

WMT = Wal-Mart Stores Inc.

Industry = Grocery Stores


Financial RatiosFinancial Ratios

Entity Market Cap ROE %Debt/

EquityPrice to

BookNet Profit Margin

(mrq)

Grocery Stores 53.17B 10 0.012 5.46 1.1

Kroger Co. 14.19B -0.367 1.842 3.635 1.414

Safeway Inc. 10.48B 13.47 1.35 2.211 1.369

Whole Foods Market Inc. 9.84B 11.682 0.014 7.275 0.812

Albertson's Inc. 8.76B 9.455 1.222 1.59 1.05

Distribucion y Servicio S.A. 2.23B 7.436 0.733 2.425 1.112

The Great Atlantic & Pacific Tea Co. 1.22B 79.924 0.371 1.596 27.302

Casey's General Stores Inc. 1.14B 10.294 0.287 2.341 2.427

Weis Markets Inc. 1.13B 10.382 0 1.902 2.553


Financial RatiosFinancial Ratios

• Trending not Done– I ran out of time!


Net Worth Analysis Net Worth Analysis (Jan, 2006)(Jan, 2006)

1. Stockholders’ Equity + Goodwill = 4,390 + 2,191 $ 6,581

2. Net income x 5 = 958 x 5= $ 4,790

3. Share price = $18.47/EPS 1.32 = 0.76 x Net Income 958 = $ 13,404

4. Number of Shares Outstanding x Share Price = 731 x $18.47 = $ 13,502

Method Average $9,569


StrengthsStrengths1. A high-quality asset base with leading market shares in many of

the nation’s largest and fastest growing markets.2. Broad geographic diversity and multiple retail formats that allow

Kroger to meet the needs of virtually every customer.3. An extensive collection of consumer data generated from our

customer loyalty cards plus a unique partnership with dunnhumby.

4. A successful track record of competing head-to-head against supercenters.

5. Outstanding private-label products that have earned industry-leading market share.

6. The financial strength and resources to build Kroger’s business for the future.

7. A prominent reputation in charitable giving and community involvement.


WeaknessesWeaknesses

1. Operates under two dozen banners.

2. Only owns 35% of store property.

3. Workforce is 71% unionized.

4. Jewelry stores are 11% of stores, but account for less than 1% of revenue.

5. Has not issued dividends since 1988.

6. Negative net income in 2004.


IFE MatrixIFE MatrixKey Internal Factors Weight Rating Weighted Score

Strengths

A high-quality asset base with leading market shares in many of the nation’s largest and fastest growing markets.

0.05 3 0.15

Broad geographic diversity and multiple retail formats that allow Kroger to meet the needs of virtually every customer.

0.10 4 0.40

An extensive collection of consumer data generated from our customer loyalty cards plus a unique partnership with dunnhumby.

0.10 4 0.40

A successful track record of competing head-to-head against supercenters.

0.05 3 0.15

Outstanding private-label products that have earned industry-leading market share.

0.10 4 0.40

The financial strength and resources to build Kroger’s business for the future.

0.05 4 0.20

A prominent reputation in charitable giving and community involvement. 0.05 4 0.20

A high-quality asset base with leading market shares in many of the nation’s largest and fastest growing markets.

0.10 3 0.30

Broad geographic diversity and multiple retail formats that allow Kroger to meet the needs of virtually every customer.

0.05 3 0.15

An extensive collection of consumer data generated from our customer loyalty cards plus a unique partnership with dunnhumby.

0.05 3 0.15


IFE MatrixIFE Matrix

Key Internal Factors Weight Rating Weighted Score

Weaknesses

Operates under two dozen banners. 0.1 1 0.10

Only owns 35% of store property. 0.05 2 0.10

Workforce is 71% unionized. 0.1 1 0.10

Jewelry stores are 11% of stores, but account for less than 1% of revenue. 0.05 2 0.10

Has not issued dividends since 1988. 0.05 2 0.10

TOTAL 1.00 2.90


Matrix AnalysisMatrix Analysis


SWOT MatrixSWOT MatrixStrengths – S1. A high-quality asset base 2. Broad geographic diversity and multiple retail formats 3. An extensive collection of consumer data4. A successful track record of competing head-to-head against

supercenters.5. Outstanding private-label products 6. Financial strength and resources 7. Reputation for charitable giving and community

involvement.

Weaknesses – W1. Operates under two dozen banners.2. Only owns 35% of store property.3. Workforce is 71% unionized.4. Jewelry stores are 11% of stores, but account

for less than 1% of revenue.5. Has not issued dividends since 1988.6. Negative net income in 2004.

Opportunities – O1. Supermarket sales of drugs up2. Low-paid Wal-Mart workforce3. Organic food sales growth4. High level of Hispanic spending5. Hispanic population growth rate6. High Margins for private-labels7. High demand for private labels

SO Strategies1. More pharmacies in stores (S1,O1)2. Organic private-label (S9,O3-6-7)3. Hispanic private-label (S9, O4-5)4. Hispanic format (S4-5, O4-5)5. Take Wal-Mart’s best employees (S10, O2)6. New stores in Hispanic hot spots (S4, O5)

WO Strategies1. Hybridize banners & push Kroger brands (W1, O6-7)2. Replace some jewelry stores with organic markets (W4, O3)

Threats – T1. Drugstore service/merchandise focus2. Growth of mail-order pharmacies3. Larger prescription rules for MOP’s4. Illegal drug importation5. Supercenters dominate grocery sales6. Wal-Mart logistics technology7. Labor >50% of operating expenses8. Price pressure caused labor strikes

ST Strategies1. Match drugstore offerings of service & merchandise. (S1-5, T1)2. Grow online pharmacy business (S6-10, T2)3. New stores in non union areas (S4, T7)4. VP of unions (S10, T7-8)5. Stress customer service in all operations (S6-7, T1-5-7)

WT Strategies1. More hybrid banner supercenter-type stores (W1, T5)2. Buy store property and save money (W2, T7-8)3. Divert jewelry store funds into online pharmacy (W4, T2)


Space MatrixSpace Matrix

1 -13 -51 -61 -61 -6

1.4 -5

-2 6-1 6-1 6-1 5-2 1

-1.4 5

Financial Strength (FS)Net IncomeCurrent RatioLoss in EPS in 2005

Environmental Stability (ES)Hispanic groth rate is 14%High energy pricesAggressive labor unions

Competitive Advantage (CA) Industry Strength (IS)

High debt to capital ratioLow bookvalue per share

Mail order pharmacies increasing salesSupercenters dominate grocery sales

Competitive Advantage (CA) Average Industry Strength (IS) Average

Private label share of sales is 24.6% Organic food sales up 19% in last 5 yearsWebsite pharmacy sales grew 18% in 2004 Customers continue to use private brandsControl over Suppliers and Distributors Labor cost total >50% of operating expenses

#1 or #2 in most major markets Retail drug chains strong gowthDiversified with four different operations Supermarket drug sales continue to grow

Environmental Stability (ES) Average Financial Strength (FS) Average

y-axis = FS + ES = 1.4 + (-5.0) = -3.6x-axis = CA + IS = -1.4 + (+5.0) = 3.6


Space MatrixSpace Matrix

6

5

4

3

2

1

-6 -5 -4 -3 -2 -1 1 2 3 4 5 6-1

-2

-3

-4

-5

-6

IS

ES

CA

FSConservative Aggressive

Defensive Competitive


GSMGSM

Albertsons KrogerSafeWay

Wal-Mart

Rapid Market Growth

Quadrant II Quadrant I

Strong Competitive

Position

Slow Market Growth

Weak Competitive

Position

Quadrant III Quadrant IV


BCG dataBCG data

All of the Company’s operations are domestic. The Kroger Co. # of Stores % of Revenue Market Share

Supermarkets 2,468 94% 1Convenience Stores 779 5% 0.1 Jewelry Stores (A) 412 <1% 0.1Other (B) N/A <1% ?

Total 3,659 100%

(A) Includes 122 locations operated inside our supermarkets and 290 in shopping malls. (B) Represents sales by Kroger’s manufacturing plants to outside customers.


BCG MatrixBCG Matrix

Dogs

IV

Cash Cows

III

Question Marks

I

Stars

II

Relative Market Share PositionHigh1.0

Medium.50

Low0.0

Ind

us

try

Sa

les

Gro

wth

Ra

te

High+20

Low-20

Medium0


IE MatrixIE Matrix

I II III

IV V VI

VII VIII IX

IFE ScoresStrong Average Weak3-4 2-2.99 1-1.99

High3-4

Medium2-2.99

Low1-1.99

EF

ES

core

s

Hold and Maintain

1


Matrix analysisMatrix analysisAlternative Strategies BCG IE SPACE GRAND COUNT

Forward Integration x x 2

Backward Integration x x 2

Horizontal Integration x x 2

Market Penetration x x x 3

Market Development x x 2

Product Development x x x 3

Concentric Diversification x 1

Conglomerate Diversification x 1

Horizontal Diversification x 1

Joint Venture x x 2

Retrenchment

Divestiture

Liquidation


QSPMQSPMStrategic Alternatives

A - Diversification of Private Label Natural and Ethnic ProductsB - Replace Convenience & Jewelry Stores with Fuel Centers

A B

Key Factors Weight AS TAS AS TAS

Supermarket sales of drugs growth 0.07 --- --- --- ---

Large, low-paid Wal-Mart workforce 0.05 --- --- --- ---

Organic food sales are up 0.05 4 0.20 1 0.05

Hispanics spend more than average 0.10 4 0.40 1 0.10

High Hispanic pop. growth rate 0.08 4 0.32 2 0.16

High margins for private-label 0.05 4 0.20 1 0.05

Popularity of private-label products 0.05 4 0.20 1 0.05

1.32 0.41

Drugstore focus on service and merchandise 0.10 --- --- --- ---

Mail-order pharmacy (MOP) growth 0.08 3 0.24 1 0.08

MOP’s dispense larger prescriptions 0.07 --- --- --- ---

Illegal drug importation 0.05 --- --- --- ---

Supercenters dominate grocery sales 0.10 3 0.30 4 0.40

Wal-Mart logistics technology 0.10 2 0.20 3 0.30

Labor >50% of operating expenses 0.10 2 0.20 4 0.40

Labor strikes 0.05 2 0.10 4 0.20

1.04 1.38

Op

po

rtu

niti

es

Th

rea

ts


QSPMQSPMQuality asset base 0.05 --- --- --- ---

Leading market shares 0.10 4 0.40 3 0.30

In large and growing markets 0.10 4 0.40 3 0.30

Geographic diversity 0.05 4 0.20 3 0.15

Multiple retail formats 0.10 4 0.40 2 0.20

Consumer database 0.05 4 0.20 3 0.15

Dunnhumby partnership 0.05 --- --- --- ---

Competitive with supercenters 0.10 3 0.30 4 0.40

Outstanding private-label products 0.05 4 0.20 1 0.05

Financial strength 0.05 4 0.20 2 0.10

2.30 1.65

Too many banners 0.1 --- --- --- ---

Too much leased property 0.05 --- --- --- ---

Unionized workforce 0.1 2 0.20 4 0.40

Many low-revenue jewelry stores 0.05 1 0.05 4 0.20

No dividends in nearly 20 years 0.05 --- --- --- ---

0.25 0.60

Sum Total Attractiveness Score 4.91 4.04

Str

en

gh

tsW

ea

kne

sse

s


EPS/EBITEPS/EBIT

• EPS-EBIT Analysis for Kroger Company (assume $1,000 million is needed)

• Figures in millions (fiscal year: 2002)

• $ Amount Needed: $ 3,000M– Stock Price: $ 18– Tax Rate: 40%– Interest Rate: 5%– # Shares Outstanding: 725.5M


EPS/EBIT AnalysisEPS/EBIT Analysis

Conclusion: Kroger Company should use debt financing to raise the $ 3,000 million on the High EBIT estimate; however, should consider using stock financing on the Low EBIT.

Recession Normal Boom Recession Normal Boom

EBIT $500,000,000 $1,500,000,000 $3,000,000,000 $500,000,000 $1,500,000,000 $3,000,000,000

Interest 0 0 0 150,000,000 150,000,000 150,000,000EBT 500,000,000 1,500,000,000 3,000,000,000 350,000,000 1,350,000,000 2,850,000,000

Taxes 200,000,000 600,000,000 1,200,000,000 140,000,000 540,000,000 1,140,000,000EAT 300,000,000 900,000,000 1,800,000,000 210,000,000 810,000,000 1,710,000,000

# Shares 892,166,667 892,166,667 892,166,667 725,500,000 725,500,000 725,500,000EPS 0.34 1.01 2.02 0.29 1.12 2.36

Common Stock Financing Debt Financing

Recession Normal Boom Recession Normal Boom

EBIT $500,000,000 $1,500,000,000 $3,000,000,000 $500,000,000 $1,500,000,000 $3,000,000,000

Interest 45,000,000 45,000,000 45,000,000 105,000,000 105,000,000 105,000,000EBT 455,000,000 1,455,000,000 2,955,000,000 395,000,000 1,395,000,000 2,895,000,000

Taxes 182,000,000 582,000,000 1,182,000,000 158,000,000 558,000,000 1,158,000,000EAT 273,000,000 873,000,000 1,773,000,000 237,000,000 837,000,000 1,737,000,000

# Shares 842,166,667 842,166,667 842,166,667 775,500,000 775,500,000 775,500,000EPS 0.32 1.04 2.11 0.31 1.08 2.24

70 Percent Debt - 30 Percent Stock70 Percent Stock - 30 Percent Debt


Recommendations Recommendations

1. Diversification of Private Label Natural and Ethnic Products

1. Combination of Market Penetration & Product Development

2. Replace Convenience & Jewelry Stores with Fuel Centers

1. Get rid of the dogs and build a new star3. Bomb Wal-Mart (Just Joking!)


ImplementationImplementation

• Build new factories and retool existing to manufacture Ethnic (Hispanic) and Natural foods in desired locations close to targeted geographic markets– 10 @ $250 Million

• Create a new national marketing campaign to inform public on new product– $500 Million


EvaluationEvaluation

Quarterly & Yearly Financial Statements

Annual strategic meetings of division

management and corporate management


Kroger 2006Kroger 2006

• Number 26 on Fortune 500 (US Companies)– Dropped from 18– Wal-Mart is Number 2

• 183th largest Company in the World– Wal-Mart is 10th

– Carrefour is 88th • Sales projected at $65 Billion

– Steady increases• Net Profit Margin 1.7%

– Better than last year but still down from 2.5% in 2002•


Impact of Fuel Centers Impact of Fuel Centers


Questions?Questions?


Sources of InformationSources of Information

• The 2006 Kroger Fact Book– http://www.thekrogerco.com/finance/

financialinfo_reportsandstatements.htm

• Kroger Case study notes– Alen Badal: The Union Institute– Henry Jackson McGill, Francis Marion University

• History from Notable Corporate Chronologies, Online Edition, Thomson Gale, 2006

• Datamonitor– The Kroger Co.– Food Retail in the United States– Global Food Retail

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