America’s leading grocery store chain, The Kroger Co. (KR) is the best positioned among its peers to compete in the heavily disrupted food retail space. The entrance of e-commerce and cloud computing giant Amazon.com Inc. (AMZN) has exacerbated a price war as food industry giants including Kroger, Wal-Mart Stores Inc. (WMT) and Alberston’s compete for market share. (See also: Kroger a Buy Despite Amazon Fears: RBC.)
In a recent research report, Moody’s Investors Service pointed to Kroger’s massive scale as a main factor in offering it the financial flexibility to withstand the prolonged pricing pressures.
"Based on sales, Kroger is twice the size its next competitor in the traditional US grocery space," wrote Moody's Vice President Mickey Chadha. "In addition, it has a diversified range of stores, strong private label penetration, geographic reach and a robust balance sheet, which will buttress it during a period of escalating price wars in the food patch."
Chadha highlighted the importance of scale in the fight for grocery market share. Of the $1 trillion in annual U.S. food sales, Walmart generates about $220 billion, Kroger comprises $118 billion, while Albertson’s and Costco Wholesale Corp. (COST) lag far behind at $60 million and $50 million in revenues respectively.
Moody’s listed distinct advantages at Kroger apart from its sheer size, including its consumer and marketing research arm, named 84:51, which analyzes data on personal shopping habits in efforts to provide a personalized shopping experience. Chadha also noted a diversified geographical presence as hedging against soft performance in one market.
“Additionally, the company’s higher margin private label products account for 26% of its sales and are on average around 23% cheaper than national brands, and it manufactures about 40% of these products, contributing to stronger margins and greater speed to market,” wrote the analyst.
Moody’s expects Kroger’s credit metrics to gradually improve over the next 12 to 18 months as the company’s “restock Kroger” plan gains traction, while a potential sale of Kroger’s convenience stores would yield $2 billion to $2.5 billion. (See also: Kroger Faces Battle Against Amazon.com: Barclays.)