Should Kroger sell its c-stores?

Discussion
Photo: Kwik Shop
Oct 17, 2017
Matthew Stern

Kroger recently announced enhanced investments in areas including private label, personalized product recommendations, smart pricing and associate training, all fairly standard initiatives designed to improve the fundamentals behind its customer experience. But the retailer is considering a more surprising move – selling its convenience store operations.

The retailer’s convenience store business, which includes KwikShop, Loaf ‘N Jug, QuickStop, Tom Thumb and Turkey Hill Minit Markets, did $4 billion in total sales last year. Kroger operates 784 stores across 18 states.

At an investor conference earlier this month, Kroger CFO Mike Schlotman indicated that the company is investigating if the stores would be more valuable to a c-store-focused owner than to Kroger’s shareholders.

Some have hailed Kroger as a data-driven innovator in recent years due in part to its 84.51° division, which was created in April 2015 after the grocer purchased the remaining 50 percent of a joint venture with dunnhumby/Tesco. More recently, some have come to see Kroger as a grocer that hasn’t distinguished itself far enough from other big players, and one that will find itself in Amazon.com/Whole Foods’ crosshairs if it doesn’t make changes.

While there hasn’t been much word lately on Amazon’s cashier-free standalone c-store concept, the grocery industry is waiting to see how the e-tailer’s acquisition of Whole Foods will impact grocery shopping as a whole.

Shares of Kroger have been down 40 percent this year, according to Reuters, the announcement of the possible c-store sell-off led to a 1.2 percent spike to $21.96 per share last week. The current stock price is $20.81.

The c-stores channel is by many indications doing quite well at the moment. Early in 2017, 79 percent of c-store retailers were optimistic about the nation’s economy. Sixty-three percent experienced an increase in foodservice sales in 2016.

But competing in the space is becoming ever-more-demanding. Customers have come to expect fresh food offerings from c-stores, and managing such food preparation correctly requires significant expertise and investment.

Kroger owns other properties outside of the mainline grocery segment besides just convenience stores, according to the press release. In addition to other grocery-related retail interests, Kroger owns 222 health clinics, 2,258 pharmacies and 307 jewelry stores.

DISCUSSION QUESTIONS: Would it be a good move for Kroger to sell off its c-stores? What would the company gain and lose by such a move?

Braintrust
" If these stores are no more profitable than 4 percent of Kroger’s profits, and if they make money on the sale, sell."
"No, Kroger should keep the c-stores, streamline them and find a way to make them work harder."
"Maybe they are building a reserve for some other venture. It is certainly smart to cash out when value is high."

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23 Comments on "Should Kroger sell its c-stores?"

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David Livingston
Guest
1 month 4 days ago

This is all about “Shares of Kroger have been down 40 percent this year.” If the purpose is to make news to increase stock price, then its the right thing to do. We will probably see a lot of lateral move press releases over the next several months. Kroger does not want to be left behind during the Trump rally.

Art Suriano
BrainTrust

It’s not wise for any company to spread themselves too thin. Today we see severe competition. Many businesses are in each other’s space all competing for a tiny piece of the pie. Kroger through the years has not grown their business by improving themselves but rather by purchasing competitors and other companies. That’s excellent for short-term growth but, eventually, it catches up to you if you don’t have a better business model than your remaining competitors.

Kroger needs to concentrate on who they are as a grocery chain and their core business. I would suggest selling off the c-store business and investing those dollars in the Kroger grocery stores, with a significant focus on building the supermarket chain of the future, one that is ahead of the competition and not just another short-term solution.

Dr. Stephen Needel
BrainTrust

Kroger generated $115 billion in sales — the c-stores generated $4 billion, including gas. It’s a very small part of their business. If these stores are no more profitable than 4 percent of Kroger’s profits, and if they make money on the sale, sell. I don’t expect there’s much carryover from their c-stores to their main stores and it will help improve their focus.

Seth Nagle
BrainTrust

If you look at the numbers I agree, but if you look at it as an innovation lab/a small store format for younger generations, there might be more to it.

Steve Montgomery
BrainTrust

That answer depends on how you define “right.” As David stated, if the purpose is to increase share price then it is likely the right decision although the impact may be limited. Currently the multiples for c-store are high and Kroger’s management stated this was a reason to explore the sale. It will be interesting to see what happen in that marketplace if 7-Eleven bondholders are able to negotiate a higher rate.

Kroger’s 784 c-stores generate about $4 billion in sales (including fuel) or about 4 percent of Kroger’s total sales. Its loyalty program is highly rated partly because Kroger customers can earn up to $1 off fuel at its locations or 10 cents off at 4,000 Shell locations. The relationships with Shell would remain, but the purchaser of the Kroger c-store may find $1-off too rich.

Each of Kroger c-store companies has a knowledgeable store management team. There has been some consolidation for BOH function but I doubt that selling these stores is going to have any significant impact on Kroger’s headcount or G&A.

Is it the right thing to do? Time will tell.

Richard Layman
Guest
1 month 4 days ago

Mostly I bicycle but have been using car shares lately. Safeway’s program provides up to $1 per gallon benefits only at Safeway-owned gas stations. The benefits at the traditional company participant (Shell) are much less (but still nice enough considering you’d be buying groceries anyway).

HY Louis
Guest
1 month 4 days ago

I don’t know much about c-stores. What I do know is that fuel prices are quite low in the U.S. When I was in primary school our science teachers told us that by this time there would be no more oil left. Instead there is a huge glut. I also know Kroger is just a mediocre retailer (but well managed) and there are superior c-store competitors. I have to wonder what the long-term future is in fuel. Will there be a conversion to electric vehicles? Maybe getting out now is a good idea.

Chris Petersen, PhD.
BrainTrust

In the traditional world of retail it made sense to separate and evaluate “channels” or retail formats separately. C-stores are certainly a different style of store generating a different market basket from large format grocery stores or pharmacies.

But in the future world of omnichannel the c-store can quite literally become an efficiently-placed outpost for click and collect that retains customer relationships.

In the UK you can purchase from the department store John Lewis and collect your goods at the small-format, food oriented Waitrose corner store when you buy milk. You can also pick up your sweets from Waitrose orders when you go buy your computer at John Lewis.

Future investment decisions in retail can not only rely on above-the-line metrics like revenue. There is a more holistic strategic question of how to leverage omnichannel to grow customer relationships and lifetime value.

Neil Saunders
BrainTrust

No, Kroger should keep the c-stores, streamline them and find a way to make them work harder.

While the c-stores deliver lower profits and margins, there are many positive opportunities ahead: on-the-run grocery trips are increasing, smaller urban markets are seeing massive growth, younger consumers have a preference for smaller stores, the large format store arena is becoming more of a battleground, smaller stores are being used to collect products ordered online, and so on.

What Kroger needs is more imagination and flair, not corporate restructuring.

Richard Layman
Guest
1 month 4 days ago

Related to the previous discussion last week, Kroger is a good competitive company. They have many of the pieces to be a transformational company, but don’t operate to that level. Convenience stores are a good example. They have been in the sector for decades. But the real innovation in convenience stores is with companies like Wawa and Sheetz. Similarly, Giant-Eagle’s GetGo brand showcases G-E brands, including Market District, and G-E is even launching smaller Market District-branded stores that are grand in the scheme of convenience stores. Kroger has the pieces but not the vision. If they are not likely to commit to taking a visionary approach to the c-store business, they might as well monetize what they have.

Ed Rosenbaum
BrainTrust

The c-store business is only a small part of the Kroger portfolio. If they are spending more than 4 percent of the invested time and only getting a 4 percent return; then it might be time to put this business on the market. Kroger does not have the c-store management expertise at the highest level to compete with those whose total business is c-stores. They should concentrate on what they know and manage best.

Mel Kleiman
BrainTrust

I think this one-liner sums it up: “It is not the fast who eat the slow or the big who eat the small. It is the focused and the flexible who beat the un-flexible and unfocused.”

Kroger needs to stay focused and flexible if it plans to grow and survive in today’s marketplace.

Richard J. George, Ph.D.
BrainTrust

The largest benefit may be in a renewed focus in its core business. The potential downside is that c-stores are increasing their share of the meals business, which is big opportunity for a company like Kroger. Not exactly certain how the jewelry stores fit Kroger’s mission and portfolio.

Dan Raftery
BrainTrust

Diversification has its time and place in the growth plan. So do improved focus and research. Kroger has made very few mistakes in its growth strategy and has retained its focus on consumers.

Unlike other national supermarket chains, Kroger knew better than to replace local preferences. Rather, they have been open to learning from each acquisition and transferring those learnings to other divisions.

Maybe they are building a reserve for some other venture. It is certainly smart to cash out when value is high.

Roy White
BrainTrust

Kroger’s earnings continue down even though they are achieving corporate sales increases. The convenience stores are a marginal group for Kroger; the supermarkets and what they term multi-department stores are the core of the business. The convenience stores, along with service sales, in-store clinics, online vitamins, jewelry stores, etc. account for around 4-5% of total sales. If selling off the convenience stores will allow them to focus management and resources on the core business, then this is a good idea even though it’s an admission that the chain is struggling.

You can also note that Kroger operates an online jewelry business and some jewelry stores, which do not fit in with the core business and probably should be sold off also.

Richard Layman
Guest
1 month 3 days ago

The jewelry group is part of Fred Meyer. It’s probably not a big deal and extends their ability to be competitive in that category for what they call multi-line department stores..

Herb Sorensen
BrainTrust
I see a number of comments about Kroger’s “core business.” So how would that line of thought have been useful guidance to Amazon ten years ago? What’s their “core business”? The reality is that the core business of Kroger is the final mile of connecting the universe of producers to the universe of consumers. You don’t notice a groundswell of condemnation of bricks retailers making blunderous efforts in online selling, for getting out of their “core business.” One of the unassailable market assets of bricks retailing is IMMEDIACY, the ability to deliver to the customer what they want RIGHT NOW! Not in two days, two hours, but RIGHT NOW! (There are other core bricks assets, often poorly leveraged.) C-stores are the cutting edge of that core asset. It helps in thinking about all this to recognize that ALL bricks stores are essentially “communal pantries.” The size and nature of the “community” varies, as does the stock in the “pantry.” “C-stores” are THE WAVE OF THE FUTURE for bricks stores. Notice Amazon’s tentative poking into the space with Amazon GO. If you are not careful, all you sharp pencil guys will successfully drive ever larger and larger retailers into bankruptcy. All… Read more »
Richard Layman
Guest
1 month 3 days ago

Personally, I agree but don’t think they have the transformational capacity to execute on c-stores like you suggest. cf. the Parker’s convenience store in the Old Historic District of Savannah, a one-off for that company that is pretty amazing and a model for urban settings, the new WaWa urban initaitive, convenience store-food delivery stores like Yummy in Greater Los Angeles, GetGo, etc. (Then again, I thought Safeway should have marketed their sodas in vending machines like they did outside of one store on Capitol Hill in DC, a couple of decades ago.) Not to mention the capability to serve as BOPIS pick up sites, etc.

Herb Sorensen
BrainTrust

Good comment. Actually, I have spent several years thinking about exactly the issues you raise, and claim no perfection in the ultimate answer. But it does look like Amazon is hot on the trail. I’m not an expert in this area, but I do believe that Wawa is maybe the best brick-and-mortar retailer approaching the solution.

I’ve been saying for a couple years that I would like to be able to help an advanced c-store concept to become the first c-store offering 100,000 SKUs from their limited shelves. I have a patent pending … 😉

Craig Sundstrom
Guest

Selling off fringe businesses has become the latest trend just as acquiring them was a fad a few years ago, so I detect bit of “jumping-on-the-bandwagon” here, which I don’t see as a positive thing. Then again, it may be a well thought-out decision. Either way, it’s not going to make much difference in their future.

Seth Nagle
BrainTrust

With the innovation around the in-store experience exploding right now I think Kroger needs to stay in the C-Suite as its role for the consumer is going to change dramatically the next few years. More Millennials are stopping in to buy bread, milk, and other items to avoid the chaos of the store after work.

Knowing this, if a grocer can identify their shoppers needs they could create a quick grab an go assortment that turns a 2 or 3 item visit into an 8 to 10 item visit pretty quickly.

Richard Layman
Guest
1 month 3 days ago

Kroger could divide their c-store portfolio into two: one traditional (cigarettes, beer, gas) and the other with growth opportunities in denser settings, and completely rebrand and reposition the latter, comparable to the bfresh initiative by Royal Ahold.

Rich Kizer
Guest

It’s a “stand-out” issue for Kroger. In a very competitive environment, and with all the e-commerce expansion, Kroger would be wise to focus heavily on its core business.

wpDiscuz
Braintrust
" If these stores are no more profitable than 4 percent of Kroger’s profits, and if they make money on the sale, sell."
"No, Kroger should keep the c-stores, streamline them and find a way to make them work harder."
"Maybe they are building a reserve for some other venture. It is certainly smart to cash out when value is high."

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