The Kroger Co.

views updated

The Kroger Co.

1014 Vine Street
Cincinnati, Ohio 45202-1141
U.S.A.
Telephone: (513) 762-4000
Fax: (513) 762-4454
Web site: http://www.kroger.com

Public Company
Incorporated: 1902 as The Kroger Grocery and Baking Company
Employees: 290,000
Sales: $53.79 billion (2003)
Stock Exchanges: New York Cincinnati Chicago
Ticker Symbol: KR
NAIC: 445110 Supermarkets and Other Grocery (Except Convenience) Stores; 445120 Convenience Stores; 447110 Gasoline Stations with Convenience Stores; 448310 Jewelry Stores

Among companies that principally operate grocery stores, The Kroger Co. ranks first in the United States (discount retailer Wal-Mart Stores, Inc., through its supercenter outlets, is actually the leading seller of groceries in the country). Kroger runs more than 2,500 food stores in 32 states in the Midwest, South, Southwest, and West; these stores operate under about two dozen banners, including Kroger, Fred Meyer, Ralphs, Food 4 Less, Smith's, Fry's, Dillons, and King Soopers. More than 500 of the outlets include gasoline stations and nearly 1,900 feature pharmacies. Of Kroger's total sales, 95 percent is derived from these food retailing operations, with the remainder coming from the company's convenience stores, jewelry stores, and manufacturing facilities. Kroger operates nearly 800 convenience stores under six flags in 16 states, most of which also sell gasoline, and about 440 fine jewelry stores under the names Fred Meyer, Littman, Barclay, and Fox's. The company's 42 food processing facilities produce dairy products, bakery goods, deli items, and other grocery products.

Late 19th-Century Chain Store Pioneer

The Kroger Co. traces its roots back to 1883, when Bernard H. Kroger began the Great Western Tea Company, one of the first chain store operations in the United States. Kroger left school to go to work at age 13 when his father lost the family dry goods store in the panic of 1873. At 16, he sold coffee and tea door-to-door. At 20, he managed a Cincinnati grocery store, and at 24, he became the sole owner of the Great Western Tea Company, which by the summer of 1885 had four stores in Cincinnati. Kroger's shrewd buying during the panic of 1893 raised the number to 17, and by 1902, with 40 stores and a factory in Cincinnati, Kroger incorporated and changed the company's name to The Kroger Grocery and Baking Company.

Kroger Co. historians characterize B.H. Kroger as somewhat of a "crank," fanatically insistent upon quality and service. Profanity was called his second language; he often advised his managers to "run the price down as far as you can go so the other fellow won't slice your throat."

Part of Kroger's success came from the elimination of middlemen between the store and the customer. In 1901, Kroger's company became the first to bake its own bread for its stores, and in 1904, Kroger bought Nagel Meat Markets and Packing House and made Kroger grocery stores the first to include meat departments.

This important innovation, however, was not easy. It was common practice at that time for butchers to short-weight and take sample cuts home with them, practices that did not coincide with B.H. Kroger's strict accounting policies. When Kroger installed cash registers in the meat departments, every one of them inexplicably broke. When Kroger hired female cashiers, the butchers opened all the windows to "freeze out" the women and then let loose with such obscene language that the women quit in a matter of days. When Kroger hired young men instead as cashiers, the butchers threatened them with physical force. But Kroger was stubborn, and in the long run his money-saving, efficient procedures won out.

From the beginning, Kroger was interested in both manufacturing and retail. His mother's homemade sauerkraut and pickles sold well to the German immigrants in Cincinnati. In the back of his store, Kroger himself experimented to invent a "French brand" of coffee, which is still sold in Kroger stores.

Expansion Outside Cincinnati, Early 20th Century

The Kroger Grocery and Baking Company soon began to expand outside of Cincinnati; by 1920, the chain had stores in Hamilton, Dayton, and Columbus, Ohio. In 1912, Kroger made his first long-distance expansion, buying 25 stores in St. Louis, Missouri. At a time when most chains hired trucks only as needed, Kroger bought a fleet of them, enabling him to move the company into Detroit; Indianapolis, Indiana; and Springfield and Toledo, Ohio.

When the United States entered World War I in 1917, B.H. Kroger served on the president's national war food board and on the governor of Ohio's food board. His dynamic plain speech raised substantial amounts of money for the Red Cross and Liberty Bonds.

After the war, The Kroger Grocery and Baking Company continued to expand, following Kroger's preference for buying smaller, financially unsteady chains in areas adjacent to established Kroger territories. In 1928, one year before the stock market crashed, Kroger sold his shares in the company for more than $28 million. One of his executives, William Albers, became president. In 1929 Kroger had 5,575 stores, the most there have ever been in the chain.

Since the early 1900s, chain stores had been accused of driving small merchants out of business by using unfair business practices and radically changing the commerce of communities. In the 1920s, an anti-chain store movement began to gain momentum. Politicians, radio announcers, and newspapers talked about "the chain store menace." People feared the rapid growth of chains and their consequent power over their industries. Because the grocery industry was so much a part of most people's lives, food chains such as Kroger bore the brunt of public complaints.

Chain store company executives soon realized they would have to organize in order to prevent anti-chain legislation. In 1927 the National Chain Stores Association was founded and William Albers was elected president.

When Albers resigned as president of Kroger in 1930, he also resigned as president of the organization. Albert H. Morrill, an attorney who had served as Kroger's general counsel, was elected president of both in his stead. Morrill faced not only the economic challenges of the Great Depression but also the political challenges of the growing public distrust of chain stores.

With the limited transportation and communication systems of the time, the company had to decentralize in order to grow. Morrill established 23 branches with a manager for each branch, and hired a real estate manager to close unprofitable stores. He also implemented policies that guarded against anti-chain accusations, while encouraging customers to shop at Kroger stores.

Instead of going through the usual channels for buying produce, The Kroger Grocery and Baking Company began to send its buyers to produce farms so they could inspect crops to ensure the quality of the food their stores sold. This counteracted the frequent complaint that chain stores sold low-quality foods. The policy eventually resulted in the formation of Wesco Food Company, Kroger's own produce procurement organization.

Morrill also began the Kroger Food Foundation in 1930, making it the first grocery company to test food scientifically in order to monitor the quality of products. The foundation also established the Homemakers Reference Committee, a group of 750 homemakers who tested food samples in their own homes.

In 1930, one of the company's southern managers, Michael Cullen, proposed a revolutionary plan to his superiors: a bigger self-service grocery store that would make a profit by selling large quantities of food at low prices that competitors could not beat. But at this stage, Kroger executives were wary of the idea, and Cullen went on alone to begin the first supermarket, King Kullen, in Queens, New York.

Throughout the Depression, Kroger maintained its business; by 1935, Kroger had 50 supermarkets of its own. During the 1930s, frozen foods and shopping carts were introduced, and the Kroger Food Foundation invented a way of processing beef without chemicals so that it remained tender, calling the process "Tenderay" beef.

Morrill and Colonel Sherrill, vice-president of Kroger, became involved with the American Retail Association in 1935. A report of the organization's publicity release on the front page of the New York Times prompted controversy, because the headline stated that the organization would work as a "unified voice" in economic matters, which suggested a kind of "super lobby" to some people. This led to a congressional investigation and in 1938, a bill was introduced imposing a punitive tax against chain stores that would almost certainly force them out of business. Only after much controversy and public debate was the punitive tax bill defeated that year.

In 1942, Morrill died. Charles Robertson, formerly vice-president and treasurer, became president. The company's plans for growth were shelved during World War II, with about 40 percent of its employees serving in the armed forces. The Army Quartermaster Corps commissioned the Kroger Food Foundation to create rations that would boost the morale of soldiers, and the company produced individual cans of date pudding, plum pudding, and fruit cake. Other rations that came from Kroger included cheese bars, preserves, and "C-ration crackers."

Company Perspectives:

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.

Rapid Postwar Growth

After the war, in 1946, Joseph Hall, who had been hired in 1931 to close unprofitable stores, became president. He changed the company name from The Kroger Grocery and Baking Company to The Kroger Co., in keeping with indications that the company was moving into a new period of growth. In 1947 Kroger opened its first egg-processing plant in Wabash, Indiana, in order to further ensure egg quality. Hall also saw that 45 private-label brands were merged into one Kroger brand, and introduced the blue-and-white logo with the name change.

Hall's new policy of consumer research was an important change for the company. Decisions about products and methods of selling were to come from the "votes" shoppers left at the cash register. During his years as president, the company moved into Texas, Minnesota, and California. Annual sales grew as small neighborhood stores were replaced with larger supermarkets. In 1952 Kroger's sales topped $1 billion.

This was a time of rapid growth for supermarkets. Between 1948 and 1963, the number of supermarkets in the country nearly tripled. Kroger was already testing the specialty shops that would later be integral to its "superstores." As competition in the industry grew increasingly fierce, Kroger joined with six other firms to found the Top Value Stamp Company, which tried to bring customers into the stores with stamp collecting promotions.

In 1960 the company began its expansion into the drugstore business, with an eye on the potential for drugstores built next to grocery stores. The company bought the small New Jersey-based Sav-on drugstore chain and made its owner, James Herring, the head of the drugstore division. The first SupeRx drugstore opened in 1961 next to a Kroger food store in Milford, Ohio.

Discount stores—strategically located stores that aggressively merchandised goods on a low margin basis with minimum service—were the retailing trend of the 1960s. By 1962, Kroger had also gone into discounting.

In 1963 Kroger's sales reached $2 billion. In 1964 Jacob Davis, a former congressman and judge and a vice-president of Kroger, replaced Hall as president and CEO. Davis concentrated on the manufacturing branch of Kroger. With the construction of the interstate highway system in the 1950s and 1960s, central manufacturing facilities could now serve larger territories, allowing Kroger to combine small facilities into larger regional ones.

Davis's experience in both retail and law became important to the company as the government began to clamp down on the food industry. During hearings for the 1967 Meat Inspection Act, several chains were exposed for selling adulterated processed meats. The U.S. Department of Agriculture revealed that Kroger was selling franks and bolognas with two to four times the legal amount of water or extender, and pork sausage treated with artificial colors to make it look fresh.

With the rapid growth of food chain stores, the government also began to concentrate on enforcing antitrust laws. Kroger was one of the companies the Federal Trade Commission (FTC) challenged on its mergers. In 1971 the FTC proposed a consent order that required the company to divest itself of three discount food departments, charging that Kroger stores would "substantially lessen" competition in food retailing in the Dayton, Ohio, area. Kroger settled without admitting any violation of antitrust laws, and sold the three food departments. The order also prohibited Kroger from buying any food store or department in nonfood stores in which the number of stores or sales accrued would indicate a lessening of competition in that city or county.

James Herring became president of The Kroger Co. in 1970 and began to take Kroger into the superstore age, closing hundreds of small supermarkets and building much larger ones with more specialty departments.

The 1970s were a turbulent time for the grocery industry in general, but both turbulent and productive for Kroger. The company perfected its "scientific methods" of consumer research, using the results in planning and advertising. In the early 1970s, at the request of consumer groups, Kroger led the industry in marking its perishable products with a "sell by" date. Kroger began to bake only with enriched flour to add nutrition to its bread products. Two years later, nutritional labels were put on Kroger private-brand products. In addition, food and nonfood products were stocked in twice the variety they had been in the previous two decades.

To increase the accuracy and speed of checkout systems, Kroger, in partnership with RCA, became the first grocery company to test electronic scanners under actual working conditions, in 1972. An invention borrowed from the railroad industry, the scanner was originally used as the electric eye that read symbols on the side of railcars. Kroger and other grocery chains decided to try to use it to read prices on products.

Key Dates:

1883:: In Cincinnati, Ohio, Bernard H. Kroger founds the Great Western Tea Company, one of the first chain store operations in the United States.
1902:: With 40 stores and a factory in Cincinnati, the company incorporates as The Kroger Grocery and Baking Company.
1929:: Store count peaks at 5,575.
1946:: Company changes its name to The Kroger Co.
1952:: Revenues surpass $1 billion.
1960:: Kroger expands into the drugstore business.
1983:: Company acquires Dillon Companies, Inc. and begins operating stores coast to coast; the Kwik Shop convenience store chain is also acquired.
1988:: Kroger fends off hostile takeovers by awarding shareholders with a special dividend, pushing its debt load to $5.3 billion.
1999:: In a deal valued at about $13 billion, Kroger acquires Fred Meyer, Inc.
2000:: Revenues top $50 billion.

While the government controlled prices between 1971 and 1974, grocery stores suffered depressed profits, but by 1974, the net profits of the top food chains were up 57 percent. As food chains grew into ever larger and more powerful businesses and gained increasing control over the agricultural economy through their enormous wholesalers, there was another round of FTC hearings that revealed the illegal business practices of several chains. In 1974, Kroger settled out of court on an antitrust claim against Kroger and two other chains for fixing beef prices. In 1974 the FTC also sued Kroger for violations of its 1973 trade rule that all stores must stock a sufficient supply of specials to meet anticipated demand and must give rain checks if the supplies run out. In 1977 Kroger consented to the FTC order.

But the biggest battle Kroger faced in its tangles with the FTC concerned the company's use of "Price Patrol," an advertising promotion used in certain markets at different times between 1972 and 1978, in which Kroger advertisements compared Kroger prices with the prices of its competitors on 150 products a week. The figures were based upon surveys conducted among homemakers. The FTC ruled that slogans such as "Documented Proof: Kroger leads in lower prices" were unfair and deceptive because the items surveyed excluded meat, produce, and house brands. A controversy ensued when the Council on Wage and Price Stability expressed concern that tougher standards for Kroger might prevent the dissemination of food price information in the future, but the FTC decided that surveys must be conducted fairly and reliably and that their limitations should be made clear. Kroger appealed; the "Price Patrol" issue was not decided until 1983, when Kroger settled out of court with the FTC.

In 1978 Lyle Everingham, who began his career as a Kroger clerk, became CEO. The company sold Top Value Enterprises and opened Tara Foods, a peanut butter processing plant, in Albany, Georgia. As Kroger moved more toward the "superstore" concept of one-stop shopping, it began to test even more in-store specialty departments such as beauty salons, financial services, cheese shops, and cosmetic counters.

1980s: Acquiring Dillon and Kwik Shop, Fending Off Takeover Bids

The 1980s were a period of significant expansion for Kroger. In 1981 Kroger began marketing its Cost Cutter brand products. In 1983 Kroger merged with Dillon Companies, Inc. and began operating stores coast to coast. That same year, the company acquired the Kwik Shop convenience store chain. A year later, Kroger formed a nonunion grocery wholesaler for Michigan called FoodLand Distributors with Wetterau. In 1987, however, Kroger reduced its involvement in standalone drug stores when it sold most of its interests in the Hook and SupeRx chains.

In 1988 Kroger received several takeover bids, mainly from the Dart Group Corporation and from Kohlberg Kravis Roberts, whose highest bid topped $5 billion. Kroger rejected the bids and restructured, expecting that recapitalization would enhance its competitiveness. The reorganization expanded employee ownership to more than 30 percent of the company's shares. Kroger also awarded its shareholders with a dividend of cash and debentures worth $48.69 per share. Kroger financed the restructuring by selling $333 million worth of unprofitable assets and by assuming $3.6 billion in loan debt. Among the divested properties were 95 grocery stores, 29 liquor stores, its Fry's stores located in California, and the majority of its stake in Price Saver Membership Wholesale Clubs.

Following the restructuring, Kroger's debt load totaled $5.3 billion. For the next several years, the firm focused on paying down this debt and stayed away from major acquisitions and from significant expansion. Kroger did, however, purchase 29 Great Scott! supermarkets in Michigan in 1990 and add them to the Kroger chain.

Paying Down Debt and Improving Efficiency in the Early and Mid-1990s

During the recession of the early 1990s, Kroger felt the pressure of increasing competition in several of the markets it served. The geographic diversity of the firm's holdings, however, insulated it from serious trouble. Under the leadership of Joseph A. Pilcher, who became CEO in 1990, Kroger adopted a strategy of protecting market share at all costs, including sacrificing margins for the more important cash flow needed to pay off the debt. When faced with increased competition in a particular market—for example when Food Lion, Inc. expanded into Texas in 1991—Kroger would simply lower prices and accept the resulting reduced margins. In fact, Kroger lost money for a period in the early 1990s in Texas as well as in Cincinnati and Dayton, Ohio. The company was able to offset such losses to some degree by relying more heavily on higher margin markets, although such markets were becoming rarer thanks to the expansion of low-price competitors.

Kroger also had to face the consequences of its unionized workforce and had to compete with nonunion chains. In addition to the increasing competitive pressures, Kroger's sales and earnings were affected in 1992 by a ten-week strike in Michigan and another work stoppage in Tennessee. Although the Michigan strike ended with the workers essentially accepting the package initially offered them, 1992 sales increased only 3.7 percent over 1991 and the company margin remained in the 0.5 percent range where it had resided since 1990. Consequently, Kroger embarked on a major program to improve its efficiency through technological improvements. From 1992 to 1994, $120 million was spent to make checkout operations more efficient and accurate, to install a new management information system, and to improve direct-store delivery accounting.

By 1994 Kroger's debt load had been reduced significantly, to $3.89 billion. Kroger enjoyed savings of almost $23 million in 1994 alone from its technology investments. The company also benefited from the economic recovery during which interest rates fell, thus reducing the amount needed to spend servicing its debt whenever it could refinance its loans. Enough money could now be freed up for Kroger to shift its focus from debt maintenance to expansion. The timing of this expansion was critical in that Kroger now faced yet another and significant threat, this time from supercenters—such as those operated by Wal-Mart, Kmart Corporation, and Meijer Incorporated—which were combination food, pharmacy, and general merchandise stores. By 1994 more than one-quarter of Kroger's sales base competed directly with a supercenter. Kroger's plan was to continue using its combination food and drug store format—facilities that were about one-third the size of the supercenters—but to increase their number dramatically.

During 1994, Kroger spent $534 million on the expansion, which included 45 new stores, 17 expanded stores, 66 remodelings, and the acquisition of 20 stores. From 1995 to 1997, $600 million was to be spent each year on expansion projects. Overall, this would be the largest capital expansion in Kroger history.

To free up additional money for the program and further reduce the company debt, Kroger in early 1995 sold Time Saver Stores, a division of Dillon which included 116 convenience stores in the New Orleans area, to E-Z Serve Convenience Stores, Inc. of Houston, Texas. Later that year, David B. Dillon, CEO of the Dillon subsidiary, became president and COO of Kroger.

Early returns from the company's mid-1990s expansion were positive. Kroger's 1994 margin of 1.2 percent was its best in several years, and 1995 saw a healthy sales increase of 4.3 percent. By 1997, when Kroger's grocery store count was nearing 1,400, the company enjoyed its best year yet—net income of $444 million on sales of $27 billion, translating into a 1.6 percent margin—while total debt had dropped to $3.2 billion.

Late 1990s and Beyond: Acquiring Fred Meyer, Squaring Off Against Wal-Mart

Its improving fortunes emboldened Kroger to join—in a big way—the ongoing consolidation wave that was sweeping the grocery industry. In October 1998 the company announced that it planned to acquire Fred Meyer, Inc. in a stock swap valued at about $8 billion plus assumed debt of $4.8 billion. The deal closed in May 1999. The Portland, Oregon–based Fred Meyer brought to Kroger 800 grocery stores located in 12 western states—a good geographic fit given Kroger's presence primarily in the Midwest, South, and Southwest. The Oregon firm operated several chains: the flagship Fred Meyer stores, one-stop shopping superstores averaging 145,000 square feet and including more than 225,000 food and nonfood products arranged within dozens of departments; and the Smith's Food & Drug Centers, Ralphs Grocery, and Quality Food Centers supermarket chains—the latter two having been acquired by Fred Meyer earlier in 1998. Fred Meyer, which reported 1997 sales of $15 billion, was also the fourth largest fine jewelry retailer in the country, operating 381 stores under five names in 26 states. The Fred Meyer deal enabled Kroger to maintain its position as the largest supermarket operator in the United States, with annual sales of about $43 billion, although the company soon ceded its position as the largest U.S. food retailer to the hyperbolically growing Wal-Mart.

Kroger wrung out significant synergies from its huge acquisition, achieving annual cost savings of $380 million per year. By 2000, revenues had swelled to $49 billion, while net income hit $877 million, signifying another jump in the profit margin, to 1.8 percent. Also during 2000, however, a deal to purchase the 75 grocery stores operated by Winn-Dixie Stores, Inc. in Texas and Oklahoma was nixed by the FTC, which was concerned about the potential erosion in competition in the Fort Worth, Texas, market.

Combining to slow Kroger's growth to a crawl was the economic downturn of the early 2000s coupled with heady competition—particularly from Wal-Mart, which by undercutting prices charged at traditional grocery stores pressured the entire food retailing industry to keep prices down. Revenues only inched ahead, topping $50 billion for the first time in 2001, then reaching $51.76 billion the next year, an increase of just 5.6 percent over a two-year span. Profits, however, surged 37 percent, hitting $1.2 billion in 2002 (and representing a profit margin of 2.3 percent), as Kroger management reined in operating costs. Late in 2001, for example, the company launched a restructuring that involved the elimination of 1,500 jobs and the consolidation of its Nashville division into other divisional offices. During 2002 Kroger aimed to cut another $500 million in operating costs in part by shifting from a divisional buying structure to centralized, nationwide buying. At the same time, the company completed several small, fill-in acquisitions, adding 34 stores from Baker's, Furr's, and other grocers in 2001 and then buying 42 Raley's, Albertson's, and Winn-Dixie supermarkets the following year. By the end of 2002, Kroger was operating nearly 2,500 supermarkets and multi-department stores. About 350 of these outlets included gasoline stations, an initiative first launched in 1998 to generate additional revenue.

In June 2003 Pichler stepped down as CEO of Kroger and was succeeded by Dillon, who became chairman as well one year later when Pichler retired. The new leader's first year was a difficult one, punctuated particularly by labor disputes. Kroger's Ralphs chain, along with Albertson's, Inc. and Safeway Inc., endured a four-and-a-half-month strike in southern California—the longest grocery strike in U.S. history. That strike ended in late February 2004. Kroger was also hit by a two-month strike in West Virginia in late 2003 that temporarily closed 44 stores. The two disputes reduced the company's 2003 fourth-quarter profits by $156.4 million. Several other charges, including a $444.2 million pretax charge associated with goodwill impairment at the struggling Smith's chain, resulted in Kroger taking $801.3 million in after-tax charges for the year, reducing profits to just $314.6 million. Sales, however, increased 3.9 percent, to $53.79 billion.

Despite the disappointing results for 2003, Kroger seemed better positioned than the other major U.S. supermarket players to withstand the Wal-Mart onslaught. Its keen focus on curtailing operating costs was enabling it to hold the line on price increases, this in spite of the fact that its unionized workforce was better paid and enjoyed better benefits than the nonunion workers at Wal-Mart. Moreover, Kroger claimed to hold the number one or number two position in 43 of its 52 major markets. Future acquisitions and new store openings were likely to be designed to bolster the company's standing in these existing territories rather than to expand into new ones.

Principal Subsidiaries

Dillon Companies, Inc.; Fred Meyer, Inc.

Principal Divisions

Atlanta Division; Central Division; Cincinnati Division; Delta Division; Great Lakes Division; Mid-Atlantic Division; Mid-South Division; Southwest Division.

Principal Operating Units

City Market; Convenience Stores and Supermarket Petroleum; Dillon Stores; Food 4 Less; Fred Meyer Jewelers; Fred Meyer Stores; Fry's; Jay C; King Soopers; Kwik Shop; Loaf 'N Jug/MiniMart; QFC; Quik Stop; Ralphs; Smith's; Tom Thumb; Turkey Hill Minit Markets.