We just published a new IOI ChartBook on Kroger 
as a comparison to the one we did on Whole Foods Markets . The three points below are our most important take-aways from our Kroger research.
- The grocery world is changing faster than you imagine.
While you may not think of groceries as a dynamic industry, there is good reason to believe that a generation from now, the grocery business will look substantially different from the way it does now. Kroger’s recent acquisitions and business strategy look to provide it a strong position in a world where the lines between fast casual restaurant and grocery store are blurred and in which a significant portion of the population uses a WiFi connection rather than a shopping cart to buy bread and eggs.
- Kroger’s profitability is shooting up.
Looking at traditional measures like gross margin IOI’s preferred measure of profit – Owners Cash Profits (OCP), Kroger is steadily converting a higher proportion of its revenues to profits. This rise in profitability likely has several root causes – it’s shift to more profitable business lines such as organic and prepared foods, its fine tuning of its organic food supply chain to generate more profits from its own line of organic generics, and what appears to be a trend of more efficient working capital management. You might think that a boost in profit margin from 2% to 3% is no big deal, but it is the same percentage change as if a company generating 10% margins suddenly started generating profits of 15%.
- Kroger has spent heavily on investments and will continue to have to do so.
In a changing environment, a company has to spend in order to stay ahead of the competition. We have seen an uptick in acquisition activity at Kroger and think there are more acquisitions to come. While the high level of investment spending does mean less cash available to the firm’s owners, we believe Kroger’s investments will pay off with a much stronger competitive position long-term. Also, Kroger’s scale allows it a much larger pool of profits out of which to invest than a competitor like Whole Foods Markets (WFM), a company on which we have also reported and in which we have a bearish position. If Kroger and Whole Foods were both sitting at a poker table, Kroger would have a mountain of chips in front of it while Whole Foods would be rubbing its remaining chips together nervously.