Note By Jim Dudlicek
Wonder Drug
I
What’s Kroger’s next move? Here are a few possible scenarios.
’m sure that I’m not alone among industry observers in wondering where The Kroger Co. is going to strike next. Harris Teeter was a major score, a beloved southeastern banner with best practices, especially in online shopping, that Kroger hungrily absorbed. Roundy’s has been a double-edged sword, giving Kroger a new beachhead in the Midwest and the golden goose of Mariano’s fronting an operator that’s basically a fixer-upper. As these assimilations continued, the Cincinnati-based grocery giant became a serious contender to purchase some of the 500 to 1,000 stores that Walgreens and Rite Aid need to jettison as a condition of their $17 billion merger, whose closing has been delayed until January. What might Kroger do with a few hundred drug stores? Kroger won’t comment on pending deals, rumor or speculation. But here are a few possible scenarios. The grocer has been expanding its healthand-wellness strategy, most recently merging its specialty pharmacy subsidiary, Axium, with Orlando, Fla.-based ModernHealth, a specialty pharmacy services provider. Might Kroger launch a free-standing drug store operation? It would seem to make more sense for existing supermarket pharmacy locations to offer these expanded services. Meanwhile, there’s been speculation that Kroger could open up to 300 Main & Vine stores across the country, replicating the fresh-focused market concept that the retailer launched in February near Seattle. Kroger’s acquisition of Rite Aid locations, and moving their pharmacy operations into existing supermarkets, would free up those sites to be converted to Main & Vine stores The pilot Main & Vine measures 30,000 square feet, significantly smaller than most Kroger supermarkets. But according to a February 2016 SEC filing by Rite Aid, its average store size is less than 13,000 square feet. That would require some significant buildout or creative space planning on Kroger’s
Jim Dudlicek
Editor-in-Chief jdudlicek@ensembleiq.com Twitter @jimdudlicek
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| Progressive Grocer | Ahead of What’s Next | November 2016
part to convert the sites, rendering its smaller format too small to be worth the effort. Perhaps a better idea would be to convert the drug stores into online shopping fulfillment centers as part of Kroger’s continued expansion of its ClickList and ExpressLane online ordering services, now offered at almost 400 Kroger locations. Such centers, supplied by other Kroger stores or central distribution centers, could help fill gaps in the retailer’s online shopping network. They would provide greater convenience to consumers and give the retailer further leverage against players like Seattle-based Amazon, which is starting to open brick-and-mortar locations of its own on the West Coast. But leave it to the feds to throw a wrench in the works: The Federal Trade Commission reportedly told Kroger that it would not be allowed to purchase the Rite Aid stores just to close them and move the pharmacy operations inside existing grocery stores, fueling speculation that Kroger may pass on the deal. Could the FTC bend? Maybe, since the Walgreens-Rite Aid merger has been fraught with snags. Between the FTC’s edict to Kroger and several private equity firms steering clear, arguing that the stores up for grabs are too scattered to support a cohesive business plan, Walgreens and Rite Aid pushed their merger completion date from late October to sometime in early 2017, PG sister publication Retail Leader reported last month. Further, SeekingAlpha.com suggests that Kroger may have intentionally leaked that it planned to bail, to provoke a sweeter deal. All of this came while Kroger, reacting to continued deflation, lowered its earnings guidance and expected capital investments for the year, following softer-than-expected sales revealed in its Q2 earnings call. Despite the currently volatile environment, “our growth objectives are on a three- to fiveyear rolling cycle, and we remain confident in those targets,” Kroger CEO Rodney McMullen said during the earnings call. “We are in this for the long run, and not a 12-week quarter or even a particular year. We have demonstrated our ability to invest at the appropriate times to create momentum when the environment improves.” Kroger is steered by consistently prudent management capable of maintaining market leadership through almost any storm. Whatever its next venture, expect it to be the right move at the right time. PG