Ann Hood
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Ann Hood in Special Situation Investing News,

Kroger Takes a Page from Aesop’s Fables

   Remember the story about the tortoise and the hare? Long story short, the tortoise wins a race against the sleeker, more athletic rabbit because he had a plan, stuck with it, and outpaced the rabbit who lost ground and lacked the stamina to finish the race. Very apropos given the latest Kroger numbers. The shares for the supermarket chain are up as much as 6.6% as of last Friday.

Johnathan Feeney, with Athlos Research said, “This quarter’s earnings are a payoff from years of rational business decisions that were extremely counter-cultural for much of the time they were making them.” He goes on to state that those decisions involved making the supermarket better, more consumer centered, and they avoided jumping on many of the fad bandwagons that many supermarket chains did. As a result, they were able to acquire the chain Harris Teeter and Vitacost.com, which have added greatly to the company’s value. Kroger shares, year to date are up more than 40%.

Kelly Bania, with BMO Capital Markets, said that she “expects the supermarket chain to continue to benefit as Wal-Mart becomes less of a threat on the grocery front. Wal-Mart 's (WMT) U.S. grocery store sales have generally flat over the past two years.”

One of the reasons is that people have become particular about upscale products and offerings, something that Walmart can’t compete with. Additionally, Barnia continues, Kroger has added innovations with their technology which outstrips Walmart and has allowed them to drive costs lower, which have increased sales. One of the innovations included a faster checkout time using a system called QueVision which makes sure that there is no more than one person ahead of another in the checkout line. They were able to cut their checkout times from four minutes to 30 seconds.

Kroger also uses the membership card to give the consumer the illusion of savings via coupons, and special low pricing on featured items. In reality, what this has done is allow Kroger to direct the consumer to the products that they need to move more quickly, and at the same time builds consumer loyalty and virtually guarantees return customers. Walmart’s ‘everyday low prices’ slogan doesn’t seem to carry the same weight as it once did.

To put this into perspective, a five year analysis shows Walmart’s stock rising by 47%, compared to Kroger’s stock which has risen to an unbelievable 135%. Most experts agree that it has been the slow and steady attention to consumer experience that has boosted Kroger into the lead in the supermarket race.  

Both Kroger and Winn-Dixie grocery stores offer various incentivizing plans which offer the consumer discounted gas in exchange for their loyalty. The take away, here, is that the consumer will continue to return to the stores that give something back to them. And right now, that someone isn’t Walmart..who is, like the hare, sitting by the side of the road watching as Kroger crosses the finish line ahead of them.