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Brick-And-Mortar's Revenge: Kroger To Trump AmazonFresh

Summary

Kroger’s fill-in acquisition strategy will drive revenue growth near term and is a strategic asset longer term.

Kroger’s profitability is shooting up as its store density allows it to siphon off the lion’s share of Whole Foods Market's customers.

Kroger has spent heavily on investments and will continue to have to do so if it wants to stay ahead of the curve.

Kroger's (NYSE:KR) fill-in acquisition strategy will drive revenue growth near term and is a strategic asset longer term

Kroger has become more active in acquisitions since 2014 (Roundy's 2014; Teeter Harris 2015) in a "fill-in" strategy - to increase its square footage and penetration in its existing markets. The firm missed out on purchasing The Fresh Market (NASDAQ:TFM) earlier this year (losing out to a private equity fund), but we expect more acquisitions in the future. Ahold NV (OTCQX:AHONY), which owns brick-and-mortar chains such as Northeastern Stop-and-Shop as well as the Peapod delivery service, is one potential target. Kroger's revenue has been boosted by acquisitions over the past few years, and acquisitions are likely to remain important in the near term as well - our best-case revenue growth rate averages out to 7% over the next five years, worst-case average growth is 5%.

We think Kroger's fill-in strategy is very important, as is the increasingly plausible trend toward home delivery of groceries. With a dense network of stores and a highly-efficient inventory management system, the next step towards delivery on demand becomes a real possibility...


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