Kroger is the largest grocery retailer in the US, operating under 24 brands across 35 states. It has achieved success through acquisitions that expanded its geographic coverage, implementing a loyalty program, and developing an efficient supply chain system. However, Kroger also faces issues like high debt from its acquisition strategy and not having a clear competitive strategy. It has recently begun pursuing a differentiation strategy through its expanded private label brands like Simple Truth organic products. Whole Foods is another major competitor that uses a differentiation strategy focused on natural and organic products.

1. 1
Company Analysis: The Kroger Co.
MGT 4800J
Tayler Reid
Timothy Valentine
Vincent Stubbs
Abigail Roberg
Ohio University

2. 2
Company Profile
History
The Kroger Company (Kroger) is in the Supermarket and Grocery Stores industry which is the
largest food retailer channel. The Supermarket and Grocery Stores industry is a $607.7 billion
industry (IbisWorld, 2017). Kroger has the largest market share of 15.8 % with perishable and
nonperishable items accounting for $87.90 billion (Kroger, 2017). Kroger has a vast geographic
distribution because currently Kroger operates under 24 brand names which is spread across 35
states totaling 2,770 locations (IbisWorld, 2017). In addition to retail location Kroger also
operates 38 manufacturing facilities that produce “private label goods, primarily bakery goods
and dairy products” (IbisWorld, 2017).
Strategic Standing
Mission and Vision
In 2016, Kroger’s CEO emphasized that “there is no single characteristic - no one person or
thing - that explains Kroger’s success, rather it is a unique and powerful combination of factors”
(McMullen, 2016). Kroger recently has leveraged its unique position by starting a new campaign
that extends into 2025. Through this campaign, Kroger has been able to embody who they are as
a brand and its commitment to the community and connect the two. Through Kroger’s strong
emphasis on the community they have started the zero-hunger campaign which will “end hunger
in the communities [Kroger] calls home and eliminate waste across our company by 2025”
(Kroger, 2017). Kroger will be able to achieve its vision of zero hunger and zero waste through
its connections as it will only be possible with “associates, customers, partners and other
stakeholders to help shape innovative solutions and scalable best practices as [Kroger’s] work
evolves” (Kroger, 2017). Kroger has also implemented the zero-hunger campaign into its vision
statement to further prove its commitment to the cause.
Competitive Advantage
Kroger has created a competitive advantage through its private label brands and customer
loyalty. Kroger has had its private label products since the 1990s which attracts customers of all
income levels because they have created three tiers of products. In addition of Kroger being able
to customize the private label products to the needs of its customers, they are also receiving more
profit from these products. Kroger has gained customer loyalty through its fuel centers because
they offer a discount. The Kroger Fuel program has been beneficial for the company because in
2015 Kroger Fuel was in the top of the list with 70-85 % satisfaction. Kroger also has a loyalty
card that uses data analytics to personalize employee training to meet the needs of customers as
well as customizing customer coupons (Du, 2015).
Unique Characteristics
Kroger has a strong supply and distribution system which has lead them to be the only company
in the Supermarket and Grocery Store industry to adopt a three-tier distribution system. This
system has allowed Kroger to increase efficiency. The first tier focuses on items that are
perishable and the warehouses serve a 200-mile radius. The second tier is comprised of health
and beauty items, dry goods and pharmaceuticals are these warehouses serve a 350-mile radius.
Lastly, the third tier serves a larger geographical area for seasonal or promotional items
(Marketline, 2017).

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Main Successes and Issues
Successes
Kroger has obtained the highest market share out of its competitors in the Supermarket and
Grocery Stores industry. This is due to their strategy of acquisitions and expanding geographical
coverage to hit the most markets possible. Kroger has 16% of the market share within the
industry. The company has 2,770 supermarkets and groceries across the U.S. and due to
acquisitions, “Kroger trades under 24 brand names across 35 states” (IbisWorld, 2017). They
have acquired numerous other grocery stores such as Harris Teeter to penetrate other markets in
the US. Kroger also has a differentiated loyalty program that unlike its competitors, includes
being able to get cheaper gas. The company has also created an efficient supply chain that
involves a three-tier distribution system that allows the company to effectively ship out products
to their stores. Kroger also operates 38 manufacturing facilities that produces “private label
goods, primarily bakery goods and dairy products” (IbisWorld, 2017). Furthermore, Kroger is
continuing to utilize predictive technologies to accurately project consumer demand and be an
important and evolving competitor within the Supermarket and Grocery Stores industry.
Issues
Kroger has accumulated a high amount of debt keeping up with their acquisition strategy and
maintaining their diversified product portfolio. On the company’s third fiscal quarter of 2017,
Kroger reported having $9.6 billion worth of debt (IbisWorld, 2017). This impacts Kroger’s
ability to obtain financing from the bank if they ever need it. Another issue with Kroger is their
inability to have one clear strategy in place. Currently the company is straddling the middle and
competing through cost leadership and broad differentiation. This is troublesome because along
with the company not knowing its clear strategy, customers also do not understand Kroger’s
strategy which provides no reason to be loyal to the company.
Competitive Strategy
Generic Strategy
Kroger is currently straddling the middle and competing against both cost leadership companies
as well as differentiation companies. Recently, Kroger has been aligning themselves with the
differentiation strategy to not be caught in the middle. Kroger’s utilization of the differentiation
strategy is aimed at a broad market that involves the creation of a product or service that is
perceived throughout its industry as unique. To achieve its differentiation strategy, Kroger has
greatly expanded its private-label offerings in attempt to cater to the macro-environmental trend
towards making healthier lifestyle choices and also implemented the customer 1st strategy.
Kroger has been in a price war with the competitors operating with a cost leadership strategy and
has dropped prices of many of its products carried in store.
Strategy Implemented
Kroger has expanded its private label brand to include the “Simple Truth” organic brand. Items
within the “Simple Truth” label give the consumer the ability to purchase organic products with
higher perceived value than other in-store products, ultimately improving margins for the
company. The implementation of this strategy additionally improves Kroger’s brand loyalty
because these products are perceived by customers as unique in comparison to many competitors
in the industry. Kroger’s “Simple Truth” label is among the top producing private-label brands in
the United States (Dalavagas, 2017). Additionally, “Kroger’s private-label brands comprised

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25.1% of sales and 26.4% of units sold in fiscal 2015” (Bells, 2015). Kroger also has goals for
2020 towards improved sustainability, which will further differentiate its products and increase
perceived value and brand loyalty. Its plan is to “source 100% of its wild-caught seafood from
fisheries that are Marine Stewardship Council (MSC) certified” (Kroger,2017), and to transition
to 100% cage-free eggs, thus further increasing consumer perceived value (Kroger, 2017).
Furthermore, Kroger has implemented a low-cost strategy to compete with major grocer firms
such as, Trader Joe's, Walmart and Aldi, who rely on a strong cost leadership strategy to attain
market share. These competitors can attribute its success in the industry to high importance
placed on efficiency among distribution, inventory, supply chain and pricing strategies. In
August 2016, Kroger “lowered the cost of 1,000 popular grocery items in 120 of its stores”
(Peterson, 2016) to combat these competitors. Kroger could do this by further increasing supply
chain efficiency which in-turn allowed them to further increase its bargaining power against
suppliers as well as benefits from economies of scale.
Competitors Using Strategy
The main competitor using a differentiation strategy within the Supermarket and Grocery Stores
industry is Whole Foods. Whole Foods differentiates itself by offering high-quality products that
are free of artificial preservatives, colors, flavors, sweeteners and hydrogenated fats (Zapolski,
2010). Whole Foods has used the differentiation strategy to quickly grow its store because they
have gained popularity by targeting all market segments while providing organic and natural
products (Thompson, 2017). Whole Foods’ differentiating strategy incompasses innovation of its
exclusive brands products, improving value perception, increasing digital presence through
instacart, which when used together ultimately is to give the customer a better experience
(Pogorelc, 2015).
The broad differentiation strategy is not a sustainable competitive advantage because as shown in
figure 1 Whole Foods total sales has fluctuated and year to year growth has drastically decreased.
The buyout by Amazon has
proven there can be a turnaround
for Whole Foods because Amazon
will focus on decreasing prices
and also focus on online retailing.
The merger has further
differentiated Whole Foods due to
Amazon’s already established
online presence. Whole Foods will
have a competitive advantage
because many other grocery stores
do not have the ability to sell its
products online and compete with
online retailer giant Amazon
(Keyes, 2017).

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Strategy and Porter’s Five Forces
Threat of New Entrants
Threat of new entrants in the Supermarket and Grocery Stores industry is weak. Firms wishing to
enter the industry must overcome many initial hurdles that require high initial capital investment
such as high leasing and start-up costs, expensive point of sale (POS) systems, securing
financing for these initial investments, and the consolidation of preexisting firms within the
industry. The top three competitors within the Supermarket and Grocery Stores industry make up
31.3 percent of the overall market share. The industry is highly fragmented with more than
41,070 operators competing for the remaining market share (IbisWorld, 2017). Top firms in the
industry already have the capital to push marketing campaigns, and implement the most
innovative technologies to increase in-store efficiency and customer loyalty.
Moreover, pre-existing firms within the industry have strategically located its stores near key
markets based on population density, making it more difficult for new brick-and mortar stores to
compete in the most highly valued geographic areas.
Since the threat of new entrants is weak and Kroger is the top competitor within the Supermarket
and Grocery Stores industry as shown in figure 2 they are not threatened by new competitors.
In fact, Kroger has a better position within the industry because new entrants will be discouraged
therefore not affecting the company. Since Kroger has been around since 1883 and have been
continuously innovating to stay competitive they have invested in the capital requirements
needed to be in the Supermarket and Grocery Stores industry. Lastly, Kroger has positioned
themselves for success with their geographic concentration through its acquisition and merger
strategy. Kroger has 2,770 supermarkets and groceries across the U.S. and due to acquisitions,
“Kroger trades under 24 brand names across 35 states” (IbisWorld, 2017).
Threat of Substitutes
Within the Supermarket and Grocery Stores industry the threat of substitutes is strong. There are
many substitutes readily available to customers in place of grocery stores including mass
merchandisers, warehouse clubs, subscription services and restaurants. With technology
constantly advancing, it is now a reality for consumers to shop for groceries from the comfort of
their own homes. Currently in the United States, online grocery sales make up less than 5% of
total retail grocery sales, but this will not remain at a constant low (Hoovers, 2017). E-
Commerce sales are projected to rise at an average rate of 9.5% per year (IbisWorld, 2017) and
“online sales are expected to surge to over 20.0% of the US grocery market by 2025, growing to
more than $100 billion, according to the Food Marketing Institute (FMI) and Nielsen” (Hoovers,
2017). In 2014, Kroger acquired Vitacost.com to better position themselves to overcome the
threat of online retailing.

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Additionally, online grocery delivery services and online pickup services are expected to further
threaten the Supermarket and Grocery Stores industry (IbisWorld, 2017). Due to the millennial
generation being tech-savvy with greater willingness to utilize the ever-growing resources at its
fingertips, they are more likely to use online grocery shopping as a resource. In 2013, online
grocery shopping accounted for 3.0% of the market share, and by 2023 it is projected to attain
14.0% of the market share (Statista, 2017).
Kroger is among the leaders to combat the macro-environmental movement towards
technological integration in the Supermarkets and Grocery Stores industry. Kroger released
innovative store technology with its newly-introduced “ClickList”, which allows shoppers to
order groceries online or through the firm’s applications, and pick the items up in-store
(Peterson, 2017). It has also implemented self-checkout registers and ecommerce channels as
well as smartphone applications which create a more streamlined shopping environment for
shoppers. Kroger receives valuable information form shoppers using the firm’s smartphone
applications which analyze the habits of shoppers and delivers targeted digital coupons to them.
Kroger is also directing capital towards the research and development of interactive shelves that
send personalized discounts and product suggestions to shoppers who are using its smartphone
application as they travel throughout the store (Stranger, 2017).
Kroger plans to remain competitive against mass merchants by expanding a new generation of
stores called “Kroger Marketplace” (Peterson, 2017). Kroger has extended its products beyond
traditional groceries, enabling consumers to look to Kroger as more of a one-stop shopping
center than to competitors in the traditional Supermarket and Grocery Stores industry. These
stores will feature nearly everything that can be found in Walmart, in attempt to capture a more
loyal customer base that will become more reliant on Kroger for all their shopping needs and not
just individual items. As of April 1, 2017, Kroger had already opened more than 120 Kroger
Marketplaces and plans to expand its supermarket presence in the future (Peterson, 2017).
Bargaining Power of Suppliers
The bargaining power of suppliers is weak in the Supermarket and Grocery Stores industry. The
suppliers do not have bargaining power over grocery stores due to several factors including;
suppliers selling commodities, grocery stores can switch to alternative suppliers, and lastly
grocery stores have grown larger due to mergers and acquisitions and even though suppliers are
trying to do the same they are not able to obtain bargaining power. Kroger has further overcome
the challenges of the bargaining power of supplier through its own manufacturing facilities and
distribution channel. Currently Kroger has 38 facilities and its “food production plants produce
45% of [its] grocery category corporate brands sold” (Kroger, 2016).
Bargaining Power of Buyers
Bargaining power of buyers is moderate in the Supermarket and Grocery Stores industry.
Customers switching costs are low due to many reasons, including shoppers going to multiple
stores with 75% citing lower prices for the main reason, no brand loyalty with 53% saying they
would change its grocery store, and lastly many products offered are homogeneous
(MarketTrack, 2014). It very easy for customers to switch stores without occurring any
additional costs. Many grocery stores struggle to keep up same-store sales due to the high

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number of competitors within the Supermarket and Grocery Stores industry (Market Realist,
2015). To combat the bargaining power of buyers, Kroger has implemented self-checkout
registers and ecommerce channels as well as smartphone applications which create a more
streamlined shopping environment for shoppers. Kroger receives valuable information from
shoppers using the firm’s smartphone applications which analyze the habits of shoppers and
delivers targeted digital coupons to them. Kroger is also directing capital towards the research
and development of interactive shelves that send personalized discounts and product suggestions
to shoppers who are using their smartphone application as they travel throughout the store
(Stranger, 2017). This will help Kroger to more efficiently offer discounts through
personalization and eliminate the pressure to offer same-store sales.
Direct Rivals
Intensity of Rivalry
The intensity of rivalry is strong in the Supermarket and Grocery Stores industry. There are
several factors making the industry more competitive including the items being sold are non-
discretionary with constant demand, buyers cost to switch retailers are low with consumers
shopping an average of 5.4 stores, and lastly homogenous products are carried by retailers
(IbisWorld, 2014; Progressive Grocer 2017). To gain customer loyalty Kroger has implemented
its Customer 1st Strategy that focuses on “growing the connection with the Customer and
remaining relevant to them”, which they are using to retain customers to reduce the threat from
the strong intensity of rivalry (Kroger, 2016). Kroger has more competition based on their
position on the group map below in figure 3 due to straddling the middle.
Figure 3: Strategic Group Map

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Kroger’s Financial Situation
Balance Sheet
Over the five years through to 2016, Kroger has had a steadily increasing balance sheet. On the
assets side, increases can be partially attributed to growth in receivables and inventories. This
level of growth corresponds with the increase in stores Kroger operates over the time period.
Additionally, the company has seen growth in plant, property, and equipment (PP&E) over that
period. These increases come from organic growth, as well as inorganically through acquisitions.
The company has opened about 375 new stores during the time frame, some of which were built
by Kroger and partially contribute to PP&E growth. The company has also pursued an
aggressive acquisition strategy focused on expanding its geographic footprint and building a
larger organic portfolio. Notable acquisitions since 2012 include Roundy’s Inc., Vitacost.com
Inc., and Harris Teeter Supermarkets Inc. Roundy’s is a smaller supermarket chain that operates
primarily in Wisconsin and the Chicago area. The primary reason Kroger acquired the company
in 2015 was to expand its geographic strongholds to those markets. Kroger bought online health
product retailer Vitacost.com in 2014, in order to utilize the websites online distribution. Vitacost
had incredibly strong infrastructure in regards to shipping to home. The deal also helped the
company vertically integrate the vitamins and health products sold in Kroger stores, and gave the
company another place to sell its organic brand Simple Truth. In 2013, Kroger bought another
grocery store chain, Harris Teeter, in order to grow operations in the Southeast, especially in
urban areas. Additionally, Harris Teeter is known for upscale stores and exceptional customer
service. Harris Teeter was an early adopter of “Click-and-Collect”, a system that allows
customers to order groceries online and then pick them up in store. Kroger has since expanded
the program to 640 (about 25 %) of its locations. In early 2017, Kroger bought Murray’s Cheese,
a gourmet cheese company that has a longstanding partnership with the grocery store. Since the
purchase, Kroger has accelerated the placement of Murray’s locations within its supermarkets.
Additionally, the acquisition has helped Kroger enter the Northeast region of the U.S., the only
area where the company does not operate supermarkets. Both the Vitacost and Harris Teeter
acquisitions were entirely paid for through debt, which has raised Kroger’s debt levels and
multiples significantly. For additional information on Kroger’s balance sheet please refer to
appendix A (Kroger, 2012-2016).

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Income Statement
While revenue for Kroger has been steadily growing year over year since 2012, net income
dropped slightly from 2015 to 2016. The drop can be mostly attributed to a fall in same store
sales, excluding gasoline. In the first quarter of that year, management conceded the decline was
largely the result of commodity price deflation, particularly in milk and eggs.
In order to retain customers while its competitors kept promotional prices, Kroger was forced to
lower prices as well. Wal-Mart was the biggest driver of intensified price competition. Over the
quarter, Wal-Mart lowered grocery prices by 1.3 %, compared to a 1.2 % price drop at Kroger
for the same basket of representative goods. Moving forward, analysts anticipate further
increases in price competition in the Supermarket and Grocery Stores industry. One of the bigger
threats currently facing the Supermarket and Grocery Stores industry is an ongoing price war.
Margins are also an ongoing issue for Kroger within a razor thin margin industry. Gross margin
fell 30 basis points (0.3 %) in the second quarter year over year. This can be mostly attributed to
the price declines, but with a net income margin of just 1.3 %, the company doesn’t have room to
give. However, cutting prices has seemed to work at increasing sales volume and customer
traffic. This has helped the company make minor gains in market share, despite negatively
impacting profitability. In order to help offset the revenue loss from lower prices, the company
has planned to cut capital spending by 600 million dollars over two years (Kroger, 2012-2016).
Increasing selling, general, and administrative expenses (SG&A) have largely contributed to the
significant increase in total operating expenses for Kroger over the past four years. The rest of
the increase in operating expenses can be
attributed to increased depreciation
accounted for on the income statement, as
Kroger’s fixed assets have aged. SG&A
likely increased mainly due to increased
labor costs because of minimum wage
raises during the relevant time frame.
While the federal minimum wage has
remained the same since 2010, more than
half of U.S. states increased state
minimums in 2014 and 19 states have tied
minimum wage to inflation, meaning it
automatically increases each year. About 12 states representing almost a third of the U.S.

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population have aggressive minimum wage increase plans. These regulations have given unions
more bargaining power when it comes to wages, leading to further increases even outside of
areas where the law requires it. Increased expenses relative to revenue has further compressed
already thin margins and this trend is likely to continue. SG&A growth has slowed significantly
over the past year, which indicates Kroger has done a better job managing costs and made cuts
elsewhere to adapt to growing wage costs, over which the company has little control.
Kroger has been able to partially offset increased operating expenses through a continual decline
in cost of goods sold relative to revenue. The two ways to achieve this effect is by increasing
prices while supply costs remain the same, or to find ways to decrease supply costs. Since
Kroger was lowering prices over this time
frame, it is reasonable to assume the
company has been able to obtain lower
prices from suppliers. This is likely the
result of increased bargaining power as
the company grew and achieved larger
economies of scale. Suppliers likely
became more dependent on Kroger for
income, and as a result were willing to
negotiate lower prices for the company to
maintain and increase its sales volumes.
For additional information on Kroger’s
income statement please refer to appendix A (Kroger, 2012-2016).
Statement of Cash Flows
Operations
In each year from 2012 to 2016, Kroger has seen an increase in accounts receivables. While this
is a positive trend for general profitability, it also means the company has not seen its cash level
increase along with revenue and net income. Considering the high debt levels of the company,
this could lead to liquidity problems in the future. However, because of the increases in net
income, cash from operations has steadily increased.
Investing - Over the five years through to 2016, Kroger has significantly increased the amount of
fixed assets on its balance sheet and has spent cash for some of the acquisitions of its
subsidiaries. Both of these decrease cash flows, and have contributed to decreasing cash flow
from investing over the time period. These investments make sense for a company trying to
expand its geographic footprint through acquisitions.
Financing
As Kroger has taken on more debt and begun repaying its outstanding loans, cash from debt has
generally trended down. Since most of the company’s debt is related to its acquisition activities,
such changes would be expected.

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Overall
In 2012 through 2015, Kroger saw steady increases in free cash flow. However, in 2016, free
cash flow fell significantly. Free cash flow is important because it represents the amount of
money actually available to the company to re-invest for future earnings. However, with the
exception of 2014, Kroger has seen a positive increase in cash each year during the time period
(Kroger, 2012-2016).
Ratio Analysis
Market Share
Food retail market share as well as organic product retail market share are important measures to
compare grocery stores that are competing on the perceived value of their products. Organic
products tend to have a higher perceived value. In the U.S. Wal-Mart is the largest food retailer,
followed by Kroger. Whole Foods and H-E-B, a regional grocery store in Texas control much
smaller portions of the overall market. While organics only represent about a quarter of Krogers
sales, the company is responsible for 32% of organics sold in the U.S. Whole Foods sales are
made up almost entirely of organic products (about 98%), and has a slightly smaller market share
of organic food sales in the U.S. Wal-Mart does not sell many organic products or publically
break out its revenue numbers on that basis, but it likely holds only a small portion of organic
food sales in the U.S. H-E-B does not release information on its organic sales, but has its own
organic private label and has an all-organic store format. However, since H-E-B only controls a

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small market share in U.S. food retail, it is unlikely to have a significant portion of the organic
food market.
Consumer Favorability Rating
This is a measure based on survey data that rates what proportion of supermarket consumers
view the store positively. Kroger ranks the highest of all supermarkets in the U.S. at 53% and
Wal-Mart has the lowest ranking at 30%. Whole Foods and H-E-B fall in the top half the
rankings for all supermarket chains.
Specialty Department Services
This is a survey category that rates how satisfied grocery store consumers are will the specialty
department offerings at different grocery stores. H-E-B does the best in this category, followed
by Whole Foods. Kroger has a high ranking relative to other supermarkets, but it still falls
significantly below H-E-B and Whole Foods. Since Wal-Mart is not a pure play supermarket, it
was not included in the survey so there is no data. Generally speaking, Wal-Mart offers fewer
specialty department services because the store also sells many product lines outside of food
retail.
Online Ordering Options
Kroger, Wal-Mart, and Whole Foods each have their own online ordering options. Kroger and
Wal-Mart offer a click-and-collect service in which customers can order groceries online and
then quickly and easily pick them up at a store location. Whole Foods also has click-and-collect,
along with a delivery service through its owner Amazon for non-perishable foods. H-E-B
partners with Instacart, a service that allows customers to order groceries online or via mobile for
same-day delivery. However, H-E-B does not have its own online ordering options. Whole
Foods also has a partnership with Instacart.
Current Ratio
The current ratio compares current liabilities to current assets. Kroger has a low current ratio
since it would be unable to cover all of its debt liabilities through liquidation of its assets. This

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puts the company at a high risk for bankruptcy. Wal-Mart has an even lower current ratio, while
Whole Foods is in a strong position with a current ratio significantly above one. Having a low
current ratio can restrict the agility of a company to make quick investments to adapt to a market
changes, as it needs a large proportion of its readily available capital to pay off debt.
Debt to Assets & Debt to Equity
These ratios compare how much total debt a company has to all of its assets and debt level
relative to equity. Kroger has much higher debt multiples than its competitors, which weakens its
financial position. When a company has high debt, interest payments and loan payments take up
a significant amount of revenue and can hinder a company from having enough money to make
new investments.
Net Income Margin & Operating Margin
Grocery stores typically have slim margins because of high costs and high customer price
sensitivity. On margins, Kroger outperforms Whole Foods, which is likely the result of strong
supplier relationships and more vertical integration for private label brands. Wal-Mart does
significantly better than both Kroger and Whole Foods, but does not break out its margins just
for groceries. Since Wal-Mart is not a pure play grocery store like Kroger and Whole Foods, it
has higher overall margins from its product lines outside of food retail.

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Inventory Turnover
Inventory turnover is an important measure to determine how well a company manages its
inventory. Higher inventory turnover means the stores are going through inventory faster as
people buy products and they do not sit on the shelves for very long. Whole Foods significantly
outperforms Kroger in this metric. There are two likely contributors to this disparity. First,
Whole Foods offers a wider range than Kroger of perishable items including produce and
prepared options. As a result, they cannot stay on the shelves for as long before going bad and
being removed. Second, Whole Foods may have more success in only stocking products its
customers want to purchase. Kroger does have better inventory management than Wal-Mart, but
since groceries are not broken out separately from Wal-Mart’s other products, it is possible that
the stores other offerings are lowering the ratio.
Same Store Sales Growth
Same store sales growth measures how much revenue growth is derived organically, which is an
important measure to determine if a company is generating revenue growth in each location or
adding locations to grow revenue. Kroger has same store sales growth from 2016 to 2017 of
0.7%, meaning that about half of the company’s revenue growth was organic. This is a very
strong indicator of success as Kroger has been able to draw more sales at its existing locations
and grow through acquisitions. Wal-Mart also has positive same store sales growth, but Whole
Foods same store sales dropped nearly 2% from 2016 to 2017. This means Whole Foods has
been getting less revenue at each location and that revenue growth stems from opening new
locations.
For additional information on Kroger’s ratio analysis please refer to appendix A (Kroger, 2012-
2016).

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SWOT Analysis
Strengths
 Diversification
 Private Label
 Zero Hunger/ Zero Waste
 Sustainability
 Supply Chain
 Distribution
 Strong Product Mix
Weaknesses
 High Debt
 Product Recalls
Opportunity
 Organic Food Trend
 Online Grocery Retailing
 Snacking Trends
 Pre-Packaged Meals
 In Store Experience
Threat
 Industry Diversification
 Restaurants
 Intense Competition
Strengths
Diversification
Kroger has had an extensive acquisition strategy that has largely diversified its product and
service portfolio. Aside from normal groceries, they carry organic food items, home products,
pharmaceutical services, jewelry, and even fuel. Due to the acquisitions, Kroger has a variety of
different stores and labels customers can choose to go to if they want more differentiation. In this
way, Kroger can target many customers within the industry in a way that competitors cannot.
Customers can find everything they want in one location without going to other grocery stores
(Kroger, 2016).
Private Label
Another strength is that Kroger has been promoting its own private label products. This is in
response to the rise in demand of organic goods. The sale of these private labeled items
accounted for a quarter of its financial sales. Kroger saw a record sale of 8.2 billion units of its
private label products in 2016 and continues to expand it at a rate of 60 new items each month
(SmartBrief, 2017). It saves Kroger a lot of money when they do not have to be dependent on its
suppliers. Simple Truth is one of Kroger’s successful private labels. The sale of private labeled
products also gives Kroger more bargaining power with its suppliers. Private label products
made up 26% of Kroger’s sales in 2016 (Seeking Alpha, 2016).
Zero Hunger / Zero Waste
“Logistics has joined with our manufacturing plants and stores in the EPA’s Waste Wise
Program and adopted the EPA’s “zero waste” definition for our sustainability efforts. In 2016, 28
of our Distribution Centers began to track individual waste streams to identify opportunities for
waste reduction. Currently, 25 of 28 locations measuring results are meeting or exceeding the
EPA's zero waste definition (Kroger, 2016).

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Sustainability
In addition to improving our capture of cardboard and plastic recycling throughout our
Distribution Center network, through the Feeding America Perishable Donations Partnership,
Kroger increased food donations by 22% in 2016 compared to 2015! The continued efforts and
focus of our Corporate Sustainability plans support our commitment to our communities and the
environment.” (Kroger, 2016).
Supply Chain
Kroger has created the Cincinnati Fresh Center distribution center which “provides great
opportunity to develop and implement innovative changes and processes that will allow
flexibility in our fresh supply chain to remain competitive and meet ever changing customer
demands” (Kroger, 2016).
Distribution System
Kroger utilizes a three-tier distribution network to deliver merchandise to its stores around the
country with ease. This means delivering the product to the Kroger store on a set distance from
the distribution center depending on the type of product. The first tier includes perishable
products and local dry goods that would have to be within 200 miles of the Kroger store. The
second tier of distribution centers include retail stores that have to be within a 350-mile radius of
each other. This includes pharmaceutical items and health and beauty care items. These centers
allow Kroger to purchase at the lowest prices possible since these items can generally last and be
kept for a longer period. The third tier is shipping seasonal products and other general
merchandise to an unlimited distance around the world. This system revolves around cost-
effective store delivery (Marketline, 2017).
Strong Product Mix
Kroger has a vast selection of brand items which include private selection, banner brands and
value segmented products. As mentioned previously, Kroger has its own extensive variety of
private products. This includes three lower priced private label lines for frugal shoppers. 40% of
Kroger’s home goods are also private label (Coolidge, 2016). Kroger also has banner brand
products and value segmented products which still make up much its sales at 75%. Kroger has a
wider variety of items compared to the traditional grocery store due to its home goods lineup.
Kroger also sells gas for a cheaper price to loyalty program members.
Weaknesses
Debt
Despite Kroger’s high market share and earning, they also have accumulated a high amount of
debt. Kroger had reported $9.6 billion in debt on the most recent balance sheet, which represents
62% of total capital (ValueLine, 2017). Kroger bases much of its strategy on acquisitions, but a
large amount of debt means that they will struggle to get additional financing for further
acquisitions. There are also interest payments tied to the $9.6 billion which will continue to
weigh Kroger down. Kroger is also struggling dealing with how the price of many main food
items such as dairy and produce products has been falling. This convinces customers to go to
cheaper grocery stores for these kinds of products. This has triggered Kroger to focus more on
brand and customer loyalty to keep shoppers happy with the Kroger name. Price competition

17. 17
amongst players in the Supermarket and Grocery Stores industry is very high, but Kroger tries to
combat this by continuing to consider price weaknesses (Kroger, 2016).
Product Recalls
One issue Kroger has is that it continuously suffers from dozens of products recalls at any given
moment in time. There’s a category on Kroger’s website that documents all current product
recalls. Most recently, it has had to recall any product that contains macadamia nuts due to a high
risk of listeria (News Desk, 2017). Kroger has also been through a lawsuit due to mislabeling
some of their private label chicken products (Huffstutter, 2014). Many of these recalls come
from its private label brands, including their Simple Truth brand. The recalls have a potential to
reduce the perceived value and overall reputation of Kroger’s products. Kroger does an adequate
job though catching and reporting these recalls as they happen and putting the geographical areas
affected on their website (Kroger, 2016).
Opportunities and Threats
Organic Trends
There has been an emergence of an organic food trend within the Supermarket and Grocery
Stores industry. The organic food market in the U.S. continues to grow at a rate of around $3.7
billion per year and was worth a total of $47 billion in 2016 (McNeil, 2017). This is very
impactful because the U.S. Supermarket and Grocery Stores industry growth has been stagnant
in the years prior to this. A large part of this has to deal with the raise in demand for higher
quality fruits and vegetables. The organic fruits and vegetables sector was worth $15.6 billion
and made up 40% of all organic sales in the U.S. (McNeil, 2017). Companies such as Kroger
have begun to address this by adding its own organic private label products. They can continue
to expand these lines to combat grocery store companies such as Whole Foods, which bases its
entire stores around organic food. Many of Kroger’s organic offerings come from its own private
labels. This was a great move by Kroger because it gives them more bargaining power with
suppliers, which allowed them to effectively enter the organic food market without the high costs
of operations (Kroger, 2016).
Online Grocery Retailing
E-commerce and the wide use of the internet has shifted the way many consumers shop for
grocery items. One quarter of grocery shoppers in a survey done by Nielson said they order
groceries online and 55% of the respondents say they are willing to order groceries soon
(Nielson, 2015). This growth of online grocery shopping has been driven by millennials. So, it
projected to continue to rapidly grow in the coming years. Kroger has taken advantage of this by
releasing ClickList, allowing customers to shop for its goods online and then having the items
ready at the front of the store when the customer arrives. Kroger has seen great success with this.
Kroger is also attempting to utilize smartphones by making an application that allows customers
at participating stores to lookup an item while shopping and have the application point out the
exact location of that item in the store.
Snacking Trends
There has been massive growth in the demand for snacks, particularly healthy snacks (Food
Engineering Mag, 2017). The market for snacks is expected to grow from $94.5 billion in 2015
to $138.2 billion by 2020 (IbisWorld, 2017). Additionally, 54% of Americans saying they are

18. 18
trying to reach for healthier snacks, as opposed to potato chips and cookies (Mintel, 2016). This
has been portrayed by the number of grocery stores increasing its product portfolio when it
comes to snacking options such organic snacks and snacks that include fruits and vegetables. A
report by Mintel states that companies that produce snacks want to focus its packaging on plant-
based ingredients to attract consumers. Consumers satisfaction scores improved with better and
more types of packaging solutions. Shelf life also attributes to the attractiveness of snacking
options.
Pre-packaged Meals
When it came to eating food, the traditional options were generally eating out at a restaurant or
grabbing it at a grocery store and then preparing it. Recently, there has been a group of people
that have become interested in obtaining pre-prepared meals. This has generally been a service
that is provided by a specialized company, but some grocery stores possess a similar option now
also. This is a market that just surfaced in 2012, but is now a $400 million-dollar industry
(Rampton, 2016). Some of the notable companies in this industry include Plated and Blue Apron.
In Store Experience
Kroger strives to continuously evolve its in-store experience for the consumer. Kroger has
always received top marks for customer service and part this has to deal with how they utilize
technology to aid the consumer shopping experience. Kroger stores are constantly monitoring
cameras and use infrared sensors which enable them to monitor foot traffic in real time and
deploy cashiers and stockers out to where they need to be (Nash, 2017). Kroger’s application
also collects data that aids the company and its stores analyze demand in real-time.
Threats
Industry Diversification
The Supermarket and Grocery Stores industry has transitioned from having just mom and pops-
type grocery stores to a wide range and highly segmented variety of stores. There has been a
push towards super discount stores such as Wal-Mart and warehouse stores such as Costco and
Sam’s club. Sales of warehouse club stores rose 10.5x from 1992-2013 to $420 billion. There
were also almost one million jobs added between 2000 and 2015 (Market Realist, 2016). The
idea of warehouse club stores is to buy in higher quantities and save money per item. Also, the
entrance of Amazon into the Supermarket and Grocery Stores industry (with the acquisition of
Whole Foods) raises uncertainty in terms of the effects it will have on grocery store companies.
Restaurant and Beverage
There continues to be a rise in demand in eating out for American families. This is rising at a rate
of between 4.9% and 5.5% each year. On average, 20% of the units within shopping centers in
the United States included food and beverage options and 24,000 new restaurants have been
added over the past 6 years (Cushman & Wakefield, 2017). The number of food halls such as
food courts have doubled in the past four years. There has been a call for more attractive and
innovative restaurants and food halls as opposed to the historically standard ones. Many
millennials and young spenders are willing to spend more money on eating out compared to
shopping and preparing its own food (USA Today, 2017).
Intense Competition

19. 19
Kroger is facing intense competition as its competitors are fighting over market share. Grocery
stores within the industry are constantly acting to differentiate themselves to obtain a higher
customer retention rate.
Recommendation
Increase Focus on Premium Goods
For Kroger to continue being the leading grocery store in the Supermarket and Grocery Store
industry they need to choose a strategy to implement with regards to its products. Currently they
are straddling the middle by competing on a low-cost strategy basis while also competing on a
differentiation strategy basis. Since there is less competition within the premium goods sector as
shown in the table below, Kroger should focus on expanding its premium goods through an
increased differentiation campaign. Kroger has successfully acquired many companies and
should continue this strategy through the acquisition of the premium grocery store H-E-B.
Internally Kroger will also expand its premium goods to capitalize on its strengths and reduce
weaknesses while also taking advantage of opportunities and minimizing threats.
H-E-B Acquisition
Kroger has completed many mergers and acquisitions and its “strategy focuses on identifying
opportunities to bring physical, intangible and human assets into the Kroger organization to
enhance or accelerate achievement of [its] corporate priorities (Kroger, 2016). H-E-B is a
regional chain of supermarkets. H-E-B has a strong organic presence and is in Texas, a market
that Kroger has minimally entered. Also, all of H-E-B’s locations in Texas aligns with figure 4 as
one of the top 10 states in organic sales in 2015.
Figure 4: Top 10 States in Organic Sales
Source: Organic Farming Research Foundation. (2015)
H-E-B
As part of Kroger’s strategy to operate in a less saturated market by focusing on premium
products, the acquisition of the Texas and Mexico-only grocery chain H-E-B would be a
valuable expansion. H-E-B is the Nation’s 25th largest retailer with more than $20B in 2014
revenue and more than 350 brick-and-mortar stores in Texas and Mexico alone (Raven, 2015).
The firm has been recognized by Forbes as America’s 15th largest private company as well as by
Progressive Grocer as the “Retailer of the Year” (Raven, 2015). Additionally, “H-E-B’s

20. 20
sustainable competitive advantage lies in the determination to be socially responsible (Scilly,
2014). H-E-B is a leader in industry contribution, industry leadership, achievements with social
responsibility and sustainability, community leadership, executive stewardship and corporate
culture” (Raven, 2015). Their platform very closely corresponds with Kroger’s pre-existing
platform as well as with the proposed strategy.
Acquiring H-E-B would give Kroger the knowledge and examples of how to incorporate more
premium, specialty products and in-store services into more of its locations, because this is an
area in which H-E-B excels. One option H-E-B shoppers have that is not currently available at
Kroger is the ability to weigh and label their own produce, which helps speed up checkout (Lutz,
2014). H-E-B has a very wide selection of prepared foods including healthy options such as
artisanal salads and build your own sandwiches, as well as fresh barbeque. There are build your
own pizza options at many stores (Lutz, 2014). Each store has a chef to prepare free samples
using H-E-B products and pass out recipe cards to customers who like the options (Lutz, 2014).
Kroger currently does not offer this level of services and in-store experiences, but adding these to
its stores would add value to Krogers brand.
Acquiring H-E-B and adding more premium services to Kroger stores would address many
concerns identified in the SWOT analysis.
Strength
Kroger is well-suited in its private-label portfolio, which accounts for roughly one quarter of its
financial sales and “26.4% of units sold in fiscal 2015” (Bells, 2015). Specifically, Kroger’s
private-label “Simple Truth” organic brand is among the top producing private-label brands in
the United States. The firm already has plans towards improved sustainability in 2020 through its
“Zero Hunger/ Zero Waste sustainability plan which will further differentiate its products and
increase perceived value as well as brand loyalty. They plan to “source 100% of its wild-caught
seafood from fisheries that are Marine Stewardship Council (MSC) certified” (Kroger,2017), and
to transition to 100% cage-free eggs, thus further increasing consumer perceived value (Kroger,
2017).
Because of Kroger’s strong private-label portfolio they are currently in better position to
compete on a differentiation platform due to its preexisting attainment of a loyal customer base
who places value on organic offerings with higher perceived value. Directing campaign efforts
towards its premium goods will positively benefit Kroger’s bottom line because they will be
positioned to be a stronger competitor in an unsaturated market segment as shown on the
strategic map in figure 5. By shifting efforts away from its low-cost strategy Kroger will be able
to reduce costs that would have previously been tied to marketing low-cost items in attempt to
compete with Wal-Mart who is its largest competitor. Additionally, with Whole Foods being the
sole competitor in the premium goods market, Kroger can focus on the strategy that most
effectively competes against them. Kroger’s Cincinnati Fresh Center distribution center will be
an asset in helping to accommodate and implement new innovative supply chain changes that
will come with the altered product selection. Figure 6 illustrates Kroger’s projected shift into the
new market segment.

21. 21
Figure 5: Strategic Group Map Before Figure 6: Strategic Group Map After
Weaknesses
Although Kroger’s financial ratios appear to be a hindrance to obtaining financing for its
premium goods marketing campaign, there are a couple of options the firm can take to eliminate
this potential obstacle. Kroger does not have to go through banks directly to obtain financing for
the proposed project. Rather, they can obtain debt financing which “occurs when a firm raises
money for working capital or capital expenditures by selling debt instruments to individuals
and/or institutional investors. In return for lending the money, the individuals or institutions
become creditors and receive a promise that the principal and interest on the debt will be repaid”
(Investopedia, 2017). Kroger’s net income decreased from 2015 to 2016 in-part because Kroger
had to lower its prices in order to compete with Wal-Mart, who had lowered its grocery prices by
1.3 %. This illustrates how competing with Wal-Mart on a cost basis has had negative effects for
the firm. Kroger will be able to pay down debt at a faster rate due to increased margins from
profits realized from the campaign.
Opportunities
Within the Supermarket and Grocery Store industry there is a growing trend for organic food.
Organic food is projected to have a compound annual growth rate (CAGR) of over 16 % during
2015-2020 proving there is still ample opportunity for Kroger to capitalize on (Mathews, 2015).
Currently organic food has premium price and in a survey consumer reports conducted the food
basket of organic food was 47 % more expensive than a traditional non-organic food basket
(Consumer Reports, 2015). Since there is a premium price attached to organic food it is a
premium product that Kroger will be focusing on promoting. The promotion and increased
supply of organic products in Kroger will also be supported by the Kroger supply chain and
distribution channel. Kroger will be able to keep its three tier distribution in place if they
increase the availability of organic food within its grocery stores because as shown in figure 7
the concentration of certified organic operations align with the geographic locations of Kroger
stores are shown in figure 8.

22. 22
Figure 7: Certified Organic Operators Figure 8: Kroger Supermarkets
Source: USDA. (2017) Source: Seeking Alpha (2017)
The locality of the location and organic operations is important because Kroger’s first tier of the
three-tier distribution system focuses on items that are perishable and should be within a 200-
mile radius. Kroger currently has locations in eight out of the ten states that have the most
demand for organic products as shown in figure 9 which further proves their geographic
locations are a strength to be able to promote its organic products.
Figure 9: Top 10 States in Organic Sales, 2015
Source: Organic Farming Research Foundation. (2015)
By focusing on premium goods within the stores it will also provide Kroger to integrate these
items online because the quality will be guaranteed due to the quality assurance that will be
implemented in Kroger’s distribution center. An increase in quality assurance will be needed to
assure there are no recalls on products and additionally increase customers perceived value of the
products. Currently, consumers issue with online grocery shopping is they are not able to see the
items they are ordering in person, but Kroger will be able to overcome this through its quality
guarantee and gain the trust of customers (Keyes, 2017). In 2014 Kroger acquired Vitacost.com,
which is an online vitamin and health-related products vendor and by acquiring this company it
allows Kroger to have an online presence. Kroger has used this platform to start selling its
natural and organic line Simple Truth, but needs to target customers shopping at Kroger and the

23. 23
other names under the parent company. Vitacost.com already has a strong following and was
ranked the best online organic food store in The Spruce (Moore, 2017). To integrate the two sites
there will need to be a team from both Kroger and Vitacost.com to make sure neither company is
sacrificing brand image or quality. Also, there will need to be increased promotion for the
average Kroger customer to be reached. The integration will provide customers with confidence
in the quality of items they are purchasing online and create loyalty between the customer and
Kroger.
Threats
By focusing on premium products, Kroger will further be able to differentiate themselves and
combat the intense competition within the Supermarket and Grocery Stores industry. As shown
below in figure 10 Kroger is currently straddling the middle in comparison to competitors. As
shown in figure 11 within five years its perceived brand value will increase and they be entering
a less saturated section of the strategic map.
Figure 10: Strategic Group Map Before Figure 11: Strategic Group Map After
Below is a summary how the increased focus on premium goods capitalized on Kroger’s
strengths and reduced weaknesses while also taking advantage of opportunities and minimizing
threats.
Strengths
 Diversification
 Private Label
 Zero Hunger/ Zero Waste
 Sustainability
 Supply Chain
 Distribution
 Strong Product Mix
Weaknesses
 High Debt
 Product Recalls

24. 24
Opportunity
 Organic Food Trend
 Online Grocery Retailing
 Snacking Trends
 Pre-Packaged Meals
 In Store Experience
Threat
 Industry Diversification
 Restaurants
 Intense Competition
Cost of Recommendation
Item Cost
H-E-B Acquisition $14.54 Billion
New Distribution Center in Texas $50.0 Million
Increased Quality Assurance $115,000 per year
Vitacost.com Integration with Kroger $30,000 one-time
Vitacost.com Promotion to Kroger Customers $200,000 one-time
The cost of acquiring H-E-B will be $14.54 billion. Kroger currently operates three distribution
centers in the eastern region of Texas and H-E-B currently operates two distribution centers in
northern and southern Texas. Because of the geographic distribution locations Kroger will need
to build an additional distribution center costing $50.0 million in the western region of Texas to
insure sufficient distribution to the state. Appendix B illustrates the calculations associated with
both the cost of acquiring H-E-B and building a distribution center.
The cost of hiring an employee for half a year to work on integrating vitacost.com with their
increased organic selection would roughly be a one-time cost of $30,000. The cost to promote
Kroger’s vitacost.com through media channels including television, social media and coupons
will be an initial cost of $200,000 and will decrease in years to follow.
References:
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http://marketrealist.com/2015/10/swot-analysis-looking-at-krogers-strengths-and-weaknesses/
Consumer reports. (2015) The cost of organic food. Retrieved from:
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Coolidge, A. (2014). Kroger using house brands to power growth. Retrieved from:
https://www.cincinnati.com/story/money/2014/09/20/kroger-using-house-brands-power-
growth/15955797/
Du, J. (2015) Factors Driving Kroger’s Success. Retrieved from:
https://www.investopedia.com/articles/investing/082815/factors-driving-krogers-success.asp

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Hoovers. (2017). Kroger. Retrieved from: Hoovers Database
Huffstutter, P.J. (2014). Kroger Co. Settles Chicken Labeling Lawsuit Retrieved from:
https://www.reuters.com/article/us-usa-kroger-chicken-lawsuit/kroger-co-settles-chicken-
labeling-lawsuit-changes-packaging-idUSKCN0I21X220141013
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https://www.investopedia.com/terms/d/debtfinancing.asp
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px?entid=1040
Keyes, D. (2017). Whole Foods’ sales soar on Amazon. Retrieved from:
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16-by-2020.html
McMullen, R. (2016). Kroger Outlines Focus, Strategy to Stockholders. Retrieved from:
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Database
Moore, B. (2017). The Best Organic Food Stores Online. Retrieved from:
https://www.thespruce.com/online-organic-food-stores-1666054
Nash, K. (2017). At Kroger, Technology is Changing the Grocery Store Shopping Experience.
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store-shopping-experience-1487646362
News Desk. (2017). Kroger expands macadamia nut recall for risk of Listeria. Retrieved from:
http://www.foodsafetynews.com/2017/06/kroger-expands-macadamia-nut-recall-for-listeria-
risk/#.WiCrLEqnFPY

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Nielson. (2015) The Future of Grocery. Retrieved from
https://www.nielsen.com/content/dam/nielsenglobal/vn/docs/Reports/2015/Nielsen%20Global%
20E-
Commerce%20and%20The%20New%20Retail%20Report%20APRIL%202015%20(Digital).pdf
Organic Farming Research Foundation. (2015). Organic FAQS. Retrieved from:
http://ofrf.org/organic-faqs
Peterson, H. (2016). Walmart, Kroger and Dollar General are slashing prices. Retrieved
from:http://www.businessinsider.com/grocery-price-wars-between-walmart-kroger-and-dollar-
general-2016-8
Peterson, H. (2017). The retail apocalypse is heading straight for Kroger, Whole Foods, and
Aldi. Retrieved from: http://www.businessinsider.com/retail-apocalypse-coming-for-grocery-
stores-2017-8
Pogorelc, D. (2015). Whole Foods outlines strategy to differentiate customer experience,
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Practices. Retrieved from http://sva.isotope221.com/images/strategy/grocery-presentation.pdf

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Appendix A
Balance Sheet
Balance
Statement
2016 2015 2014 2013 2012
Total Assets 36,505 33,897 30,497 29,281 24,634
Total Liabilities 29,795 27,099 25,055 23,886 20,420
Total Equity 6,710 6,798 5,412 5,395 4,214
Income Statement
Year Net Income Revenue
2012 $1,497 $96,619
2013 $1,519 $98,375
2014 $1,728 $108,465
2015 $2,039 $109,830
2016 $1,975 $115,337
Year OG&A Expenses (% of Sales)
2012 15.37%
2013 15.45%
2014 15.82%
2015 16.34%
2016 16.63%

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Ratio Analysis
Food Retail
Market Share
Organic Food
Market Share
Customer
Favorability
Rating
Specialty
Department
Service
Online
Ordering
Options
Kroger 7.17% 32% 53% 43% Yes
Wal-Mart 14.46% 30% N/A Yes
Whole Foods 1.21% 31.6% 48% 53% Yes
H-E-B
1.71% 45% 57% Yes - only
through
partners
Current
Ratio
Debt /
Assets
Debt /
Equity
Net
Income
Margin
Operating
Margin
Inventory
Turnover
Same
Store
Sales
Growth
Kroger .87 38.56 209.79 1.71% 2.98% 11.71 0.7%
Wal-Mart .78 21.49 53.06 2.81% 4.69% 8.11 2.7%
Whole
Foods
1.29 16.22 31.57 1.53% 2.86% 16.38 -1.9%

30. 30
Appendix B
Cost Explanation
Upon calculation, the cost of acquiring H-E-B Amazon’s acquisition of Whole Foods was used
as a reference point as it is the the most similar firm to H-E-B in the same industry. Both H-E-B
and Whole Foods have a 3.5% 1-year growth rate, which made weighting the two even more
exact. Whole Foods has 456 stores with $15.7 billion in revenue and H-E-B has 388 stores with
$23.8 billion in revenue. Also, it was taken into consideration that the cost that Whole Foods was
bought out for being $13.7 billion. Each firm’s revenue was divided by the number of store
locations to come up with .0344 for Whole Foods and .0613 for H-E-B. This number represents
the value of each brick-and-mortar store as a percentage of the firm’s revenue as a whole. Then
.0613 was multiplied by $13.7 billion (cost of acquiring Whole Foods) and then added back the
cost of acquiring Whole Foods ($13.7billion) and that brought us to our estimated cost to acquire
H-E-B which was $14.54 billion
Upon calculating the cost to build an additional warehouse it was noted that the cost Kroger paid
to purchase land for a warehouse in Cincinnati which was $10.0 million and looked at the cost
for Wal-Mart to build a distribution center, which was $90 million and came up with roughly
$50.0 million to build an additional warehouse.