Kroger Co.

Company Overview

Business Model: The Kroger Co. operates a retail grocery business that includes supermarkets, retail pharmacies, and fuel centers. The Company's strategy focuses on growing households and increasing customer loyalty by delivering value and convenience, supported by four strategic pillars: Fresh, Our Brands, Data & Personalization, and Seamless. Revenues are primarily generated from the sale of consumer products in stores, fuel centers, and via online platforms, with income derived from selling products at price levels exceeding procurement, distribution, occupancy, operational, and overhead costs. The retail business generates data and traffic that fuels fast-growing, high operating margin alternative profit businesses, including data and analytic services and third-party media revenue, which in turn enables reinvestment into the retail operations.

Market Position: The Kroger Co. is diversified across brands, product categories, channels of distribution, geographies, and consumer demographics within the domestic U.S. market. The Company serves approximately 63 million households annually, with over 95% of customer transactions linked to a Kroger loyalty card, leveraging over 20 years of investment in data science capabilities for personalization. Its retail media business, Kroger Precision Marketing, is a key driver of digital profitability and alternative profit. The Company operates 2,731 supermarkets across 35 states and the District of Columbia, with approximately 51% in Company-owned facilities.

Recent Strategic Developments:

• Kroger Specialty Pharmacy Sale: On October 4, 2024, The Kroger Co. completed the sale of its Kroger Specialty Pharmacy business to Elevance Health for $464 million, recognizing a gain on sale of $79 million ($91 million net of tax). This business had sales of $2.0 billion in 2024 and $3.2 billion in 2023.
• Share Repurchase Program: Following the termination of the Albertsons Companies, Inc. merger, the Company resumed its share repurchase program. On December 19, 2024, it entered into Accelerated Stock Repurchase (ASR) agreements for $5.0 billion, receiving an initial delivery of approximately 65.6 million common shares at an average price of $61.54 per share.
• Debt Issuance and Redemption: In 2024, The Kroger Co. issued $10.5 billion of senior notes. Following the termination of the Albertsons Companies, Inc. merger, $4.7 billion of these notes were redeemed.
• Associate Investments: In 2024, the Company increased associate wages, resulting in an average hourly rate of more than $19, and over $25 with comprehensive benefits factored in, representing a 38% increase over the last seven years. The Company invested $192 million in associate training in 2024 and $64 million in tuition reimbursement since 2018.
• Albertsons Companies, Inc. Merger Termination: On December 11, 2024, The Kroger Co. terminated its merger agreement with Albertsons Companies, Inc. following a preliminary injunction from the United States District Court for the District of Oregon and a permanent injunction from the Washington court. Albertsons Companies, Inc. has since sued The Kroger Co. for a $600 million termination fee and additional damages, which The Kroger Co. denies and has filed counterclaims.

Geographic Footprint: The Kroger Co. operates supermarkets under various local banner names in 35 states and the District of Columbia. As of February 1, 2025, the Company operated 2,731 supermarkets, of which 2,273 had pharmacies and 1,702 had fuel centers. Approximately 51% of its supermarkets are in Company-owned facilities. All of the Company’s operations are domestic.

Financial Performance

Revenue Analysis

Profitability Metrics (2024):

• Gross Margin: 22.26%
• Operating Margin: 2.62%
• Net Margin: 1.81%

Investment in Growth:

• Capital Expenditures: $3.6 billion (2024), $3.6 billion (2023) (excluding lease buyouts).
• Strategic Investments: Capital investments are focused on enhancing the customer experience in stores, improving process efficiency, and enhancing digital capabilities through technology developments. In 2024, the Company increased capital investments in store projects, offset by decreased investments in supply chain, manufacturing, and digital projects.

Business Segment Analysis

Retail Operations

Financial Performance (2024):

• Revenue: $143.9 billion
• FIFO EBITDA: $6.5 billion
• Key Growth Drivers: Identical sales, excluding fuel, increased by 1.5% in 2024, driven by increases in total and loyal households, increased Health and Wellness sales, and digital sales, partially offset by a reduction in the number of items per basket. Digital sales grew to over $13.0 billion annually, with Delivery solutions growing by 18% in 2024 (excluding the Extra Week in 2023).

Product Portfolio: The primary grocery store format, the combo store, offers specialty departments including natural food and organic sections, pharmacies, general merchandise, pet centers, and high-quality perishables. Our Brands products represented over $32 billion of sales in 2024, with approximately 31% of units produced in the Company's 33 food production plants (including dairies, deli/bakery, grocery, beverage, meat, and cheese plants).

Market Dynamics: The Company is diversified across brands, product categories, channels of distribution, geographies, and consumer demographics. Its fuel strategy aims to include a fuel center at each supermarket location where feasible and profitable. The Company connects with customers through an expanding seamless ecosystem, offering Pickup, Delivery, and Ship solutions.

Sub-segment Breakdown (2024 Revenue):

• Non perishable: $77.0 billion (52.3% of total sales)
• Fresh: $36.3 billion (24.7% of total sales)
• Supermarket fuel: $15.0 billion (10.2% of total sales)
• Pharmacy: $15.7 billion (10.6% of total sales)
• Other: $3.2 billion (2.2% of total sales), primarily from third-party media revenue, data analytic services, and in-store health clinics.

Capital Allocation Strategy

Shareholder Returns:

• Share Repurchases: $4.2 billion (68.4 million shares at an average price of $61.31 per share) in 2024.
• Dividend Payments: $883 million ($1.22 per common share) in 2024.
• Future Capital Return Commitments: The Board of Directors approved a $7.5 billion share repurchase program on December 11, 2024, replacing the previous program. As of February 1, 2025, $2.5 billion remained under this program, reflecting the reduction of $1.0 billion in unsettled accelerated share repurchases. The Company expects to continue to grow its dividend over time, subject to Board approval.

Balance Sheet Position (as of February 1, 2025):

• Cash and Equivalents: $4.0 billion
• Total Debt: $17.9 billion
• Net Cash Position: -$13.9 billion (Net Debt)
• Credit Rating: The Company is committed to maintaining its current investment grade debt rating and a net total debt to adjusted EBITDA ratio target range of 2.30 to 2.50.
• Debt Maturity Profile (in millions):
  • 2025: $104
  • 2026: $1,300
  • 2027: $606
  • 2028: $675
  • 2029: $583
  • Thereafter: $12,641

Cash Flow Generation (2024):

• Operating Cash Flow: $5.8 billion

Operational Excellence

Production & Service Model: The Kroger Co. operates supermarkets, pharmacies, and fuel centers, and offers an omnichannel shopping experience through its digital ecosystem, including Pickup, Delivery, and Ship solutions. Pickup and Harris Teeter ExpressLane™ services are available at 2,412 supermarkets. Delivery solutions encompass orders from retail stores, customer fulfillment centers, and third-party platforms, while Ship solutions primarily involve online orders dispatched via mail or third-party couriers. The Company also manufactures approximately 31% of its Our Brands units in its 33 food production plants.

Supply Chain Architecture: Key Suppliers & Partners:

• Technology Partner: Ocado International Holdings Limited and Ocado Group plc - exclusive U.S. partner for enhancing digital and robotics capabilities in distribution networks. Facility Network:
• Manufacturing: 33 food production plants, including 14 dairies, 9 deli or bakery plants, 5 grocery product plants, 2 beverage plants, 1 meat plant, and 2 cheese plants.
• Distribution: The Company maintains over 200 business continuity plans to prepare for and manage various risk scenarios, including business disruptions to its supply chain.
• Research & Development: Not explicitly detailed as a separate facility network.

Operational Metrics:

• Supermarket Count (as of February 1, 2025): 2,731
• Supermarkets with Pharmacies: 2,273
• Supermarkets with Fuel Centers: 1,702
• Pickup/Harris Teeter ExpressLane™ locations: 2,412
• Total Supermarket Square Footage (2024): 182 million square feet
• Store Expansions (2024): 6
• Store Remodels (2024): 210

Market Access & Customer Relationships

Go-to-Market Strategy: Distribution Channels:

• Direct Sales: Utilizes in-store sales and owned online platforms for direct customer relationships.
• Digital Platforms: Offers customer-facing apps and interfaces for a seamless experience across store and digital channels, including Pickup, Delivery, and Ship solutions.
• Channel Partners: Engages third-party platforms for certain Delivery solutions.

Customer Portfolio:

• Customer Concentration: Serves approximately 63 million households annually, with over 95% of customer transactions linked to a Kroger loyalty card, indicating strong customer engagement and loyalty.
• Strategic Partnerships: The exclusive partnership with Ocado International Holdings Limited and Ocado Group plc in the U.S. aims to enhance digital and robotics capabilities for customer fulfillment.

Geographic Revenue Distribution: All of The Kroger Co.'s operations are domestic, with supermarkets operating in 35 states and the District of Columbia.

Competitive Intelligence

Market Structure & Dynamics

Industry Characteristics: The food retailing industry is characterized by intense and increasing competition from a wide array of local, regional, and national retailers, including online retailers, mass merchants, club stores, regional chains, deep discounters, dollar stores, and ethnic, specialty, and natural food stores. The industry is significantly shaped by e-commerce, cooking at home, and prepared foods to go, with customers expecting a seamless shopping experience across brick-and-mortar stores and digital channels (pickup or delivery).

Competitive Positioning Matrix:

Direct Competitors

Primary Competitors: The Company faces competition from online retailers, mass merchants, club stores, regional chains, deep discounters, dollar stores, and ethnic, specialty, and natural food stores.

Emerging Competitive Threats: Rapidly evolving technological and regulatory developments related to Artificial Intelligence (AI) and related technologies pose a competitive risk, as competitors may incorporate AI more successfully. New entrants, disruptive technologies, and alternative solutions also represent emerging threats.

Competitive Response Strategy: The Kroger Co. aims to maintain its competitive advantage by continuously enhancing customer connection through investments in its four strategic pillars: Seamless, Personalization, Fresh, and Our Brands. The Company also monetizes traffic and data insights from its retail business to create fast-growing, asset-light, and margin-rich alternative profit streams.

Risk Assessment Framework

Strategic & Market Risks

Market Dynamics: The Company is exposed to intense and increasing competition from various retail and digital formats, evolving customer preferences (e-commerce, prepared foods), and changes in overall economic conditions, including interest rates, inflation/disinflation, and the effect of fuel costs on consumer spending. Geopolitical events, including wars, conflicts, and social unrest, also pose risks. Technology Disruption: Rapidly evolving AI and related technologies present competitive, legal, and security risks. Competitors may integrate AI more successfully, potentially impairing the Company's ability to compete or improve operational efficiency. Customer Concentration: Not explicitly identified as a material risk in the filing.

Operational & Execution Risks

Product Safety: Concerns regarding product safety, including contamination, spoilage, or damage, could lead to lost customer confidence, product recalls, personal injury, or product liability claims. Supply Chain Vulnerabilities: Disruptions in the global supply chain, including loss of supply arrangements, labor disputes, impairment of key manufacturing sites, geopolitical events, quality control issues, supplier financial distress, natural disasters, health crises, regulatory actions, or ethical sourcing issues, could adversely affect the business. Capacity Constraints: Providing flexible and cost-effective fulfillment options (in-store, pickup, delivery) and implementing new technology is complex. Failure to reduce or offset fulfillment costs could adversely affect financial performance. Employee Matters: A majority of employees are covered by approximately 350 collective bargaining agreements. Work stoppages, inability to control health care, pension, and wage costs, or insufficient operational flexibility under these agreements could materially affect operations. The ability to attract and retain qualified talent, including senior management, is also a key risk.

Financial & Regulatory Risks

Demand Volatility: Operating results are materially affected by changes in economic conditions, consumer confidence, and discretionary spending. Inflation can increase costs of goods, supply chain, and labor. Credit & Liquidity: Indebtedness could limit additional financing. Changes in credit ratings or interest rates could affect financing costs. Reliance on third-party financial institutions for cash balances exceeding FDIC limits poses a risk if banks become insolvent. Regulatory & Compliance: Subject to various laws and regulations (antitrust, privacy, data protection, environmental, healthcare, tax, financial reporting). Rapidly changing laws, increased enforcement, and compliance costs, including those related to HFC refrigerants, create challenges. Legal Proceedings: The Company is involved in material litigation, including opioid claims (with a $1.4 billion settlement charge in 2023) and litigation related to the terminated Albertsons Companies, Inc. merger (Albertsons Companies, Inc. seeking $600 million termination fee and damages).

Geopolitical & External Risks

Geopolitical Exposure: Geopolitical conflicts and unstable political situations increase the possibility of cyberattacks and could affect operations. Trade Relations: Changes in tariffs could affect the cost and availability of products. Weather & Natural Disasters: A large number of facilities are in areas susceptible to extreme weather events (hurricanes, tornadoes, floods, wildfires, etc.), which can disrupt operations, interrupt product delivery, and increase costs. The effects of climate change may also impact commodity procurement. Public Health Crises: Future disease outbreaks, pandemics, or widespread health concerns could adversely affect operations, customers, suppliers, and financial conditions.

Innovation & Technology Leadership

Research & Development Focus: The Kroger Co. has invested over 20 years in data science capabilities to create personalized customer experiences and value. The Company is actively utilizing Artificial Intelligence (AI) and machine learning capabilities across its business and plans to increase investments to innovate new capabilities and processes incorporating AI.

Intellectual Property Portfolio: The Company's cybersecurity program includes policies, standards, processes, and practices integrated into its risk management system to safeguard business information and intellectual property.

Technology Partnerships: The Kroger Co. has an exclusive partnership with Ocado International Holdings Limited and Ocado Group plc in the U.S. to enhance its digital and robotics capabilities within its distribution networks, particularly for customer fulfillment centers.

Leadership & Governance

Executive Leadership Team

Leadership Continuity: The Company has development and succession plans for key associates and executives, though recent executive changes highlight the challenges in replacing individuals with the necessary skills and experience.

Board Composition: The Audit Committee of The Kroger Co.'s Board of Directors oversees data privacy and cybersecurity risks, receiving quarterly updates from the Chief Digital Officer and Chief Information Security Officer. The Public Responsibilities Committee oversees environmental sustainability and other ESG matters.

Human Capital Strategy

Workforce Composition:

• Total Employees: Over 409,000 full- and part-time employees as of February 1, 2025.
• Geographic Distribution: Employees are located throughout the United States.

Talent Management: Acquisition & Retention: The Company focuses on attracting and retaining talent through competitive wages, quality benefits, and a safe work environment. It offers a broad range of employment opportunities and invests significant resources in training and motivating associates.

• Hiring Strategy: Aims to recruit, hire, develop, and retain qualified associates with diverse skills to meet evolving business needs.
• Employee Value Proposition: In 2024, the average hourly rate exceeded $19, and over $25 with comprehensive benefits, representing a 38% increase over the last seven years. The Company has invested over $2.7 billion in incremental wage investments over the last five years.
• Development Programs: In 2024, $192 million was spent on associate training, including onboarding, leadership development, and upskilling programs. The tuition reimbursement benefit offers up to $3,500 annually ($21,000 over employment), with approximately 5,500 associates utilizing it in 2024.

Diversity & Development: The Company strives to attract, develop, and engage a diverse workforce that reflects the communities it serves, fostering a culture of opportunity.

Environmental & Social Impact

Environmental Commitments: Climate Strategy: Managing greenhouse gas emissions is a core part of the Company's "Thriving Together" responsible business strategy. A quantitative climate risk assessment indicated that physical climate risks (drought, extreme heat, extreme precipitation) are not anticipated to adversely affect financial condition for the foreseeable future.

• Renewable Energy: The Company monitors utility and technology availability and costs to anticipate future impacts on operations, including the transition to alternative energy sources like renewable electricity or electric vehicles, which could incur higher costs.
• Emissions Targets: The Company anticipates steadily replacing its refrigerant infrastructure to meet state and federal requirements for the phasedown of hydrofluorocarbon (HFC) refrigerants, which could incur significant costs.

Supply Chain Sustainability: The Company monitors climate-related legislation and its potential effects on business, including increased costs associated with compliance, tracking, reporting, and sourcing related to greenhouse gas emissions.

Social Impact Initiatives: The Company prioritizes associate safety, providing training, equipment, and resources to improve well-being. It tracks health and safety metrics, including total injuries, OSHA injury rates, and lost-time injuries.

Business Cyclicality & Seasonality

Demand Patterns: The majority of the Company's revenues are generally not seasonal. However, revenues tend to be higher during major holidays throughout the year. Significant events, such as inclement weather systems (particularly winter storms), can affect sales trends.

Economic Sensitivity: The Company's operating results can be materially affected by changes in overall economic conditions and other factors influencing consumer confidence and discretionary spending, including employment levels, interest rates, inflation, and changes in government benefits.

Planning & Forecasting: The Company maintains more than 200 business continuity plans to prepare for and manage various risk scenarios, including natural disasters and business disruptions to its supply chain, ensuring quick response and operational continuity.

Regulatory Environment & Compliance

Regulatory Framework: The Kroger Co. is subject to various laws, regulations, and administrative practices, including those related to antitrust, competition, privacy, data protection, environmental standards (e.g., HFC refrigerants), healthcare, anti-bribery, anti-corruption, tax, accounting, and financial reporting. Compliance with these rapidly changing regulations and increased enforcement actions can increase costs.

Trade & Export Controls: Changes in tariffs and trade relations can affect the cost and availability of products.

Legal Proceedings:

• Opioid Litigation: The Company reached an agreement in principle in September 2023 to settle the majority of opioid claims from states, subdivisions, and Native American tribes for up to $1.2 billion for abatement efforts and $177 million for attorneys' fees and costs, resulting in a $1.4 billion charge in 2023. As of February 1, 2025, the estimated settlement liability was $279 million current and $1.1 billion long-term.
• Albertsons Companies, Inc. Merger Termination: Following the termination of the merger agreement on December 11, 2024, Albertsons Companies, Inc. sued The Kroger Co. for an alleged $600 million termination fee and additional damages. The Kroger Co. has denied these allegations and filed counterclaims.
• Other Litigation: The Company is involved in various other claims and lawsuits arising in the normal course of business, including personal injury, contract disputes, employment discrimination, wage and hour, and other regulatory claims.

Tax Strategy & Considerations

Tax Profile:

• Effective Tax Rate: 20.0% in 2024, compared to 23.5% in 2023.
• Geographic Tax Planning: The 2024 tax rate was influenced by a tax benefit from recognizing deferred tax assets related to the sale of Kroger Specialty Pharmacy, benefits from share-based payments, and utilization of tax credits, partially offset by state income taxes.

Insurance & Risk Transfer

Risk Management Framework: The Kroger Co. utilizes a combination of insurance and self-insurance for potential liabilities related to workers’ compensation, automobile and general liability, property, director and officers’ liability, cyber risk exposure, and associate health care benefits. Liabilities for workers’ compensation claims are actuarially determined and accounted for on a present value basis.

Insurance Coverage: The Company purchases stop-loss coverage to limit per-claim exposure and is insured for covered costs exceeding these limits. It also maintains insurance for cyber exposure and property-related losses.

Risk Transfer Mechanisms: The Company maintains $478 million in outstanding surety bonds as of February 1, 2025, primarily for self-insured workers’ compensation claims. Additionally, $261 million in standby letters of credit were outstanding as of February 1, 2025, supporting its insurance program and other business purposes.