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Kroger Has More Than Just an Amazon Problem

By Charley Blaine

Investing.com - Yes, Amazon.com apparently wants to start a supermarket chain. No, it isn't going to put Kroger Co ., one of the largest supermarket chains, out of business.

A Wall Street Journal report that Amazon (NASDAQ:AMZN) was looking to start a new brand of supermarkets in some of the largest markets sent Kroger (NYSE:KR) shares down nearly 4.5% on Friday. The shares still haven't recovered.

Kroger is set to report earnings before U.S. markets open Thursday. Analysts polled by Investing.com expect the company to report earnings of 52 cents a share in the fiscal fourth quarter, down from 63 cents a year ago with revenue of $28.5 billion, down 8.3%. The stock is up slightly in 2019 and was flat in 2018 after a 5% hit in the fourth quarter.

But Amazon isn't Kroger's biggest problem -- yet. A huge problem, which has contributed to Kroger's 35% stock price decline since 2015, is that big chains are stepping all over one another. And there are other competitors like Costco Wholesale (NASDAQ:COST).

Kroger is still big. It operates 2,765 stores nationally, plus a network of food processing plants, including 17 dairies and 10 deli/bakery operations. Store brands generate more than a third of sales with higher profit margins. About 90% of grocery shopping is still done in stores, which are located to attract customers within a few miles.

But the art of surviving is painful, even for a company founded in 1883. Kroger abandoned 14 Kroger-branded stores in the Raleigh-Durham region in North Carolina last year.

And online and Amazon pose big challenges. Last year, the Food Marketing Institute projected online sales will account for 20% of grocery sales by 2025, with Amazon among the leaders.

Kroger isn't sitting still. Last year it bought a 5% stake in the UK's Ocado Group (LON:OCDO), a pioneer in online grocery delivery logistics. The companies will partner to build 20 warehouses focused purely on online delivery by 2020. The first are projected for Cincinnati, Houston, Louisville and Nashville.

Amazon is looking to start its chain, featuring everyday products, in major markets, the Journal said, with stores sized at about 35,000 square feet. That's about half the size of a typical Kroger store, but bigger than the typical store operated by the more upscale Amazon-owned Whole Foods Market (NASDAQ:WFM).

The Journal said Amazon hopes to open one store in Los Angeles this year, ground zero for people who drive and hate it, and is looking for locations in places like San Francisco, Chicago, Washington, D.C. and Philadelphia.

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