From a small northwestern observatory…

I truly like Kroger.  I do the largest portion of my “commodity” shopping there.  Friends and colleagues know of my constant battle with my weight, and sadly enough, Kroger (or their pacific northwest brand, Fred Meyer) is partly to blame.

That said, I’m very concerned with Kroger (and Fred Meyer) as brands, and by extension as users of big boxes of real estate and anchors of shopping centers.  Kroger’s stock hit a one-year high of $37.86 last July, and is today 40% lower at 22.82.  Admittedly, about 7 points of that loss came on the heels of Amazon’s announced acquisition of Whole Foods.  However, another 7 or 8 points came from slow drift over the last 11 months.  For the record, during the past 12 months, the S&P 500 (not the most aggressive benchmark, for sure) rose from 2000 to 2433 (today, 1pm EDT), for a gain of just under 22%.  Hence, Kroger has underperformed the S&P by 62%.  Ahem…. To put this in more meaningful terms, Kroger has lost about $14 Billion in shareholder wealth in 11 months.

So this morning, I took time out of my nasty, busy schedule to listen to Kroger’s CEO, Rodney McMullen, interviewed on CNBC.  I was underwhelmed, to say the least.  He basically wanted to defend their current modus operandi, and bragged about their cheese department (which, I will admit, is quite good).  Arguably, when one loses $14 Billion in shareholder wealth in 11 months, perhaps one should have a “Plan B” to discuss on CNBC.

From a real estate perspective, Kroger and its other brands (e.g. — Fred Meyer) run 2,778 grocery stores in the U.S.  At about 50,000 square feet each, that’s roughly 140 million square feet of real estate (not counting 786 convenience stores, 37 food processing facilities, 1,360 supermarket fuel centers, and such and so forth).  Further, most of these stores are anchors for community shopping centers.  Lose the grocery anchor, and the entire shopping center becomes a dust bowl pretty quickly.

A long time ago, In Search of Excellence established that businesses “in the middle” of a market are doomed to failure.  You can make money at the top of the market (Whole Foods) or at the bottom (WalMart Super Centers) but not in the middle.  Profit margins in grocery have always been razor thin.  I can think of a dozen business scenarios that make sense for Amazon and Whole Foods, not the least is the fact that Whole Foods, geographically, is well positioned to serve as distribution centers for the sort of “top of the market” customers who would order groceries from Amazon.  I would love to see where Kroger thinks its market lies, but I’m going to guess that everyone in the grocery biz who is not chasing the top of the market will be in a race for the bottom of the market.