Grocery Store Industry Analysis Junichi Hara, Ewa Nelip, Megan Wiethoff and Eddie HjerpeTable of Contents Executive Summary. Industry Analysis, Major Competitors: - Description of four compat ‘Comparable Companies Accounting Ratios. : ROE Analysis....... What-if Scenarios: . Whole Foods Expands Internationally Kroger Expands Its Organic Sector Conchision...ecese oe Appendix... eneseneneesn 10Executive Summary Industry Overview ‘The Supermarkets and Grocery Stores industry makes up the largest food retail channel in the United States. The main economic drivers in the industry are per capita disposable income, consumer confidence index and population. High food prices, less disposable income and high competition results in limited profitability. A recent trend in the industry is increased consumer preference of private labels. In store brand sales increased 21% from 2007 to 2011. Another trend in the industry is that consumers shop at ‘more than one place to take advantage of value pricing and cost saving promotions. More stores in the industry are expanding into organic foods. Finally, e-commerce is gaining popularity in the grocery store industry. This includes online grocery delivery and mobile applications. Company Strategies ‘The companies that are being compared are Whole Foods and Kroger. Whole Foods is an organic specialty store. Stores contain organic and natural foods that are unique and valued to a certain market of people. They continue to see strong revenue and earnings growth, led by their continued store expansion. Kroger is a mature company that is known for it’s grocery stores but also operates wholesale warehouses, Jewelry stores, pharmacies, and department stores. Kroger maintains a significant market share (leading grocer in US) and focuses on “identical supermarket store” growth. Identical growth means that a grocery store has been operating for five years and they have seen a growth in sales for that store without any significant expansion. ‘The way to achieve identical growth is through improving margins and introducing new products. Kroger has seen 41 consecutive quarters of identical supermarket sales growth. Analysis Kroger and Whole Foods may have different business strategies today, but by comparing their balance sheet and income statement you can sce important industry trends as well as how the two companies are compared to each other. Kroger has a much faster conversion cash cycle, which allows them to receive their cash much quicker from sold inventory than Whole Foods. Kroger manage their cash efficiently, but have smaller margins than Whole Foods. Kroger’s margins appear to be more representative of the grocery store industry margins because Whole Foods has @ large premium built in their margins that most of the grocery store industry does not benefit from. Perhaps the most important comparison comes by looking at the debt to equity ratio. Whole Foods has very little debt and because of their profitability they are able to finance operations and expansions through cash. Kroger has made several strategic acquisitions in the past few years through debt. What IPs ‘As Kroger and Whole Foods continue to grow and eventually mature we looked at a few assumptions and how they could impact the balance shect and income statement of both companies. Kroger, already a very mature company, is expecting to see expansion through their organic food sales in the next few years, but eventually they believe the margins will converge as the organic market becomes more saturated. We believe Whole Foods growth will steady and slow eventually because of the margins on organic foods eventually shrinking over time. The organic foods industry is expected to grow at 15% per year with most growth coming from Asia and South America. If Whole Foods decides to expand internationally they can take advantage of the growth opportunity.