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EXTERNAL ENVIRONMENT ANALYSIS FOR KROGER CO.

CHAPTER 1

1.0 INTRODUCTION The Kroger Co. (NYSE: KR) is a retailer chain in America. The company is specialized in the manufacturing and processes of food items in its supermarkets. Kroger was founded by Bernard Kroger in 1883 and its headquarters are located in downtown Cincinnati, Ohio. The company earned the profit of US dollars 76.7 billion for the year 2009 from its sales (Annual Report, 2010). Kroger is one of the largest grocery store chainsin American grocery industry (American Companies, 1999) and it is considered as the second largest general retailer in the country (supermarket news, 2007), with WalMart being the largest (Fortune 500, 2009).As of January 30, 2010, the Company operated, either directly or through its subsidiaries, 2,468 supermarkets and multidepartment stores, 893 of which had fuel centers. The Companys supermarket and multidepartment stores operate under banners, including Kroger, Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smiths, Frys, Frys Marketplace, Dillons, QFC and City Market. Kroger operates 40 manufacturing plants, primarily bakeries and dairies (stores org, 2010).

CHAPTER 2

2.0 SWOT ANALYSIS The SWOT analysis of Kroger Co. is as follows: Strengths Market position Brand image and Branding Strategies Operative capabilities Diverse Inventory Opportunities Emphasize private brands Expansion opportunities In store ad-ons options Recapture customers Weaknesses Control over vendors Workforce unions Legal issues Cost of operations Threats Labor costs Economic downturn Debt burden Wal-Mart expansion

2.1 STRENGTHS Kroger enjoys sturdy market position and it has weathered the economic downturn efficiently, the company maintains number two position in the list of companies in the retail business. The company competes with 2468 other supercenters and has achieved at least a number two market share position in 35 of its major markets(supermarket news, 2007). The brand image of the company provides strong competitive advantage to the company over other firms. As of 2010, Kroger was listed at number 47 in the Global Reputation Pulse Ranking by Reputation Institute (rankingthebrands.com, 2010). The branding strategies adopted by the company are

giving leverage to it. It has three pronged branding approach which includes private selection, banner brands and Kroger value. The private selection brand allows the company to compete with the national brands and its value delivers quality at low prices. The banner brands consist of companys private label items. This branding approach enables the company to meet the demands of its customers and offer them savings opportunities that are not given by other brands. It operates around 40 manufacturing units that involve processing, packaging, and manufacturing of its labels. The company has so far manufactured more than 43% of its private label items in its plants. Kroger product inventory includes a wide range of private and national brand products in a number of product categories including food produce, grocery, beverages, apparel, meat, jewelry, accessories, and general merchandise. The diversification strategy is also evident in its fuel service stations and financial services. This wide range of products and services enables the firm to create a one-stop atmosphere which facilitates frequent repeat visits for a number of purposes.

2.2 WEAKNESSES The company obtains most of its merchandise from various venders which limit its control over suppliers. There are number of incidences when the customers have recalled the products in the stores. There is large number of recalls in the previous year including some of its private brand labels (FDA, 2010). Obviously these recalls especially those deemed hazardous to ones health serve to harm the company's brand image by reducing customer confidence and loyalty. The workforce unions at Kroger are a sign of dis advantage to the company in terms of competition when compared with

Wal-Mart, Sears or Target. These competitors enjoy low labor costs. Kroger has faced a relatively long list of legal issues stemming from its acquisition of Fred Meyer and Ralphs Grocery. Among them include a settlement in 2006 over illegal hiring practices that occurred during a 141 day labor dispute. Potential legal issues for Kroger have also loomed in connection with Ralphs alleged improper accounting practices. Kroger is awaiting a decision by the Commissioner of the Internal Revenue Service with regard to a transaction between Ralphs Holding Company and Ralphs Grocery. A negative decision in the case could have substantial financial impact on Kroger.

2.3 OPPORTUNITIES There are some opportunities available to Kroger Co. to pursue to limit some of its weaknesses. First it should increase its emphasis on private label brands. The private labels developed at Kroger are strategic assets to the company. With a goal of decreasing its dependence on national brands, Kroger has increased promotions of its own products which include more than 14,000 brands. During the fourth quarter of FY2009, the companys private label brands accounted for approximately 27% of the entire grocery sales. Private Selection, a private brand owned by Kroger, exceeded $1 billion in sales in FY2009. These brands have offered much appreciated savings to its customers during the economic recession. Kroger has one of the strongest private label (store brand) programs in the United States, selling more than 4,800 products under its label, including grocery, dairy, bakery, and health and beauty aids. The company operates 36 food-processing plants to support the Kroger brand. The private label products account for approximately 20 percent of total sales, several points above the industry average (The Kroger Co,

1997). The company is planning to expand its operations including relocating, remodeling and opening new stores.Kroger is striving to better serve its customers by providing walk-in medical clinics and consumer health assistance in its stores. By partnering with The Little Clinic Kroger is able to offer the services of licensed nurses and certified physician assistants to diagnose treat and write prescriptions for common illnesses as well as for minor injuries. Kroger intends to implement the program throughout its stores and by doing so hopes to reap rewards of addition customer revenues. 2.4 THREATS One of the threats faced by the company is the increased labor costs. The maximum number of employees at the company has joined various labor unions and is affiliated with the several international agencies. Kroger employees have benefited from recent increases in the federal minimum wage and it is predicted they will also benefit from health care reform. These changes present financial challenges for Kroger and have the potential to negatively impact its operating costs, as well as profitability. The increased labor and operational costs may end up into increased debt burden to the company. The high debt burden can adversely affect the image and market share of the company. The strategic plans, like restructuring, remodeling and new store openings, Kroger wants to follow will likely to increase its debt burden. The slumping economy continues to have a negative impact of consumer expenditures. The first quarter of 2009 registered a drop of 60.5% in the US Consumer Confidence Index, the score of 26 in March 2009 as compared to the score of 65 during same period in the previous year. Current job data outlined in The Conference Board Employment Trends Index for April

2010 indicates a moderate recovery may be underway; however a slow recovery may continue to stifle potential expenditures by Kroger customers.

CHAPTER 3 3.0 PESTEL ANALYSIS 3.1 POLITICAL The company has no political pressures on it at present. The political framework of the country supports the Retailership businesses. Kroger took part in the campaign started by USO, which is a not for profit organization that aims to serve the US military troops and their families; this initiative was a collaborative effort by Kroger and P&G (WGSC org, 2011). 3.2 ECONOMIC The economic environment of the company is not performing up to the mark. The customers are increasingly cutting off their expenses by limiting the number of purchases and visits to the stores. The economic downturn has adversely affected the businesses and other operations in US. Kroger is no different from the other companies but due to its intense marketing and customer services strategies it has tried to maintained its position even in the period of recession. 3.3 SOCIAL Kroger is continuously trying to take part in the activities to promote the culture and social benefits to the people of country.Food safety is Krogers top priority. They have well-established, science-based practices in place to ensure that the food items sold in the stores are prepared and handled safely. Kroger recently began a new customer notification system for certain types of recalls. Using customer loyalty database, they are able to notify customers via register receipts about recalls of products they may have

purchased. They use personalized communications to the customers (Kroger Sustainability Report, 2008). 3.4 TECHNOLOGICAL Kroger continuously is in the effort to enhance its processes and technological requirements to meet the customer needs and wants. The company has invested significant amount of capital to ensure that their information system is efficient and cost effective. The company has two data centers that conduct proper research and development to provide innovative and safe products to its customer base. Kroger continues to research and monitor developments in RFID and related technologies. We continue to execute internal pilots with our supplier partners where we see the potential for compelling business process and operating improvements.(TheKrogerCo, 2010). 3.5 ENVIRONMENTAL The company has launched various campaigns to limit the environmental pollution issues that can be a product of its operations. Among those campaigns, bag 2 bag campaign is the most notable one. In 2007 Kroger recycled more than 1billion pounds of corrugated cardboard. That marked a 14 percent increase over the previous year. Through Krogers Plastic Recycling Program, plastic bags, dry-cleaning bags, and plastic shrink-wrap can now be recycled in all of the stores. This program resulted in 9.1 million pounds of plastic recycled from the stores and distribution centers. As a result of the Bag2Bag recycling program in many of stores, the grocery bags used in some of retail divisions contain 25 percent recycled content (Kroger Sustainability Report, 2008).

3.6 LEGAL There are several incidences when Kroger was charged for various legal implications. This has badly affected the market position and the brand image of the company. Potential legal issues for Kroger have also loomed in connection with Ralphs alleged improper accounting practices. Kroger is awaiting a decision by the Commissioner of the Internal Revenue Service with regard to a transaction between Ralphs Holding Company and Ralphs Grocery. A negative decision in the case could have substantial financial impact on Kroger.

CHAPTER 4

4.0PORTERS FIVE FORCES ANALYSIS 4.1 BARGAINING POWER OF SUPPLIERS It plays very important role in the determination of distribution system and prices. There is moderate supplier bargaining issues in grocery industry. The power of suppliers depends on how big the retail grocer is and how popular the brand he is selling.Larger retailers have more power over their suppliers.The bargaining power of suppliers is moderate in the grocery industry. 4.2 THE BARGAINING POWER OF BUYERS The pricing of a product and the bargaining power the consumer have over stores determines the power of a consumer over the producer. If a company truly wishes to compete and make a profit within this industry, they must take these items into account and deal with them as they feel is necessary. In the grocery industry, the bargaining power of buyers is quite high.

4.3 THE THREAT OF THE ENTRY OF NEW COMPETITORS The threat of the entry of new competitors in retail grocery industry is low. They face lot of challenges along the way to establish their business operations. Some of these hindrances include large economies of scale with purchasing and distribution,costly startup purchases for distribution centers, and food health and safetyregulations by US and state governments. New entrants into this industry canbe effective if they sell

specialty products or provide specialty services to helpdifferentiate themselves from the rest of the market.

4.4 RIVALRY AMONG ESTABLISHED COMPETITIONS The rivalry among the existing competitors is high in the retail grocery industry. The industry is very mature at the moment involving intense level of competition. Large retail grocers have a competitive edge in this industry due to their efficient distribution operations and their purchasing power. However, small firms can be competitive in this industry if they differentiate themselves by selling specialty products, providing superior quality goods, or by creating specialty services. Companies in the retail grocery industry deal with many critical issues such as: slow growth, high concentration, lack of opportunities to differentiate product offerings, low consumer switching cost, and a market that has high excess capacity. 4.5 THE THREAT OF SUBSTITUTE PRODUCTS OR SERVICES There is very minimal level of threat of substitute products in the grocery industry due to their low quality issues. Due to this reason the substitute products do not pose much of threat to the industry. The majority of the different retailersin the market carry the same general products. Due to the many differentchoices in food selection, with the exception of specialty type food vendors,tends to lead to the death of a particular company. With all of the choices withinthis day and age, you have to be flexible with what you are willing to sell in orderto compete with the competition.

CHAPTER 5

5.0 RECOMMENDATIONS This study provided brief overview on the external environment analysis of Kroger Co. The findings of the study suggested that Kroger should focus on the following factors in order to excel its business and social image in the world: 1. Establish the business level strategies to minimize the cost of doing business. 2. Communicate with the employees to decrease the effects of labor unions in its business operations. 3. Take reasonable measures to improve the public image of the company which has been compromised due to various legal implications on the company. 4. Effective installation of strategic plans requires proper planning and implementation in order to reduce the debt related issues and the cost of restructuring, remodeling and starting new stores. 5. Take reasonable steps to improve the corporate image of the company with respect to the social and cultural responsibility. Engage in the activities that can enhance the corporate social image of the company so that the people will know that Kroger values them and takes pain for them.

REFERENCES

2007 Top 75 North American Food Retailers, Supermarket News, Retrieved on June 20, 2011 from http://supermarketnews.com/profiles/top75/ 2010 Top 100 retailers, 2010. Stores Organization Website. Retrieved on June 20, 2011 fromhttp://www.stores.org/2010/Top-100-Retailers Collaboration of P&G and Kroger to Support USO, 2011. WGSC org website, Retrieved on June 20, 2011 from http://www.wglobalscorecard.org/ Fortune 500 2009: Fortune 1000 Companies 1-100. CNN. Retrieved on June 20, 2011 from http://money.cnn.com/magazines/fortune/fortune500/2009/full_list/ Groceries Chains, 1999. American Companies Website, Retrieved on June 20, 2011 from http://www.americancompanies.com/industry.asp?ID=Grocery%20Chains Global Reputation Pulse, 2010. Ranking the brands website, Retrieved on June 20, 2011 from http://www.rankingthebrands.com/The-BrandRankings.aspx? rankingID=135&year=175 Kroger Customer Recalls, 2010. FDA website, Retrieved on June 20, 2011 from http://www.fda.gov/Safety/Recalls/ucm215421.htm Kroger Company (KR) annual SEC income statement filing via Wikinvest, Retrieved on June 20, 2011 from http://www.wikinvest.com/stock/Kroger_Company_ %28KR%29/Data/Income_St atemen t The Kroger Co, 1997. Hoover's Handbook of American Business 1998. Austin, TX: The Reference Press. The Kroger Co, 2010. Retrieved on June 20, 2011 from http://www.thekrogerco.com/finance/documents/SectionIV-4.pdf

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