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Kroger Case

Principles of Management Case Study

Mitchell Bazzel

on 22 March 2013

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Transcript of Kroger Case

Principles of Management Strategic Analysis Overview of Industry and Firm Barney Kroger opened a grocery store with his life savings of $372 in 1883 in downtown Cincinnati that followed the straightforward motto: “Be particular. Never sell anything you would not want yourself” (“History.”) This motto became the basis of The Kroger Co. Becoming one of the nation’s largest retailers did not happen overnight. The first priority for Mr. Kroger was the customer and, through his business model, he strived to save them time, stress, and money using quality as the key ingredient for profit (“History.”) Kroger was the first grocer in the United States to sell meats and groceries in the same location and the first to have its own bakeries. Manufacturing some of his products and enlisting family members to help cut the costs dramatically. Now Kroger not only produces it’s own bread but of the 14,400 private-label items in the stores, almost half are made by a Kroger owned manufacturing plants that include cookies, milk, soda, ice cream, peanut butter, and so much more (“History.”). Kroger gains a little over a quarter percent of the grocery dollar sales from their manufactured “corporate brands” which gives them a strategic advantage over other companies (“History.”). SWOT Analysis Strategy The foundation of Kroger’s strategic plan is a balance between margin and sales growth. From the beginning Kroger has followed Porter's differentiation strategy of knowing it's customers and target markets and striving to meet every need it can. As they did with their actual stores, Kroger is changing their business model to meet the “changing needs and expectations of our customers in a competitive and consolidating industry,” with the balance of sales, earnings, and capital investment while “being driven by strong, sustainable identical sales growth”( Johnson). The following quote was taken from the Kroger Company website via Johnson’s Blogspot website: Porter's Five Force Model Performance Works Cited Key strategic moves March 22, 2013 This model identifies and analyzes 5 competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths Intensity of rivalry amongst existing competitors Threat of entry by new competitors Pressure from substitute products Bargaining power of buyers (customers) Bargaining power of suppliers SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By definition, Strengths (S) and Weaknesses (W) are considered to be internal factors over which you have some measure of control. Also, by definition, Opportunities (O) and Threats (T) are considered to be external factors over which you have essentially no control. Strengths Weaknesses Opportunities Threats As mentioned before, Kroger’s first key strategic move was to manufacture its own products, allowing customers access to a less expensive product that held the high quality Kroger is still known for today. Basing an entire company off the basics of “putting the customer first” is a standard in today’s business world but in the 1930s, it was not so. Truly caring for its customers by showing them through employee’s actions, ads, sales, etc. helped Kroger solidify its customer-first outlook of business. Adding to Kroger’s list of “firsts,” they were the first grocery chain to routinely monitor product quality and test foods offered to the customer” and the first grocery retailer in America to test an electronic scanner (“History.”) Significant market share – 44 markets in 31 states Increased Emphasis on Private Label Brands - 14,000 brands including Private selection (over $1 billion in sales in FY2009) Economy – slow with higher levels of inflation (food, fuel, etc.) Time has changed the layout and theme of the Kroger stores to focus on the customer want of a one-stop-shop showing again how this company is flexible to the modification of traditions to fit with the every changing market. This company now boasts nearly 2,500 stores (new stores are 65,000 square feet or more filled with 50,000 items) in 31 states with annual sales of more than $70 billion (“History.”). What started as a small grocery store 130 years ago is now a company over grocery retail, convenience stores, jewelry stores, supermarket fuel centers, and pharmacies, not to mention having the world’s largest florist. Facts about the previous are listed by the Kroger website under operations overview and are available in the next step of the presentation. One way Kroger exemplifies this philosophy is by using ad campaigns to talk directly to the customer, ensuring them Kroger is doing what it can to cut costs and make the overall shopping experience more enjoyable as shown by this commercial: With a great business comes great opportunities to grow and in 1983 Kroger merged with Dillon Companies Inc. to become a "coast-to-coast operator of food, drug, and convenience stores” (“History.”) Kroger’s biggest merger was with Fred Meyer, Inc. in 1999. This $13 billion acquisition broadened Kroger’s market area and opened new doors to fresh target markets available. The Kroger company has a great track record of using their customers as a guide to how their business should be run. They use customer feedback to improve how the overall shopping experience should be. Their simple, yet effective method of "putting the customer first" implies they focus on if the customer is happy then quality products will sell. Sticking with this line of thought, just as Jesus states in Matthew 5:41 "If anyone forces you to go one mile, go with them two miles," will help customer retention and overall growth. Kroger also leaves a big impact on the community it operates in. Stated in the Kroger company website, they "contribute more than $220 million annually in funds, food and products to support local communities." They also are active in feeding the hungry with the help of more than "80 local Feeding America food bank partners, women’s health, our troops and their families, and local schools and grassroots organizations("Community.") Geographical Diversity – allowing Kroger to reach out to customers everywhere Valuable private label – self-manufacturing that accounts for 26% of grocery dollar sales Customer service focus - “Be particular. Never sell anything you would not want yourself” Some of the Kroger Company's SWOT is listed below Unionized Workforce – higher labor and operating costs; time consuming labor negotiations Vendor quality control lapses – little control over some supplier merchandise; causes brand uncertainty and potential product recalls Food contamination risk - 42 manufacturing plants In-Store Health Clinic Program - partnering with The Little Clinic allows Kroger to offer services of licensed nurses and certified physician assistants to diagnose treat and write prescriptions for common illnesses as well as for minor injuries “Our identical sales growth is the result of merchandising and operating initiatives that improve the shopping experience and build customer loyalty. These initiatives are funded by operating cost reductions and productivity improvements. Kroger’s associates are focused on improving our customers’ shopping experiences in three major areas: service, selection, and value. Our strategic plan aligns everything we do with meeting the needs and expectations of our customers. Simply put, our business is focused on putting the Customer first. We are confident that our ‘Customer 1st’ business strategy will enable us to generate positive results as we face continued challenges in the rapidly changing retail grocery industry.” Strategic Expansion Plans - help the company enhance its in-store store productivity and to penetrate new markets; reach a larger customer base Customer interest shift – customers shift buying habits from high-end products to those with a lower margin. Increasing labor costs - recent increases in the federal minimum wage and from health care reform High Debt Burden – recent store relocations, remodeling, and openings weigh down the company The treat of a substitute for Kroger's products is not very large. There are so many substitutes out there for food products that what it comes down to is quality. Kroger must always be watching it's close competitors to see what their trends are and adjust accordingly. If the company maintains the quality of the products it chooses to stock in its stores and the quality of the products it continues to manufacture then the pressure from substitute products will be held at bay. The threat of a new competitor in the retail grocery industry is rather low. New businesses are swamped with high starting costs, government regulations, and distribution troubles from the beginning. The only issues to watch for are new firms with their own specialty product or service but product differentiation and brand placement will help keep Kroger on the forefront of the evoked set. The bargaining power of buyers is high in the grocery business. The power of a consumer over the producer is determined by the pricing of a product and the bargaining power the consumer has over the store. To compete and make a profit in the retail grocery business a company must find the balance between the customer proceeded value of their products and the breakeven point of business income. The bargaining power of suppliers is moderate in the grocery industry. The power of suppliers depends on how big the retail grocer is and how popular the brand it is selling. This is one factor determines the distribution system and price of a company's product. Overall, the larger retailers (like Kroger) have more power over their suppliers because every company is willing to be the supplier for a business that it knows is doing well. The rivalry among the existing competitors is high in the retail grocery industry.The industry is very mature and involves an intense level of competition. Large retail grocers (like Kroger) 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
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