Kroger Co. will look at growing by building its own stores just as much as buying them, CEO David Dillon told a group of investors and analysts on Wednesday at the company’s investor conference.
“We look at M&A (mergers and acquisitions) as one of the vehicles we can use to go into new markets and one of the vehicles that can add fill-in,” Dillon said. “There’s not a preference. Sometimes you have a choice and sometimes you don’t. We pick a strategy based on the fact of the situation.”
Mike Ellis, Kroger’s (NYSE: KR) senior vice president of retail divisions, added that Kroger CFO Mike Schlotman has told company executives that as long as the financial performance of new stores can meet Kroger’s targets, it doesn’t matter which route it takes to expand. Ellis will become president and COO on Jan. 1,when Rodney McMullen takes over for the retiring Dillon as CEO.
Dillon also talked about Kroger’s hesitance to make too big of a push into home delivery, a stance Kroger executives have talked about in the past. Amazon.com has said it will start offering home delivery of groceries on the West Coast, but Kroger has been dubious that fresh goods can easily be delivered in a practical manner and that many customers want home delivery.
“We do expect some change in that environment,” Dillon said of home delivery. “The issues ultimately come down to what does the customer want and how can it be provided? Nothing has changed, except the customer’s interest might be changing.”
Dillon also said Amazon is different because its stock is judged on revenue and not on the cash flow it produces, as Kroger is.
McMullen added that Kroger has spent plenty of time and effort studying home-delivery models in Europe.
“There are markets out there that are more mature than the U.S. that you can learn from,” McMullen said.
Dillon told a story about sitting in a vendor-sponsored meeting 20 to 25 years ago that was also attended by Lee Scott, who later became Walmart Stores’ CEO. Faith Popcorn, a futurist, said at that meeting that groceries would shift to almost all home delivery within five to 10 years. That obviously didn’t happen.
“I wouldn’t be too quick to assume that the leap to home delivery ends up replacing everything,” Dillon said. “I think a large percentage of customers still like to get out and have that interaction with friends and neighbors as they walk through the store.”
Schlotman said Kroger is still on track to wrap up its acquisition of Harris Teeter Supermarkets Inc. (NYSE: HTSI) by its target of the end of its fiscal year on Feb. 1. He’ll lead the integration effort.
“A lot of work has already happened,” he said, adding much can’t take place until theFederal Trade Commission approves the deal.
Kroger is working on a list of items and prioritizing them, much as it did with the Fred Meyer acquisition in 1998. It developed an A list and a B list and focused on the A-list items first. When those were done, the B-list items moved up.
“That way you don’t get distracted from the most important things by good ideas that are secondary,” he said.
Kroger also reconfirmed its earnings guidance for the year. It still expects to generate same-store sales growth of 3 percent to 3.5 percent and earnings per share of $2.73 to $2.80.
It updated its labor situation in a Securities and Exchange Commission filing along with the presentation. It will negotiate a deal with the United Commercial and Food Workers union for Cincinnati employees later this year and has reached a tentative agreement with that union in Seattle, it said. It also plans to address its underfunded pension plan.
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