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Grocery Industry

Grocery Industry. Junichi Hara, Eddie Hjerpe , Ewa Nelip , Megan Wiethoff. Agenda:. Industry overview Company strategies Accounting Comparison ROE What-if’s: Whole Foods expands internationally Kroger expands their organic sector Conclusion. Industry Overview. Grocery Store Industry.

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Grocery Industry

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  1. Grocery Industry Junichi Hara, Eddie Hjerpe, EwaNelip, Megan Wiethoff

  2. Agenda: • Industry overview • Company strategies • Accounting Comparison • ROE • What-if’s: • Whole Foods expands internationally • Kroger expands their organic sector • Conclusion

  3. Industry Overview

  4. Grocery Store Industry • The Supermarkets and Grocery Stores industry makes up the largest food retail channel in the United States. • Key Economic Drivers: • Per capita disposable income • Consumer Confidence Index • Population • Revenue: $ 517.8 bn • Profit: $6.7 bn • Annual Growth 2008-2013: -0.4% • Expected Growth 2013-2018: 0.8%

  5. External Key Drivers • Disposable income: • Less disposable income leads consumers to buy only staple items and substitute name brand items for generic • As disposable income increases, people eat out more resulting in less trips to the grocery store • Consumer Confidence • Low consumer confidence leads people to shop at grocery stores more, but buy less • Population • Determines the number of and types of stores in a particular area

  6. Market Share

  7. Industry Trends • Private Labels: • Consumers shop at more than one place • Companies expanding into Organic Foods • Online and Grocery Delivery

  8. Company Strategies

  9. Whole Foods • Founded in 1980 in Austin, Texas • Revenue: $13.30 bn • Market Cap: $18.84 bn • Employees: 78,400 • Market Price (as of 04/28/14): $50.65 • Number of Stores: 373

  10. Whole Foods • Whole Foods continues to see strong revenue and earnings growth, lead by their continued store expansion • Whole Foods has suggested that the company increase store openings to 33 to 38 in 2014 and 35 to 40 in 2015 • Whole Foods has lowered the top end of its sales growth ranges for 2014. The company now expects sales growth in the 11% to 12% range.

  11. Differentiation Strategy • Stores contain organic and natural foods that are unique and valued to a certain market of people. • Targeting population with a higher income level, that is interested in fitness and wellness, and want food that is in it's most organic state. • Allows the company to charge higher prices which results in higher profit margins.

  12. Value Chain Activities Differentiation • Human Resource Management • Procurement • Marketing and Sales

  13. Potential Problems with Differentiation Strategy: • The current recession has caused people to become more conservative with their money. Higher prices may no longer appeal to the target market if the economy is suffering.  • If big competitors (Kroger, Safeway) start changing their product lines to a healthier option, there may be some fierce competition.

  14. Kroger • Founded in Cincinnati, OH in 1883 • Revenue: 98 Billion (Fiscal year 2013 sales) • Market Cap: 23.06 B • Employees: 343,000 • Market Price (as of 04/28/14): $45.15 • Number of Stores: 2,640 (grocery stores as well as fuel centers and wholesale warehouses)

  15. Kroger Strategy • Kroger focuses on “identical supermarket sales” growth, not just number of stores • Increase shift to organic and fresh produce in the past few years • Kroger pursues the everyday shopper. They have a variety of products and price ranges for low to high income individuals • They expect margins to increase on organic food the next few years but eventually converge

  16. What Makes Up Kroger • Non Perishable (50%), Perishable, Pharmacy, Fuel, and Other • Perishable is the portion of sales that Kroger is most bullish on • Very mature company • Risks include: cost of fuel, declining margins, health care and wage costs

  17. Accounting Ratios Comparison

  18. ROE Analysis

  19. Two Generic Strategies

  20. Accounting Relationship Cost Leadership Same RNEA EATO EATO Differentiation EPM

  21. Return on Net Enterprise Assets

  22. 2013 RNEA Comparison RNEA 14% RNEA 16% EATO EPM

  23. Leverage

  24. Return on Equity

  25. ROE Breakdown

  26. What-if’s Scenarios

  27. What-if’s Scenarios • Whole Foods expands internationally • Kroger expands their organic sector

  28. Whole Foods expands internationally

  29. Whole Foods Expands Internationally • International Federation of Organic Agriculture Movements reported that organic food is now a $63 billion industry worldwide. From 2002-2011, the industry grew 170%, averaging about 19% per year. • The growth is slowing down to 15% in 2013, with the highest rate of growth coming from Asia. • In terms of sales, the U.S. and Europe combined account for more than 90 % globally in the organic foods market.

  30. Assumption 2013 2024

  31. No International Expansion

  32. International growth projection

  33. International Expansion

  34. Impact on WFM Price Without International With International $51.41 $57.47

  35. Kroger is stable

  36. Kroger expands organic sector

  37. History repeats itself

  38. History repeats itself

  39. Q4 2013 Analyst Call Stephen W. Grambling - Goldman Sachs Group Inc., Research Division Great. And then I have a quick follow-up to I think it was Ken's question. And you had mentioned last quarter that you would expect the margin on natural organic items to converge over time with conventional.

  40. Prediction • Kroger complete organic expansion in 5 years • No significant impact on Kroger’s margins • Whole Foods’ margins will be compressed

  41. No competition

  42. EPM Projection Margins will go flat

  43. With competition

  44. Impact on WFM Price No competition With competition $51.41 $38.97

  45. Conclusion • Whole Foods and Kroger following different strategies • Business strategies reflected in accounting numbers • Whole Foods should consider international expansion due to domestic competition

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