What Does Kroger Know About Fashion?
Kroger (NYSE:KR) is the country's largest traditional supermarket chain with around 2,800 stores in 35 states, but under intense pressure from rivals both off and online, it now thinks adding clothing racks to its stores will help boost sales and profits.
Although other retailers have moved beyond their core offerings in a misguided attempt to draw customers into their stores, Kroger's decision to become a fashion retailer is particularly wrongheaded as it diminishes and devalues its brand.
Penny pinching profits
Kroger's second-quarter earnings report in September was hurt by price cuts it instituted to meet the threat posed by its primary rival Wal-Mart (NYSE:WMT), but also the expanding presence of discount chains like Aldi and Lidl, not to mention the dollar stores that continue to expand the amount of perishables they offer consumers.
The supermarket giant has also been punished severely from Amazon.com (NASDAQ:AMZN)purchasing Whole Foods Market. After an initial round of price cuts immediately after the acquisition was made, Amazon has recently announced it was cutting more prices at the organic grocer and doing so more steeply.
Kroger's revenues of $27.6 billion were up 3% from the year-ago period, but profits slid 8% to $353 million amid the price war.
Made up out of whole cloth
The grocery business has always carried slim margins of around 2% or so, and year to date Kroger is running about half that. Apparel, however, runs much higher, currently offering net margins of approximately 8%. It's easy to see why Kroger is tempted to make the jump to become a fashion plate to boost profitability, but there is also tremendous risk.
The clothing industry is reeling at the moment as bricks and mortar retailers grapple with changing consumer preferences for how they shop. Most retailers are closing stores, reducing their footprint, and firing workers to remain viable. They're also exploring new ways to bring customers to their stores.
A rush toward "experiential shopping" opportunities has resulted in retailers like footwear outlet DSW opening up manicure and pedicure shops in its stores, American Eagle Outfittersinstalling a laundromat in one of its locations, and Nordstrom opening a store that offers just about everything but clothing. Maybe they'll go to Kroger to get their threads.
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