Kroger: Competitive Pressures Prompt No-Moat Rating, but Steady Demand Should Buoy Financial Results

Although Kroger operates over 2,700 stores and its top line eclipses $150 billion, we have stripped the grocer of its narrow moat rating as we no longer believe it has a durable competitive edge. The industry is highly competitive, with a virtual absence of customer switching costs, so we think food retailers tend to compete primarily on price. While Kroger’s national footprint likely results in strong relationships with its suppliers—the company is the third-largest domestic grocer with about 7% share, according to Euromonitor—we fail to see how national scale translates into a substantial cost advantage over lower-priced peers like wide-moat Walmart, wide-moat Costco, and hard discounters such as Aldi. Additionally, we don’t think Kroger’s loyalty membership program, fuel rewards, and in-store pharmacy provide a unique means of driving foot traffic to stores.