Macroeconomic factors have been playing with e-commerce growth rates over the past few years. Lockdowns led to an unanticipated acceleration, followed by the desire to experience real life and a dip in e-commerce sales.
Are things finally stabilizing? Trends are pointing to people getting comfortable with incorporating physical and digital shopping into their routines now, and e-commerce is back on the rise.
That's great news for industry leaders like Amazon and Shopify, which can't thrive without it. But investors may not realize that Kroger (KR +3.72%), the U.S.'s largest non-discount supermarket operator, has recently become one of its top e-commerce companies. Does this spell opportunity?
NYSE: KR
Key Data Points
America's largest non-discount supermarket operator
Kroger operates 2,700 stores under various names, including the eponymous Kroger, Ralph's, and Dillon's. Kroger went through some tough times when e-commerce began to grow and it wasn't set up to become a serious competitor. It lost market share, and it took a while to pivot into this new paradigm. It began to seriously invest in e-commerce channels when the pandemic started, and it has benefited in the past few years from both this new program and a return to in-store shopping.
However, investments in e-commerce, as well as other aspects of its business, have been eating away at profits, and while revenue has returned to growth, profits have remained largely stagnant.
KR Revenue (TTM) data by YCharts
Kroger is an e-commerce superstar?
Not only has Kroger embraced e-commerce, it has grown to become the 10th largest U.S. company by share of retail e-commerce sales.
Kroger has piled investments into data science to understand its customer needs and provide creative and effective solutions. It's focused on personalization, which strengthens the relationship with the customer and increases loyalty and engagement. This is illustrated by a 29% increase in digital coupon downloads, which are personalized to the shopper.
Image source: Statista.
E-commerce sales are booming. Total sales increased 1% year over year in the 2023 fiscal second quarter (ended Aug. 12), or 2.6% adjusted for one-time charges and fuel. But e-commerce sales increased 12%, driving growth overall. Kroger gained 1.2 million new digital household customers in the second quarter.
Who knew? Kroger is known for its spacious supermarkets filled with fresh food and geared toward an upscale market, as opposed to discounters like Walmart and Costco Wholesale. It's a smaller company, with less revenue and income and a lower profit margin.
But it's effectively developing a strong e-commerce business that its customers love, and that could be a game-changer in the coming years.
Short-term challenges, high dividend
Kroger is experiencing the effect of inflation, which weighs on it because it's not a discounter. It has launched several owned brands at lower price points which attract more dollars from a wider population, but earnings will likely continue to be pressured until inflation calms down.
It's in the process of acquiring competitor Albertson's (ACI +2.80%), which will make it into a powerhouse company. Kroger is a Buffett stock, and it fits the classic Buffett company -- it plays a large role in the U.S. economy and is likely to stay relevant for decades to come, growing sales and getting back to increasing profits.
It pays a growing dividend, which yields 2.6% at the current price, and it trades at a lower valuation than competitors. Granted, it also posts slower growth. But it's well-positioned to benefit from growing e-commerce sales and could add value to a diversified portfolio.
