Is Divestiture the Right Move for Kroger?

Kroger recently announced it is considering selling its chain of 780 convenience stores across the U.S. The company sites this side of their business would have more value outside of the supermarket core business. For all major changes there is always two sides to the coin and I am sure the leadership of Kroger who have built a reputation for innovation and category leadership have considered both. From a case of divestiture, under the current business structure this makes a lot a sense if you are sitting at the board level allowing this separate business to prosper under a new owner focused at growing in an industry that is going through consolidation. In addition, the board is probably looking at the fact cars will be predominantly electric in the next decade, putting the front court traffic generating engine of the c-store in jeopardy.

Global competitors such as Circle K and 7-Eleven and local favourites such as Wawa and Sheetz are expanding their offering and competing with foodservice operators on numerous day part segments. For Kroger to keep pace with the industry, it would need to invest serious resources to remain competitive. In addition, it has numerous brands such as KwikShop, Loaf’N Jug and Turkey Hill Minit Markets which lack scale and the ability to identify operational efficiencies on thinner margins. Makes a lot of business sense to spin the business off as did IBM with its computer business and PepsiCo with its foodservice Yum! Brands.

However, there is always a counter side to any decision. There is a case for keeping the business as part of Kroger in a world of delivery as convenience will be reshaping the supermarket business. With Amazon getting into the supermarket business with the purchase of Whole Foods and the launch of Amazon Go,  the standard for convenience is being redefined. The convenience business can be reshaped to bring greater convenience to customers by becoming distribution centres allowing more points of contact for consumers. Loblaws’ acquisition of Shoppers Drug Mart has allowed the grocery chain to deliver their private label products and fresh platform to more Canadians. With more food purchase going online and the shift of population growth happening in urban centres, Kroger will need to find a business model that can match the convenience of new start-ups and the potential growth of Amazon Go in urban markets. If anything, the war will be won with the organization that has an agile business model that allows for quick response to market opportunities and a shift in how consumers buy groceries.

Ultimately, I believe the board will push the sell button to allow Kroger to reallocate its capital on revamping its stores to provide the level of convenience millennials are demanding from industry leaders. The capital to retool their convenience chain which is in need for an overhaul and rebranding program may put the parent company financial at risk.

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