If Kroger Co. had its way, all of its markets would resemble its position in the Kentucky cities of Louisville and Lexington.
Here, the Cincinnati-based retailer has forged a dominant position that has driven away not only chain competitors but many independents as well. It's the kind of hometown dominance enjoyed by Publix Super Markets in parts of Florida, by Stop & Shop in some New England communities and by Safeway in Northern California.
The markets — and Kroger's behavior there — illustrate a chain at the top of its game. Observers say Kroger has taken particular care to protect and grow its market share, including aggressive moves to renovate and relocate stores, while emphasizing an array of new formats and footprints. Its focus on shoppers in the meantime is motivated in part by the footsteps of Wal-Mart Stores, which is the second-leading food retailer in both markets and like Kroger operates multiple formats there.
Grand Rapids, Mich.-based supercenter operator Meijer Inc. runs a distant third in both markets, according to recent figures from Metro Market Studies, Tucson, Ariz. (see tables). Beyond those top three, small chains and independents fight for shares of less than 4% in both Lexington and Louisville.
Jim Buchanan, chief executive of London, Ky.-based Laurel Grocery, a supplier to independent stores in Kentucky and Indiana, said there is no secret to Kroger's dominance in those markets. “Kroger is good,” he said. “They typically have the best facilities in the markets where they compete. They are marvelous at pricing. They give a good price image without being real cheap throughout the store. They know how to run grocery stores.”
Kroger's success in Lexington and Louisville also says a few things about the markets themselves, local sources say. Although the cities, about 60 miles apart, have significant differences, shoppers in both markets are strongly influenced by price. Convenience of a one-stop-shopping experience also ranks high considering the multidepartment stores operated by Wal-Mart and Meijer, with Kroger also looking to expand its Marketplace stores in both markets.
The strength of the larger players has forced many small chains and independents out of the Bluegrass State, while the remaining players have had to be creative to survive, they said. Many, however, said they see an opportunity for differentiation in their respective markets.
Holding Up in the Recession
The Louisville metropolitan statistical area is home to more than 1.2 million, and includes nine counties in Kentucky and five across the Ohio River in neighboring Indiana. Around half reside in the city-county known as Louisville Metro after a 2003 merger of city government with Jefferson County.
A diverse economy based on manufacturing, transportation and health care held up relatively well during the recession, residents said, in part because the economy hadn't bloated in the years leading to the downfall. Now some businesses are hiring again.
“‘We don't see a boom and we don't see a bust’ is what they say here, and it's turning out to be true,” David Nicklies, president of Nicklies Development, a Louisville-based developer, told SN. “Our area's been pretty stable. We retained both of our Ford manufacturing facilities and both of them are being updated. General Electric has moved their green appliance division to their facility here and they're hiring. We didn't dodge anything, but the economy's in pretty good shape and I think we will come out of this thing faster than some other folks will.”
Nicklies has been working with Kroger on various store developments in the Louisville region for more than 20 years. He credits the retailer's success to the leadership of John Hackett, a veteran executive who today leads Kroger's Louisville-based Mid-South Division, which includes more than 160 stores in Kentucky, Indiana, Illinois and Tennessee.
“What you have to realize is you've got one of the best operators in the whole country here with John Hackett,” Nicklies said. “He's very tough to compete against.
“Kroger has never been complacent. You don't find a tired Kroger store in this marketing area. Every store looks like new because it's been renovated in the last five years. And when a store needs to be relocated, they belly up to the table and relocate it.”
Kroger operates 39 stores in the Louisville MSA, as well as six stores doing business under the Jay C banner in Indiana, giving the company a total share of 36.5%, Metro Market Studies said. A program of steady renovation and relocation has kept the base fresh, sources said. Many stores include fuel. Sources told SN that Kroger is looking at least two sites to introduce its multidepartment Kroger Marketplace stores to the market. Kroger officials were not available to confirm this.
“Kroger has expanded a number of stores in the area and has been looking at [acquiring] Blockbuster Video stores as a means to expand by 20,000 or 25,000 feet,” Michael Tabor, an associate at CB Richard Ellis' Louisville office, told SN.
Its ascent to the top was aided in part by the collapse of a former conventional competitor, Winn-Dixie Stores, which abandoned the market in 2004. The former Winn-Dixie locations didn't go to Kroger immediately but instead to independents including Jasper, Ind.-based Buehler's, which bought 16 stores and soon found itself facing financial difficulties. The stores eventually wound up in the hands of some independents, but Kroger has also since taken over some.
Wal-Mart, with 14 supercenters and five Neighborhood Market grocery stores in the region, commands a 26.5% share. The Bentonville, Ark.-based retailer has been renovating stores but not opening them rapidly lately. “They've done a good job building stores around the periphery,” Nicklies said.
Meijer, which first marched into Kentucky about a decade ago, in February opened a store in Richmond, Ky., near Lexington. The store was Meijer's ninth in Kentucky and the furthest south of the entire chain. “We like the area,” a spokesman for Meijer, Frank Guglielmi, told SN. Citing company policy, he declined to discuss any further expansion.
Specialty chains and small discounters still see potential to grow in Louisville. Local sources said Trader Joe's was considering an expansion to Louisville but encountered delays with a liquor sale issue. The Fresh Market, the Greensboro, N.C., specialty grocer, has two stores in Louisville now and Whole Foods Market has one store (a Wild Oats location closed after Whole Foods acquired that chain).
For Rob Auerbach, the “mainstreaming” of natural and organic food, and trends such as the locavore movement are something of a vindication. Auerbach's five Rainbow Blossom natural-food stores have been offering those things to Louisville residents for more than 33 years. He is planning a sixth location in the next year or two.
“As the mass market moves towards us, we gain more customers,” Auerbach told SN. “It's a net positive gain for us, even though some things that used to only be at my store are now available at Kroger.”
According to Auerbach, Kentucky is ahead of most states in developing support for a healthy eating lifestyle, thanks in part to state programs that helped convert former family-run tobacco farms to organic food farms. Kentucky, like California, had its own organic standards before national ones were adopted. “The idea of growing organics, shopping local and buying goods from a small geographical area is something that's been in place here much longer than the national trend.”
Still, he said, much has changed.
“Thirty years ago, people were pretty blasé about their food selections. You asked them where a chicken came from and they'd say, ‘The grocery store,’” Auerbach said. “From there the needle has really moved to the point where it's, ‘My shopping experience is about health and what's best for my family.’ More and more people are aware of that.
“There are still unconscious people eating Ding-Dongs, don't get me wrong,” Auerbach added with a laugh. “But from where we started to where we are? People like me should give ourselves a pat on the back.”
Chain Restaurant Competition
The Lexington-Fayette metropolitan statistical area comprises six counties in central Kentucky and just less than a half-million people. Buoyed by government, the University of Kentucky and technical jobs, it is a more service-oriented economy than blue-collar Louisville.
Kroger, with 16 conventional stores and two Marketplace multidepartment stores, is even more dominant in this market than in Louisville, controlling nearly 40% of the market, according to Metro Market Studies. Wal-Mart operates Neighborhood Market and Supercenter concepts here and controls 30.8% of the grocery market share, while Meijer is third with an 8.6% share.
Grocery stores in Lexington are up against a unique challenge: It's a market that national chain restaurants — many headquartered there or in Louisville — frequently use as a test market for their new concepts, meaning meals eaten away from home are unusually high, according to Brad Newsome, president of Sloan's Signature Market, a five-store, Lexington-based chain that identifies itself as the city's last independent grocer.
“In recent years we've seen these restaurants try and address value, and win back the meals that are being taken from restaurants by supermarkets,” he said. “The economy has hurt restaurants as badly as anyone.”
Sloan's emphasizes perishables, prepared foods and customer service to distinguish itself in a market dominated by Kroger and Wal-Mart, Newsome said. But the emphasis on price from the big guys — particularly lately amid a troubled economy — has been difficult for anyone to avoid.
“There used to be 20 independents here; now we're the only one left,” Newsome said. “We feel we can give our perishables more attention than the big guys can and our foodservice is one of the things we're known for around town — we'll put our fried chicken up against anybody's.
“But the overriding concern is value right now,” he added. “And every time you turn on the TV, you've got Kroger, Wal-Mart and Meijer coming on and telling you, ‘We're the lowest.’ Whether it's true or not, people tend to believe it when they're getting blasted with that message. And that's hurting everybody in the market.”
Save-A-Lot, Supervalu's hard discount chain, operates seven stores in Lexington and has a 3.7% share, while Aldi has some surrounding stores but is not yet a real factor in either Lexington or Louisville, sources noted.
“Some people would like a company like Publix to come up here, but they've only gotten as far as Nashville,” added Tabor of CB Richard Ellis.
Buchanan, whose Laurel Grocery supplies a few independents in both markets, said shoppers at his member stores have shown a willingness to trade down in grocery, with ad merchandise and private-label sales up tremendously, but higher-ticket items and average baskets down.
“The consumer has only so many dollars to spend in a week or a month and they're doing all they can to make it stretch,” he said. “They may not have that much control over the rent or house payments or electric bill. But they feel like they can control how much they spend at the grocery store.”
To combat the more aggressive price stance by Wal-Mart and Kroger, Laurel has tweaked its “Strategic Marketing Initiative” plan for EDLP in Center Store, using deeper discounts on fewer items. The new program began rolling out last week.
“That's what Kroger's doing,” Buchanan said, “so that's what we've got to do.”