If you were a shareholder of Kroger (NYSE: KR) over the past year, you know it has not been a pleasant ride. The stock is down mightily as a result of a) food deflation and the accompanying grocery store price wars, and b) the blockbuster Whole Foods acquisition from this summer. Add to that the expansion of German discounters Aldi and Lidl in the U.S., and you've got a recipe for investor pessimism.
Continue Reading Below
To combat the threat, Kroger has been lowering prices to match the biggest discounters, investing in its Clicklist digital product, and expanding its higher-margin private label brands to new foods. Recently, Kroger also offered up a new opportunity -- a restaurant! Here's what you need to know about the new Kroger cafe: Kitchen 1883.
The Kitchen 1883 concept
The name comes from the year in which Barney Kroger opened his first grocery store in Cincinnati, Ohio -- not far from where Kitchen 1883 will make its debut in Union, Kentucky. Kroger had previously used 1883 in its private label steak sauce but will now upgrade the brand to the restaurant. According to WCPO Cincinnati, the first Kitchen 1883 will be about the size of a strip mall Subway and will be located inside a large Kroger store.
The company claims Kitchen 1883 will offer "a fresh take on American comfort food" along with handmade cocktails in a friendly atmosphere. The restaurant was the brainchild of Paul Sturkey, a former chef who joined Kroger in Mar. 2016 to head product development. Sturkey was a restaurateur who started the Encore restaurant chain in Wyoming in the late '90s. While the restaurants eventually closed, Sturkey's line of gourmet salad dressings would later become a hit.
Why a restaurant?
Continue Reading Below
At first glance, it may seem misguided to start a restaurant in the current environment. The U.S. has been in a restaurant recession for the better part of two years, so jumping headlong into that industry doesn't exactly seem prudent.
However, if Kroger can use its expertise in food preparation and logistics to create a profitable restaurant, that would greatly expand the company's total addressable market. As the second-largest grocery chain in the U.S., Kroger may have trouble growing meaningfully based on grocery stores alone (though that is debatable if consolidation occurs, which is likely to happen).
As CEO Rodney McMullen said in the company's second-quarter conference call:
[W]e've been working to redefine the market as share of stomach rather than share among traditional grocery stores. We know that the massive $1.5 trillion U.S. food market creates a unique and sustainable growth opportunity for Kroger. You'll see changes in the way we go to market as a leading indicator of the lens through which we view our market. We see anyone who sells food as competitors in the future.
It seems as though Kitchen 1883 is the first iteration of that strategy.
An optimist's take
I happen to think it's a great experiment, as long as it doesn't take management's eye off the ball for the core business. Not only could a restaurant increase overall sales, but it's also possible that people stopping in at Kroger for groceries might also decide to have a meal (or throw back a cocktail). Plenty of competitors have integrated dining into their own store footprint, including Wal-Mart and Whole Foods.
At the company's most recent shareholder meeting, management stressed Kroger's focus on "human connections". In other words, the company may be looking to distinguish itself from Amazon, with its focus on machine learning and automation, by retaining its image of the community grocery store. Certainly, a restaurant (especially one that serves alcohol) could help with that.
10 stocks we like better than Kroger
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Kroger wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of September 5, 2017