Does Kroger Have Too Many Stores?

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Kroger (NYSE: KR), according to many people who follow the grocery business, faces an onslaught of competition, primarily from Amazon (NASDAQ: AMZN) which recently bought Whole Foods (NASDAQ: WFM). The huge bricks and mortar grocery store faces the same issue that other traditional retailers have. Does Kroger have too many locations?

Kroger operates 2,792 stores in 35 states. Its store count has been virtually flat since the second quarter of 2015. The company has 443,000 “associates”. However, with all this fire power same-store sales rose only 1% last year. Kroger’s revenue has improved for most of the last five years, but that growth has almost stopped. It is a flattening that retailers like J.C. Penney (NYSE: JCP) and Target (NYSE: TGT) began to struggle with long ago.

It is almost certain that any large retailer with hundreds of locations and essentially flat sales has a number of underperforming locations. Traditional retailers have found out the hard way that maintaining all of these stories in un-economic.

The stock market has turned against Kroger with a vengeance. Its shares have dropped 37% in the last year to $23.16. Presumably, investors share the opinion that Kroger will start to shrink as consumers have more options to get groceries from several sources. Among those is Amazon, which has decided to branch out into physical locations in addition to its existing delivery business.

Amazon may find it has made a mistake based on its decision to buy stores. However, even a mistake could cost others in the industry dearly. The huge e-commerce company is bound to stick to its new strategy, if only for a year or two, and invest in it substantially. In the meantime, the competition against Kroger may be crippling.

Kroger’s management has two directions it might go. The first is to fight Amazon by keeping its entire store chain with the hope the success a large network and its brand will allow it to grow again. The other is to take the lesson many other retailers have. Close underperforming stores and hope to win the battle for profitability