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Going Big at the Middle Class Actually Hurts Kroger Co Stock

Dana Blankenhorn

Kroger Co. (NYSE:KR) made its second move in a week into the home shopping future, buying Home Chef for an initial $200 million. It was the kind of news that should have moved Kroger stock one way or the other.

The price could rise another $500 million with incentives built into the deal and follows Kroger’s deal last week with Ocado, a British company that builds automated home delivery warehouses.

The stock’s reaction? Crickets. If anything, the reaction has been negative, shares falling $1 each since May 18, opening May 24 at $24.70 each.

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It has been difficult to figure out. Kroger had sales last year of $122 billion, and its year over year growth for the February quarter came in at 12%. It remains profitable and delivers a yield of 2% to new stockholders.

What could be the problem?

Kroger Stock and the Class War

Kroger is on the wrong side of the class war.

What all of Kroger’s brands have in common is that they serve the middle class. Some stores like Harris Teeter and Mariano’s in Chicago have a slight upper-middle class lilt. But Kroger is a middle-class company.

Investors don’t want the middle-class. They want the upper middle-class. They want Costco Wholesale Corp. (NASDAQ:COST) and Amazon.Com Inc. (NASDAQ:AMZN). They don’t want Walmart Inc. (NYSE:WMT). They don’t want Kroger stock.

Retailers serving the upper middle-class inspire intense loyalty. People pay $10 per month to be part of Amazon Prime, $110 per year for Costco executive memberships. Why, anyone can just walk into a Walmart, or Kroger, pick something up from the shelf, and buy it! Where’s the fun in that?

The result is ridiculous stock pricing by Wall Street. Kroger is worth $19.75 billion with $122 billion in revenue while Costco is worth $87 billion on $129 billion in revenue? Kroger made $1.9 billion from its sales last year, while Costco made $2.7 billion. Is that worth $68 billion in market cap?

Slow to Trends

Kroger, like it’s customers, is also a trend follower.

Online groceries and meal-kits are very 2016. The value of these assets can be seen in the stock market’s reaction to Blue Apron Holdings Inc. (NASDAQ:APRN), the meal-kit market leader (Home Chef is third).

Since going public last year, Blue Apron has lost 80% of its value, and now has a market cap of $560 million, less than Kroger will pay for Home Chef if it meets its financial targets.

What’s big in 2018 is the small gourmet market. I have noticed this in my own neighborhood. Stores can be as small as 1,000 square feet, with names like Oakhurst Market, the Mercantile, and Savi Provisions. 

These markets are turning into small chains featuring prepared meals, wine, and special events. Go there in the morning for coffee and a burrito, at lunch for a sandwich, and on the way home for a bottle of wine and maybe a sous vide steak. There is some fresh produce, but the meat counter is bigger.

At some point, Kroger may well follow this trend, but probably not until it has played out, until the broader middle class has bought-in, until there’s a company in the space it can buy for $500 million or more.

From an investment perspective, that’s too late.

The Bottom Line on Kroger Stock

Kroger is a huge middle-class market. That is its weakness.

What investors want today is a focus on either people making over $100,000 per year, or those making under $40,000 like Dollar General Corp. (NYSE:DG), a stock up 33% in the last year while Kroger is down 15%.

Logically it makes no sense, but if you stand around in the market arguing with the cauliflower they will haul you away.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.

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