Why Kroger (KR) Stock Won;t Get a Boost From Battling Visa
Upset over the fees Visa (NYSE:V) charges it to handle customer transactions, Kroger (NYSE:KR) is halting its acceptance of Visa cards at some of its outlets, and considering a nationwide ban of Visa cards. That is a huge deal for Kroger and KR stock because Visa has more than half the credit card market, and customers continue to use cash less frequently.
This could be a huge deal for Visa as well, since Kroger is the second-largest grocery-store chain in America, behind only Walmart (NYSE:WMT). If Walmart, or even eighth-place Amazon.com (NASDAQ:AMZN) join the fight, things could get nasty.
The trouble for KR stock is that they’re not joining the fight. Kroger, which is due to release its results through January before the market opens on Mar. 6, is all alone. KR stock is already suffering, as it has dropped 5% over the last few trading days.
Kroger’s Worst Nightmare
I am Kroger’s worse nightmare.
When I go to Kroger, usually about twice each week, I use a Visa card. I only use one credit card and one debit card. Both carry the Visa logo.
I often spend only $10-$20 on each visit because I make my big purchases at Costco (NASDAQ:COST). I use the automated check-out, plug the card in, take my groceries and go. I’m in-and out in ten minutes.
But Kroger’s hangover is just beginning. It costs KR 21 cents to process my transaction and could cost as much as 35 cents if I were using a small bank
Grocery margins are wafer-thin. Kroger is fortunate when it brings 2 cents of every dollar to its bottom line. During the third quarter, which ended on Halloween, its profit margin was slightly over 1%. If I spend $10 and it costs KR 35 cents to process my card, it’s losing money.
Settlement fees aren’t the only hassle. Merchants are also subject to fees when their merchandise is returned. Taken together, the average merchant pays about 2.5% of the revenue it gets from credit cards in fees to the card networks and banks.
KR can’t get mad at me. I wouldn’t understand. There’s a Walmart just as close to me, in the other direction. So, Kroger is getting mad at Visa. Smith’s, a Kroger-branded store in the Rocky Mountain region, will be no longer accept Visa cards starting on Apr 3. Kroger’s Food 4 Less chain in California has already stopped accepting Visas.
Going to Court
The rest of the industry has chosen to go to court to fight these so-called “swipe fees,” and recently made a $6.24 billion settlement The settlement covers 14 years and follows a preliminary deal last year some merchants said didn’t go far enough.
Visa and rival MasterCard (NYSE:MA), which was also part of the case, thought that was the end of the battle. They’re already contemplating a new price hike, which could go into effect as early as next month, and while the increase will only be assessed to the banks the networks do business with, it’s assumed those banks will pass the costs on to merchants.
The Bottom Line on KR Stock
KR stock is an incredible bargain. It has a price-earnings ratio of 6.3, and its market cap of $22.6 billion is about one-sixth its fiscal 2018 sales of $122 billion. The tiny, 14-cent-per-share-dividend paid to owners of Kroger stock currently yields 1.9%.
But KR stock has been cheap for a long time It currently trades below where it was two years ago, despite two dividend hikes. I’ve suggested that Kroger stock could rise if KR consolidated under one brand ; it currently has 17.
At least it now has a quest. Too bad that quest looks like an impossible dream.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
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