Kroger's big $4 billion expansion plan

Kroger has big expansion plans in 2016.

How big?

Enough to build both the Horseshoe Casino Cincinnati and the Great American Tower at Queen City Square – five times. Enough to rebuild the Brent Spence Bridge – twice. Enough to buy Convergys and Chemed combined – not just the Downtown buildings, but both entire companies.

Kroger's not just spending a ton of money – if it were in $100 bills, the Cincinnati- based retailer would be spending almost 41 tons of money.

It's spending more than $4 billion to open new stores, expand or renovate old supermarkets and upgrade technology and logistics to support them.

"It's a big number there's no question," said Terry Kelly, principal at Bartlett & Co. "But let's face it, it's also necessary. Stores wear out and look old. It's one of the keys to their success: they've been good investors in their own business."

Kroger officials say it's all part of a long-range plan to keep increasing the investment in their stores. The spending is becoming particularly noticeable because Kroger's operations have become so large. It's now the world's third-largest retailer with nearly $110 billion in sales.

The nation's largest supermarket chain has upped its capital expenditure budget this spring by 24 to 33 percent, to between $4.1 billion and $4.4 billion. The projections don't include possible acquisitions, so costs will be even more if Kroger makes an another deal, such as December's $800 million takeover of Milwaukee-based Roundy's.

In the Cincinnati/Northern Kentucky/Dayton market alone, Kroger is currently spending $200 million on new and expanded stores – including three new jumbo Kroger Marketplace stores in Dent, Colerain Township and Fairborn that will begin construction this year and open in 2017.

The grocer is spending 70 percent of the money on its national store base, even as it faces a potential new digital threat from Amazon, which expanded in April its Prime free same-day shipping service into Kroger's backyard, Amazon's 27th metro market.

But Kroger will compete against that with an aggressive ramping up in 2016 of its stores offering its ClickList service – an order online/pick up at the store option – that will be at nearly one-third of Cincinnati stores by year's end and is growing in half-a-dozen markets across the country.

The heavy investment in its stores comes as investors have cooled on the entire retail sector; companies from Target to Macy's and even Kroger itself have reported slower sales this spring that disappointed Wall Street.

Kroger CEO Rodney McMullen in his annual letter to shareholders last week that adding or expanding stores within the company's existing 35-state footprint was critical to its continued success. Winning more market share gets Kroger more sales and greater efficiency that help finance flashier moves, such as acquisitions or bold technical innnovations.

"These are markets where we already operate, yet offer a significant opportunity to grow the business," McMullen wrote, noting 8.5 million shoppers visit a Kroger every day. "We continue to expand our presence in fill-in markets across the country."

Building boom unleashed in key markets

So what does $200 million worth of store and technology upgrades look like? Cincinnatians won't have to look far.

Local construction work is already beginning on the next wave of new stores, expansions and upgrades. Four stores – one each from Dent, Colerain Township, Union, Kentucky and Fairborn – will be upgraded to the outsized Marketplace format. When the stores open in 2017, they will replace smaller existing supermarkets and raise the number of the region's total Marketplaces to 20.

Besides that, Kroger is expanding or remodeling five stores: its Corryville store has been torn down and will double in size on its old site; the Anderson Township store will add another 50,000 square feet; and its Miami Township and Cleves are getting extensive remodels.

Finally, Kroger is also adding its ClickList service to 20 local stores this year. That's on top of the 14 that already have the order online/pick up at the store service that it only first introduced at its Liberty Township store in late 2014.

The nation's largest supermarket chain is spending all this money in a market it appears to have already conquered: Kroger is the region's No. 1 grocer, commanding an estimated $2.5 billion in local annual sales – more than 40 percent of all grocery sales in the area.

Kroger has announced similar spending sprees in targeted markets around the country: In April, it said it would spend $250 million in the Nashville market; in March, Kroger's Fry's subsidiary trumpeted a planned $260 million investment plan in Phoenix; company officials announced last summer a $465 million investment in Indianapolis last summer; and Kroger officials disclosed last year they're spending $1.2 billion over the next three years in Dallas and Houston.

Leon Loewenstine, managing director at Riverpoint Capital Management, said Kroger can maintain and build on its momentum by increasing its store presence in its existing markets.

"If you're not always trying to pick up that extra customer, you run the risk of losing them," Loewenstine said. "It's keep growing or die. If you don't continue to add share, a competitor could begin to nibble away at your business."

Kroger executives coyly note they leave those announcements to the marketing teams at the division level and not all of them tout their improvement plans.

Kroger's growing store base is also fueling demand for 14,000 new workers, including 800 employees the grocer is trying to hire locally.

It's all part of a bigger plan

While Kroger's recent spate of acquisitions are flashier, top executive say they plow way more resources into upgrading the existing store base. Company officials credit Kroger's "fill-in" strategy for helping drive its 12-plus year winnning streak of consistent market share increases.

In his letter to shareholders, CEO McMullen said his industry puts too much emphasis on splashy tech innovations and corporate takeovers at the expense of sustained nuts-and-bolts investment in stores.

"Too many companies over-focus on innovation in the hopes of discovering the next 'big thing,'" McMullen wrote. "Important to our success with mergers is that we don't need them to meet our long-term earnings per diluted share growth target... Balance – the integration of these strategic elements across our business – is how we'll continue to win with customers."

Kroger executives say the more market share the company grabs in a metro area, the more efficient the operation becomes and the more pricing power. In turn, that gives Kroger the flexibility to lower prices, buy competitors or develop new technologies and still make more money.

They spend heavily on stores because they prefer to own, not lease their stores, which eventually lowers operating costs and gives them flexibility to make improvements. They also prefer to buy bigger plots of land for new stores, so they can easily be expanded at a later date.

McMullen told analysts last fall Kroger could double its $110 billion in annual sales if it could increase its market share in existing markets. He said the company was focusing on increasing growth and profitability by amassing market share in regions where it already does business.

Kroger controls 14 percent to 45 percent of retail food sales in its 10 most lucrative markets, according to industry tracker Chain Store Guide.

While Kroger executives are open about the fill-in philosophy, they are tight-lipped about its precise execution. Last fall, McMullen told Wall Street analysts the company had identified eight markets where it would concentrate its firepower on further growing.

Executives say their fill-in strategy includes helping newly acquired subsidiaries, North Carolina-based Harris Teeter and Wisconsin's Roundy's, execute –and accelerate – their previous expansion plans.

Kroger officials won't elaborate, but Harris Teeter was making a push into the Washington, D.C. market. With its more formidable financial resources, Kroger has already bankrolled a $95 million distribution center in Caroline County, Virginia, an hour south of the nation's capital.

Kroger officials have also said they would continue to grow Roundy's stores in Wisconsin as well as its Mariano's concept in Chicago.