Hi Classmates –
Diversification is an aspect of corporate-level strategy, where an organization determines that it would be beneficial to have stake in multiple markets. This may be in related or unrelated industries. One organization that could benefit from value-creating diversification would be The Kroger Co, a food retailer which owns several store brands, including Fry’s Marketplace, Dillon’s Food for Less, Fred Meyer, King Soopers, Quality Food Centers, Ralph’s, and Smith’s Food and Drug. In combination, these stores have a footprint which covers 35 US states. Specifically, Kroger would benefit from entering into the last-mile distribution market. As newer entrants in the market, like Walmart and Amazon Pantry, provide disruptions by offering low-cost delivery services, Kroger needs to ensure that it has stake in the game. Currently, certain Kroger stores offer in-store pick up solutions, but only two locations in the country have tested delivery services, which were done using Uber. Industry analysts anticipate significant growth in grocery delivery over the next decade, with expectations that it could claim 20% of the total grocery market by 2025. Kroger will need to find a cost-effective way to enter into the delivery game, providing vertical integration with existing store front sales. Doing so would provide value-adding diversification for the existing business.
There is a risk in diversification. Generally speaking, diversification requires additional resources and costs. There is a tipping point to investment that will negatively impact the bottom line. Based on Kroger’s most recent quarterly earnings report, the organization had net earnings of $397M for the quarter. Spread out over their 2,778 stores, that equates to a net earning of $142,908 net earnings, which is quite small for the amount of work that goes into maintaining each location. Obviously, any investment over this amount for an extended period of time will be unsustainable. However, an initial investment that leads to additional revenue may make diversification worthwhile.
Looking forward to your thoughts.
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