Case Study: Grocery Store Operations

The grocery business is highly competitive and has been undergoing rapid consolidation over the last decade. Do any of the major grocery retailers have significantly better cost control performance?

Kroger has a consistent relationship of cost of sales and operating expense to sales.

Albertsons also has a consistent relationship, although there is somewhat greater variation following a large merger. Its marginal cost of sales exactly matches Kroger, but its marginal operating expense is 1.6% higher.

Safeway also has consistent relationships, but shows excessive operating expense in the last two years. Its marginal cost of sales is significantly lower than Kroger and Albertsons, and its marginal operating expense is between the two other’s rate

Before comparing the three retailers, let’s look at Safeway’s operating expense in more detail.

These costs showed some variability between 1989 and 1996, especially in 1992 and 1993.

1994-1996 look fairly consistent, so we can estimate the relationship during those years.

When we look at 1997-2000, however, it is clear that the 1994-1996 did not continue.

The later relationship has higher marginal and total cost then the 1994-1996 relationship. Although comparisons are difficult due to the large change in sales, the 1997-2000 relationship does appear consistent with the data back to 1989.

Results from 2001-2003 show a sharp rise in costs, beyond what would be expected for the increase in sales. The increase is too sharp to represent a new relationship, so it is likely either unusual costs have occurred, or the relationship has been shifting up each year. Either way, this does not represent good cost control performance. This additional expense was $306 million in 2001, $908 million in 2002, and $1,396 million in 2003, totaling $2,610 million over the three years.

A review of the cost relationships will show which retailer has the better cost control performance.

Performance is very close on cost of sales, but Safeway comes out ahead.

Kroger has the lowest operating expense up to about $46 billion in sales. With Safeway (based on 1997-2000) having lower expense at higher sales levels.

Albertsons has the highest operating profit up to $19.5 billion in sales, with Safeway being much higher than Albertsons and Kroger beyond that sales level. Of course, Safeway’s operating expense results since 2000 call into question whether it can maintain this favorable cost relationship.