When it comes to household names in the grocery industry, Kroger is king. With nearly 2,800 stores across the United States and annual revenue exceeding $137 billion, Kroger is the largest supermarket chain in the country by sales. To put Kroger‘s size in perspective, its yearly revenue is greater than the GDP of Ukraine. Remarkably, 60 million households shop at a Kroger-owned store each year, accounting for nearly half of all U.S. families.
Given Kroger‘s massive scale and brand recognition, many entrepreneurs may wonder: is Kroger a franchise? Could owning a Kroger store be a path to financial success?
The short answer is no, Kroger is not a franchise. But there‘s much more to the story of how Kroger has strategically structured itself to become a leader in the cutthroat grocery industry. As a retail and consumer expert who analyzes the sector through the eyes of a picky shopper, I‘ll take you on a journey through Kroger‘s history, business model, and competitive differentiation. We‘ll explore how Kroger‘s corporate structure has enabled its growth, and why franchising is rare among major grocery chains. Finally, I‘ll share some other franchise concepts to consider in retail and grocery.
How Does Franchising Work?
Before we dive into the specifics of Kroger, let‘s define what franchising is. Franchising is a business model where a company (the franchisor) allows an individual or company (the franchisee) to sell its products and services using its brand name and operating model. The franchisee sells the franchisor‘s products, and in return pays the franchisor an initial startup fee, plus ongoing royalties based on sales.
According to the International Franchise Association, there are over 750,000 franchised businesses in the U.S. across 75 industries, employing nearly 8 million people. The most common type of franchise is the "business format franchise", where the franchisor licenses a complete business model to the franchisee. Prominent examples include restaurant chains like McDonald‘s, convenience stores like 7-Eleven, and hotels like Holiday Inn.
Starting a business format franchise typically requires:
- Paying the franchisor an initial franchise fee (can range from $10,000 to $50,000 or more)
- Investing in real estate, equipment, and initial inventory (can cost hundreds of thousands to millions of dollars)
- Paying the franchisor monthly royalties (typically 4-8% of gross sales) and marketing fees (1-4% of gross sales)
- Signing a franchise agreement detailing the terms of the partnership (usually 5-20 years)
Franchisors make money from franchise fees, royalties, and product markups, while franchisees earn profits from their individual locations. Franchising can be a win-win: franchisors get to expand without the capital costs and operational headaches of company-owned locations, while franchisees get a playbook for running a business using an established brand.
However, the franchise model has some potential drawbacks. Franchisees sacrifice a degree of operational flexibility and entrepreneurial freedom. Profit margins are crimped by royalties and marketing fees. And franchisees‘ fates are tied to the overall brand, so missteps by the franchisor or other franchisees can damage an individual owner.
The Kroger Story: From Corner Store to Grocery Goliath
So is Kroger‘s business model suited for franchising? Let‘s dive into how Kroger has evolved over nearly 140 years in business.
Kroger‘s story began in 1883, when 23-year-old Bernard Kroger invested his life savings of $372 to open a grocery store at 66 Pearl Street in downtown Cincinnati. The son of German immigrants, Kroger was a savvy merchant. One biographer noted that he "sold to his customers the groceries that he himself would want to buy at the lowest prices he could afford to charge."
To keep prices low, Kroger pioneered the practice of allowing customers to select items themselves from store shelves rather than requesting them from clerks. He also bought merchandise directly from manufacturers to cut out middlemen. These innovative tactics seem obvious today, but were game-changers at the time.
Kroger‘s formula proved popular with customers, and he quickly expanded. He opened four new stores within two years. By 1902, Kroger had 40 stores and merged with the rival Great Western Tea Company to form the Kroger Grocery and Baking Company, which went public later that year. In 1928, Kroger hit a milestone of $1 million in annual sales.
Over the next century, Kroger would continue to grow by strategically acquiring regional chains to expand its footprint. The company made over a dozen major acquisitions, including Henke & Pillot in Texas (1955), Dillon Companies in Kansas (1983), Fred Meyer in Oregon (1998), and Harris Teeter in North Carolina (2013). Kroger also launched new store formats to serve a wider range of customers, including combination food and drug stores, warehouse stores, and gourmet markets.
Today, Kroger operates 2,726 supermarkets in 35 states under two dozen banners, including Kroger, Ralphs, King Soopers, and Harris Teeter. It also runs 2,255 pharmacies, 1,613 fuel centers, and 170 jewelry stores. The company employs over 465,000 associates, making it one of the largest private employers in the U.S. In 2021, Kroger rang up sales of $137.9 billion, a 4% increase over 2020.
Kroger‘s Corporate Structure and Strategy
Despite its extensive store network, Kroger is not structured as a franchise organization. Every one of Kroger‘s 2,700+ supermarkets is wholly owned by the company. Kroger is a publicly-traded corporation, with ownership shares divided between institutions (87% of shares) and individual investors (13%). Its largest shareholders are passive institutional investors like Vanguard, BlackRock, and State Street.
Why has Kroger pursued a corporate structure rather than franchising? A few key reasons emerge from my analysis:
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Control over store operations and customer experience. With full ownership of every store, Kroger can precisely calibrate pricing, promotions, assortment, and service across its fleet. If it wants to roll out a new technology or store format, it can move quickly without seeking franchisee buy-in. This operational control allows Kroger to provide a consistent brand experience that builds customer loyalty.
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Flexibility to innovate and adapt. The grocery industry is notoriously challenging, with thin margins and constant pressure to adapt to changing consumer preferences. By avoiding the complexities of franchise contracts, Kroger can dynamically adjust its strategies to stay ahead of the curve. For instance, when the pandemic spurred demand for contactless shopping, Kroger rapidly scaled up curbside pickup to 2,200 locations. A franchise model could have slowed that rollout.
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Capturing full economics of the business. As a corporate entity, Kroger retains all profits generated by its stores (after paying operating costs). If Kroger had franchisees, it would have to share a cut of store-level profits with franchisee owners. For a low-margin business like grocery, giving up even a few percentage points to royalties could make a meaningful difference to the bottom line.
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Unionized workforce. About 66% of Kroger‘s workforce is represented by labor unions, including most of its grocery store associates. This means that wages, benefits, and working conditions are negotiated through collective bargaining. A franchise model would add another layer of complexity to those union dynamics.
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Centralized investments in technology and infrastructure. As an analyst, I‘ve been impressed by Kroger‘s willingness to invest in cutting-edge capabilities to boost its efficiency and customer experience. For instance, Kroger has spent hundreds of millions of dollars on robotic fulfillment centers that can pick a 50-item order in under 5 minutes. It has also acquired digital coupon startup You Technology and data science firm 84.51° to personalize promotions. Making those investments is simpler with a centralized corporate structure.
Some of Kroger‘s key initiatives would be harder to implement in a franchise model. Let‘s look at a few examples:
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Private label products: Kroger‘s 15,000+ private label products account for over 30% of sales and carry higher margins than national brands. Kroger leverages its scale to manufacture those products efficiently and sell them across all banners. With franchisees, Kroger could have a harder time getting compliance on private label distribution and pricing.
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Loyalty and payments: Kroger‘s popular loyalty program drives 96% of sales. It has also launched Kroger Pay, a mobile payment solution. Those programs rely on centralized customer data and technology integrations that could be tougher with franchisees operating separate point-of-sale systems.
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Seamless e-commerce: Kroger has invested in digital channels, allowing customers to build shopping lists, redeem personalized offers, and choose delivery or pickup fulfillment. Enabling those omnichannel capabilities across a patchwork of franchisees would require careful coordination.
Kroger certainly could have built a massive company using a franchise model – after all, franchise businesses generate over $750 billion in annual economic output in the U.S. But the company has strategically opted to prioritize control and flexibility. Its corporate structure has provided a strong foundation for profitable growth.
How Kroger Stacks Up Against Other Grocery and Retail Giants
Looking across the grocery industry, Kroger‘s corporate approach is the norm. None of the 10 largest U.S. grocery chains by revenue offer franchise opportunities. Publix (the largest employee-owned company in the U.S.), Albertsons, Ahold Delhaize, H-E-B, Meijer, Wakefern, Aldi, and Whole Foods are all company-operated. Even Walmart, the largest grocer by volume, only franchises some of its international locations.
Several structural factors make the franchise model challenging for grocery stores:
- Low margins: The average grocery store has a profit margin of just 1-3%, leaving little room for franchise royalties. Most grocers rely on high sales volume to offset those thin margins.
- Operational complexity: Grocery stores carry thousands of SKUs, many of which are perishable. Carefully managing inventory to minimize shrinkage and stock-outs requires centralized systems and expertise that could be harder to replicate with franchisees.
- High cost of entry: Opening a grocery store is capital-intensive. The average supermarket occupies 40,000 square feet, and initial inventory alone can cost $500,000+. Those startup costs could be prohibitive for potential franchisees.
Some smaller grocery chains, like Grocery Outlet and Save-A-Lot, have found a way to make a quasi-franchise model work. They have a mix of corporate-owned and independent licensed locations. But those are exceptions to the rule.
Even looking beyond grocery to the wider world of retail, the largest players tend to be company-operated. Like Kroger, top retailers such as Walmart, Costco, Home Depot, Target, and Amazon have all rejected the franchise model in favor of consistency and control.
That said, there are some highly successful retail franchises out there. Ace Hardware has grown to 5,500 stores in 70 countries by offering a turnkey business model to local entrepreneurs. Likewise, 7-Eleven has become the world‘s largest convenience store chain with 78,000 locations, including 9,500 in North America, by using a franchise model.
In the food industry, franchising is common for restaurants but rare for supermarkets. Chains like McDonald‘s, Subway, and Domino‘s have built global empires on the backs of franchisees. Franchise models work well for restaurants because they are relatively simple to operate and replicate. A Big Mac is a Big Mac, whether you order it in Manhattan or Malaysia.
Franchise Opportunities in Grocery and Retail
While you can‘t open a Kroger franchise, there are still plenty of franchise opportunities for entrepreneurs looking to get into the retail industry. Here are a few options to consider:
- Grocery Outlet: This discount grocery chain has over 400 locations, primarily on the West Coast. It offers an "independent operator" model where the company procures surplus inventory while local owners handle store operations. Startup costs range from $567K to $1.5M.
- Save-A-Lot: With over 1,000 stores in 32 states, Save-A-Lot is the largest hard-discount grocery chain in the U.S. It offers both corporate and licensed stores, with franchises costing $750K to $1.5M to launch.
- Ben & Jerry‘s: If you‘re passionate about ice cream and social responsibility, consider a scoop shop franchise from this iconic brand. Startup costs range from $150K to $500K depending on location.
- Ace Hardware: For a classic retail franchise, look no further than Ace Hardware. With 5,500 locally-owned stores, Ace offers a proven playbook and a $274M brand advertising budget. All-in costs range from $286K to $1M+.
Conclusion
After 140 years in business, Kroger has grown into an industry titan by strategically leveraging a corporate business model. With $137 billion in annual sales across 2,700 locations, Kroger is the largest pure-play grocery chain in the U.S.
Despite its scale, Kroger is not a franchise. The company has full ownership of its vast supermarket network. That centralized structure has allowed Kroger to drive supply chain efficiencies, invest in technology and innovation, and provide a consistent customer experience across its banners.
As a retail analyst and picky shopper, I believe Kroger‘s corporate model aligns well with the unique dynamics of the grocery industry. With such low margins and high operational complexity, most major grocery chains have chosen to forgo franchising. Even top retailers in other categories, like Walmart and Costco, have taken a similar tack.
For entrepreneurs itching to own a piece of a proven brand, franchising can still be a great path to business ownership. The franchising industry is thriving, contributing 3% of U.S. GDP. Aspiring grocers can look at licensing opportunities like Grocery Outlet, while those interested in other retail categories have options like Ace Hardware.
But individuals shouldn‘t completely write off Kroger just because they can‘t buy a franchise. With over 465,000 employees and frequent hiring, Kroger offers compelling career opportunities for those passionate about the grocery business. Who knows, maybe you could be the next Bernard Kroger and come up with an innovation that transforms the industry. Just don‘t plan on doing it as a Kroger franchisee.
