Though not as closely watched by the banking industry as Wal-Mart Stores Inc., the supermarket giant Kroger Co. has been marketing financial services, and some in the industry have begun to take notice.
Observers say Kroger is distinguishing itself by selling its own brand of mortgages, home equity lines of credit, and pet insurance at 24 stores in the Cincinnati area — essentially competing against its in-store bank partners. (In fact, banks have branches in most of those stores.)
"It's certainly something that's raising eyebrows," said Dave Martin, the executive vice president and chief training consultant at NCBS, an in-store bank consulting unit of SunTrust Banks Inc. "Banks are not thrilled in this instance to see their partners promoting their own financial services in stores."
The Cincinnati grocer would not discuss its financial offerings, but Kathy Kelly, the president of its personal finance unit, said in a September interview with The Cincinnati Enquirer that her company eventually would roll out financial products and services at most of its roughly 2,200 supermarkets in 31 states.
"If it were up to me, it'd be next week," she told the paper.
David Kittle, the president of Principle Wholesale Lending Inc. in Louisville, mentioned Kroger last month at a Mortgage Bankers Association conference in Los Angeles while discussing the trade group's support for uniform licensing standards.
As an example of how easy it is to enter the mortgage business, he said, "You can now walk into a Kroger supermarket and get a mortgage in the checkout line."
(Mr. Kittle, the MBA's vice chairman, referred further questions about Kroger from American Banker to the trade group, whose spokeswoman said it had not "taken a stand" on the grocer's offering mortgages.)
Kroger customers can pick up loan and insurance brochures at the checkout counter, but they must apply for such products by phone or at the company's personal finance Web site.
The grocer is partnering with experienced financial services companies. Royal Bank of Scotland Group PLC's Charter One Bank funds the home equity loans and lines of credit. KPF Mortgage LLC, a joint venture of Kroger and a Charter One subsidiary, handles the mortgage applications, and PetFirst Healthcare of Jeffersonville, Ind., writes the insurance policies.
Andrea Binnick, a spokeswoman for Citizens Financial Group Inc., the U.S. banking arm of Royal Bank of Scotland and the direct parent of Charter One Bank, would not provide details about her company's partnership with Kroger, except to say that Charter One also has 47 branches in Kroger stores.
Citizens has 500 in-store branches around the country, Ms. Binnick said, making its in-store network the second-largest, after Wells Fargo & Co.'s network.
Bart Narter, a senior analyst in San Francisco for Celent LLC, said Kroger may have taken a cue from Tesco PLC.
For 10 years, the Cheshunt, England, retailer has sold an array of financial products and services in its supermarkets through a fifty-fifty joint venture with Royal Bank of Scotland.
Mr. Narter said Kroger essentially is shoehorning itself into the financial services market, in the same way that it would offer a private-label brand of ketchup to compete against better-known brands such as Heinz and Hunts.
"This is a lot different from Wal-Mart, because Kroger isn't trying to get a bank license," he said. "Banks get nervous when a retailer wants to offer checking accounts, and Kroger isn't doing that — yet."
Of course, if Kroger had such ambitions, it would have to take a number. Industrial loan companies are the only type of bank a nonfinancial company can buy or start. Several companies have had applications to acquire or charter ILCs pending before the Federal Deposit Insurance Corp. for months.
The agency imposed a six-month freeze on ILC applications in July; when the freeze was scheduled to expire last month, the agency decided to shelve requests from nonfinancial companies, including Wal-Mart, for another year. (The FDIC said it would process financial companies' applications.)
Congress has been weighing whether to block commercial ownership of ILCs for several years. The legislation's odds improved after Democrats won control of both houses in November, but a senior Republican on the Senate Banking Committee, Sen. Bob Bennett of Utah (where most ILCs are based), remains opposed and could block enactment.
Overblown or not, fear of increased competition from nonfinancial companies is widespread among financial services executives, according to a quarterly online survey by American Banker. (See
Kroger leases space in hundreds of its stores to banking companies, including Fifth Third Bancorp of Cincinnati, its largest in-store banking partner.
Mr. Narter said that Kroger is the first supermarket to create its own financial services brand to compete against an existing in-store bank. "Fifth Third must be less than pleased, especially since Kroger is bringing in one of their rivals, Charter One, as their partner."
Fifth Third would not discuss the matter. In the Enquirer article, Ms. Kelly said Kroger-branded financial offerings "can coexist" with in-store branches.
Kroger's stock rallied to a five-year high this month after Scott Mushkin, an analyst at Banc of America Securities LLC, upgraded the shares to "buy," from a "sell," and wrote in a report that Kroger had "closed the productivity gap with Wal-Mart."
It did so by closing 44 distribution facilities, renegotiating labor contracts to reduce expenses, and keeping its average prices no more than 7.5% above Wal-Mart's, Mr. Mushkin wrote. The efforts have reduced the pressure on gross margins to the point where "Wal-Mart is no longer able to inflict damage on Kroger at will."
In its core business of selling groceries, Kroger appears to be holding its own against Wal-Mart, he wrote. Kroger stores are in the same markets as 950 of the Bentonville, Ark., behemoth's supercenters — more than any other retailer.
Kroger's ability to parse data on customers who have cards has played a key role in helping the company withstand competition from Wal-Mart, Mr. Mushkin wrote.
"Kroger continues to better utilize its card data to optimize its pricing versus Wal-Mart, lowering prices on items that its customers most care about," he wrote. "It has weathered a prolonged assault from Wal-Mart and now stands to benefit" as Wal-Mart "struggles to overcome a higher-cost structure and a significant image problem."
