Why Did Buffett Buy Kroger?

Kroger Co (NYSE:KR) is the largest supermarket in the United States and trails only Walmart Inc (NYSE:WMT) and Amazon.com, Inc. (NASDAQ:AMZN) in general retail.

In fact, the company runs neck-and-neck with Costco Wholesale Corporation (NASDAQ:COST), which has a long-running relationship with Berkshire Hathaway and its CEO Warren Buffett.

That’s why it’s interesting that Berkshire Hathaway bought into Kroger in the run-up to the panic shopping sprees that took hold of consumers in the first quarter of 2020. He then sold Costco in late 2020, so why did Buffett buy Kroger?

For starters, Kroger’s P/E ratio was under 10x almost a year after the worst of the toilet paper buying sprees, which was a bargain compared to the level at which rivals traded. Walmart (WMT) trades for twice this level, Costco is nearly quadruple, and Amazon (AMZN) leads the pack, trading at a P/E ratio approaching 100x.

In Kroger’s favor is its strong e-commerce presence and how well it adapted to curbside orders and deliveries. Kroger also trounced investor earnings expectations in each quarter subsequent to local and state restrictions. But there are other market forces in play.

Let’s explore Buffett’s decision to switch from Costco to Kroger to determine if it’s a good post-pandemic play.

Why Did Buffett Buy Kroger?

He’s not known as the Oracle of Omaha for nothing – Warren Buffett invested in the largest grocer in the quarter leading up to the coronavirus hitting U.S. shores. In fact, the World Health Organization started tracking it as early as December 2019, which is how COVID-19 got its name.

While much of the western world ignored it as just another SARS or MURS, and assumed it would remain regional and not affect us, Buffett took action.

Buffett likely saw the early signs in the Asian economy. Following their moves, he saw panic grocery shopping coming. He’s often technology shy with investments because of higher P/E valuations.

When given the choice between Amazon and Kroger, Berkshire – which already owned a massive Costco stake – invested in what management knew well. Whether that investment paid off is debatable though.

Even though Kroger outperformed analyst estimates throughout 2020, its $13.47 billion in short- and long-term debt makes it hard for some investors to swallow. Also rival Albertsons Companies Inc (NYSE:ACI) held a successful summer 2020 IPO, making competition seemingly harder.

But Buffett probably knows what he’s doing with this investment. After all, his childhood occurred during the Great Depression. This type of economy is what Buffett was born and raised on.

How Much Kroger Does Buffett Own?

According to Berkshire Hathaway’s February 13F filing with the Securities and Exchanges Commission, management bought 18.9 million shares worth approximately $550 million. The “Buffett Effect” then pushed the stock up 6 percent the next day.

The firm didn’t buy a large share compared to some of its other holdings, like Bank of America (BAC), Apple (AAPL), and American Express (AXP). But it adds to other large food-related holdings, like Coca-Cola (KO) and Kraft Heinz (KHC). He already owns shares in many of the products on the shelf – why not buy the store too?

When he invested, Kroger’s stock price was near its 52-week low of $26.72. However, it soon recovered and reached over $35 per share by the summer before slowly deflating by year end.

This presents a rare opportunity for investors to jump in at a price not far from where Buffett and Berkshire entered the market. It paid just under $30 per share, and much of the December drop is due to stalled government stimulus talks.

Holidays are always a good time for grocers, as Thanksgiving and Christmas are food-focused holidays. Everyone rushes to gather all the required ingredients for holiday cookies and meals throughout the winter months at year end.

But no one can say what will define the world’s 2021. It’s likely to still be immersed in a pandemic. And that has investors wondering if Buffett’s Kroger buy was a good one.

Is Kroger a Good Investment?

Kroger had a market capitalization around $24 billion during the pandemic Christmas season. By comparison, Albertsons was worth around $7.5 billion, Costco was worth $161 billion, Walmart was worth over $400 billion, and Amazon is aiming to be a $2 trillion company.

Share prices moved between $26.72 and $37.22 during the 2020 calendar year. Kroger’s stock was brutalized in the back half of the 2010s as Amazon bought Whole Foods and made clear its intention to become a force in brick-and-mortar grocery stores.

It doesn’t help that the company has debt, lots of it. And that lockdowns hindered food supply chains, forcing various meat and dairy over- and undersupplies.

Although it has $13.47 billion in debt, Kroger has $46.94 billion in total assets to easily take care of them. And despite early panic shopping that made toilet paper and disinfectants scarce resources, the company faced few supply chain issues in spite of logistical challenges.

No matter what happens to the economy in 2020, food will always be a necessity. And small businesses make up a large portion of the food industry. The pandemic put big pressure on smaller grocers who may be ripe for a Kroger buyout.

Over the 2020s, expect to see many of the big retailers mentioned expand their retail footprints by taking over struggling small businesses that can’t get enough government relief.

Why Did Buffett Buy Kroger: The Bottom Line

Kroger is a long-standing grocery superstore and the biggest supermarket in the U.S. This gave it the opportunity to generate a lot of revenue when panic shoppers rushed to clean out grocery stores across the world. That’s why Buffett bought Kroger stock at the onset of the pandemic.

By the end of the pandemic, Buffett and his team saw the growth potential in Kroger more than Costco and is now invested in the competitor.

Economic heartache is bound to drag on well into 2021 and define the 2020s. Everyone has a 2020 horror story, but for small grocers, restaurants, and retailers, acquisition from Kroger and its ilk may be a lifeline to survive.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.