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Executive Summary

Kroger will keep its hand in the drug retail business through its 380 supermarket pharmacy departments despite the company's plans to "reposition" drug store operations, Kroger indicated in a July 21 press release. However, the recently announced reorganization plan could result in a spinoff or outright sale of the company's SupeRx and Hook Drug operations. "The assets of Kroger's retail drugstore group will be repositioned under one of several options now under active review," the Cincinnati-based supermarket chain said in the release. "These range from a partial divestiture in which Kroger would maintain an ownership position to a sale of the drugstore group." The announcement apparantly signifies Kroger's retreat from the freestanding drugstore business after an aggressive expansion period. Only last year, Kroger increased its number of drugstores by almost 50% with the $160 mil. purchase of the 330-store Hook Drug chain. Kroger currently operates 891 SupeRx and Hook Drug stores located in the midwest and southeast. "While drug retailing shows significant profit opportunities, the business was developing along parallel tracks -- one within the large combination food and drugstore setting, the other in the retail drug chain environment, each with distinct distribution and merchandising patterns," Kroger explained in the release. "We believe that a repositioning of the drugstores will enable [the standalone] portion of the company to better pursue its market niche as a health care/convenience retailer, while Kroger concentrates on the development and refinement of drug merchandising within the combination store setting." A spin-off of the drugstore operation to shareholders or a public offering of a new company formed with assets of the current retail drugstore business are among the options Kroger said it is currently considering. According to Chairman and CEO Lyle Everingham, a decision on the repositioning will be announced in roughly 60 days, but implementation will probably not occur until the end of 1986. Kroger Drugstore Division Generated $1.2 bil. Sales In 1985, Making Up 7% Of Corporate Sales Other elements of the Kroger restructuring program include the sale or disposition of 100 food stores, sale of some "underproductive" food manufacturing facilities and a 25% reduction in the corporate headquarters expense. The latter is to be achieved primarily through a voluntary early retirement program covering about 300 employees, the release notes. Kroger said it plans to use the proceeds generated from the restructuring "for a number of purposes including the re-purchase of outstanding common stock, the reduction of debt and reinvestment in the company's core business." After-tax costs are estimated in the $75-95 mil. range, exclusive of any gain on the sale of drugstores. The Kroger announcement closely follows the decision by another company whose primary business is outside the chain drug retailing area to exit the field. Two weeks ago, Sherwin Williams announced that is was putting its Gray Drug Fair chain up for sale in order to focus on its core paint manufacturing and retailing business ("The Pink Sheet" July 14, T&G-2). Coincidentially, Kroger has announced its corporate streamlining/belt tightening plan at the same time the nation's largest food retailer, Safeway, is locked in a hostile takeover battle with the former owners of the Dart Drug chain. For calendar 1985, Kroger reported net earnings of $180.8 mil. on total sales of $17.1 bil. Drugstore division sales were $1.2 bil. in 1985, or approximately 7% of corporate volume. The company operates 1,360 Kroger and Dillon food stores.

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