kroger_pre14a.htm
SCHEDULE 14A
 
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________
 
PROXY
 
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
 
PROXY STATEMENT
 
AND
 
2009 ANNUAL REPORT
 
________
 
 
 
 
 
 
 
 
 
 
 
 




FELLOW SHAREHOLDERS:
 
     The Kroger team delivered solid results in 2009. In doing so, we further strengthened our competitive position – improving our unique advantage in the marketplace by continuing to successfully execute our Customer 1st business strategy in one of the most challenging retail environments in recent history.
 
     As a Shareholder of Kroger, you should know that our Customers always come first. This philosophy drives our focus on programs that help loyal Customers get even more value as they shop more frequently in our stores. This Customer-centric approach also drives the increase in the total number of loyal Customers we serve.
 
2009 Highlights
 
     We generated an increase in total sales to $76.7 billion and reported net earnings of $70 million or $0.11 per diluted share. Excluding the effect of a non-cash impairment charge taken in the third quarter for southern California assets, the net earnings for fiscal 2009 would have been $1.12 billion or $1.71 per diluted share.
 
     Even in the face of high unemployment, unprecedented deflation, and a weak U.S. economy, Kroger improved its operational performance and continued to focus on creating value for our Shareholders. We did this by:
   We are increasing revenue from loyal households.
 
     By offering a unique and personalized value proposition for our diverse shoppers, we increased the number of households that are loyal to Kroger and earned a greater share of their business. These loyal households represent our very best Customers.
 
     Kroger’s unique offerings include rewarding Customers for their loyalty in multiple ways, tailoring offers that are meaningful to their individual households through the use of our robust shopper loyalty data, and delighting them with a pleasant and convenient shopping experience.
 
   We are generating strong tonnage growth.
 
     Strong growth in sales of our Corporate Brands along with national brand items is driving the most dramatic tonnage growth in Kroger’s history. Our strong volume growth is a direct result of our investments in pricing, service and product offering and is among the strongest in the industry in both perishable and non-perishable categories. Our associates in our plants, warehouses and stores are doing an outstanding job keeping up with the tremendous volume growth we are generating.
 
1


   We are growing identical sales.
 
     Throughout 2009, Kroger successfully grew identical sales, one of the key objectives of our business model. Identical supermarket sales increased 2.1%, without fuel, compared with the prior year. Through the efforts of all of our Associates, we continue to widen the gap between Kroger’s identical sales growth trends and those of most of our competitors. We believe this trend has extremely positive implications for our Associates, Customers and Shareholders both now and as we continue to grow our business.
 
   We continue to invest in our stores to keep them fresh and inviting for Customers.
 
     Our remodeled stores continue to generate favorable returns and we plan to continue on our steady course of remodeling stores and other assets to keep them innovative and appealing to our Customers. These projects enhance the overall shopping experience for our Customers, improve the work environment for our Associates, and help drive sales. Remodels also enable us to utilize more efficient technology, which creates cost savings we can invest in our strategy.
 
   We are increasing Kroger’s market share.
 
     Growing market share is an important part of Kroger’s long-term strategy. In 2009, Kroger’s overall market share increased approximately 60 basis points, according to Nielsen Homescan Data. Kroger’s market share increased in 13 of the 17 marketing areas outlined by the Nielsen report, declined in three, and remained unchanged in one.
 
   We are rewarding our Shareholders.
 
     In 2009, we returned more than $450 million to our Shareholders through our dividend program and share repurchases. We increased our quarterly dividend in 2009 by more than 5% per share in a year when many large companies reduced or eliminated dividends. This marked the third increase in the quarterly dividend since the program was initiated in 2006. In 2009, Kroger paid $237.6 million in cash dividends. Kroger’s dividend enhances total shareholder return by more than 1.5% on an annual basis. During the year, Kroger repurchased 10.3 million shares of stock at an average price of $21.25 per share for a total investment of $218.3 million.
 
   We listen to our Customers and Associates.
 
     Every quarter, we track what our Customers say about us in four key areas: our people, our prices, our products, and the overall shopping experience in our stores. Their feedback helps us offer a better overall shopping experience. It includes clean stores with quick checkout lines; well-trained, friendly Associates; and a relevant assortment of products that offer more value for the way our Customers live.
 
     In 2009, our Customers told us we improved more in each of our key Customer 1st areas than in any year since we began these Customer surveys in 2004. We saw a good balance of improvement across all four keys. These surveys provide meaningful insight we can act on immediately. We will continue to seek feedback from our Customers and incorporate what they tell us into the way we manage our business. We conduct similar surveys of our Associates and continue to make improvements based on what our Associates tell us is important to them. Associate engagement is a critical part of our Customer 1st strategy.
 
2


   We are committed to safety.
 
     Safety is a core value at Kroger. As a result of our deeply engaging safety programs, we have reduced our accident rates in our stores and plants by 72% over the past 14 years. We continue to strive to achieve our goal of zero accidents.
 
   We partner with our Customers and Associates to support the communities we serve.
 
     We touch the lives of millions of Customers every day through our family of stores. We consider it a privilege to partner with our Customers and Associates to improve the communities we serve. We focus our efforts on hunger relief, local community organizations, especially K-12 schools, and women’s health initiatives. In 2009, our family of stores, the Kroger Foundation, and our Associates and Customers donated more than $150 million to support organizations and causes that are important to them.
 
     Every year, Kroger proudly recognizes some of the many Associates who make outstanding contributions to their communities. The winners of The Kroger Co. Community Service Award for 2009 are listed following this letter.
 
     We are proud of what our Associates accomplished throughout the year and we look forward to building on this momentum.
 
   We continue to make strong progress on our Sustainability agenda.
 
     At Kroger, we have four focus areas for Sustainability:
 
       1)        Using energy more efficiently, which reduces our carbon footprint;
 
       2) Recycling and reducing waste, including plastic bags and waste generated in our stores;
 
       3) Reducing the effects of our supply chain;
 
       4) Enabling our Customers and Associates to improve their own communities and take meaningful steps to protect the environment.
 
     In 2009, we continued our aggressive program to reduce energy usage in our stores and plants. In the past 10 years, Kroger has reduced its energy consumption by more than 27%. This year, we installed LED lighting and energy-efficient motors in freezer cases in many of our stores.
 
     We are off to a good start toward our waste reduction goal of saving 1 billion plastic bags. Our Associates are helping us achieve this goal by increasing the number of items placed in each bag while still meeting the needs of Customers. At the same time, our Customers are using more reusable bags for their shopping trips. Every reusable bag has the potential to save 1,000 plastic bags over its lifetime.
 
     Our fleet efficiency improved by more than 7% in 2009, meaning our Logistics team delivered more cases of products per gallon of fuel used.
 
     As Customer interest in buying locally grown products has increased, we have standardized programs to make it easier for our stores to source fresh products from local farmers and small businesses, reducing transportation and minimizing handling.
 
3


   We are confronting our challenges.
 
     As we look ahead, the slow pace of the economic recovery will continue to influence Kroger’s business in fiscal 2010. Unemployment levels remain high, suppressing consumer confidence and spending. Volatility in inflation or deflation and changes in the competitive landscape will continue to affect our business in the coming year. Significant increases in health care and pension costs, as well as credit card fees, will also affect our business. We will address these challenges, and others, as we continue to grow our business over the long term.
 
     Kroger stands apart from others in our industry because of our Customer 1st strategy and our Associates’ commitment to making it a reality every day for every Customer who visits one of our stores.
 
     We believe Kroger will continue to be in the best position to deliver Shareholder value now and as the economy and consumer confidence improve.
 
     On behalf of the entire Kroger team, thank you for your continued trust and support.
 

David B. Dillon
Chairman of the Board and
Chief Executive Officer
4


     Congratulations to the winners of The Kroger Co. Community Service Award for 2009:
 
Division Recipient
Atlanta Greg Smith
Central Chris Fought
Cincinnati Cultural Advisory Council
City Market Linda Dukart
Columbus Doug Jarrells
Delta Steven Hicks
Dillon Stores Monte Werth
Food 4 Less Teri Roach
Fred Meyer Andrew Thompson
Fry’s Robert & Laura Hamblen
Jay C Stores William E. Lee
King Soopers Ron Daniels
Michigan Denise Bennett
Mid-Atlantic Rick Ramsuer
Mid-South Betty “Joe” Hughes
QFC Ronald Davidson
Ralphs Frank Devera
Smith’s Sub for Santa Committee - Store 477
Southwest JoAnn “JoJo” Garcia
______
 
KB Specialty Foods Laurie Foster
Layton Dairy Tom Ostler
Pace Dairy Food of Indiana Annette Hitch
State Avenue Wendell Lundy
______
 
Corporate Kelly Lee
______
 
Turkey Hill Dairy Protectors of the Tea (Highville Fire Co.)
Turkey Hill Minit Markets Erin Dimitriou Smith
Logistics Patti Murray

5


NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
 
Cincinnati, Ohio, May 14, 2010
 
To All Shareholders of The Kroger Co.:
 
     The annual meeting of shareholders of The Kroger Co. will be held at the DUKE ENERGY CONVENTION CENTER, Junior Ballroom, 3rd Floor, 525 Elm Street, Cincinnati, Ohio 45202, on June 24, 2010, at 11 a.m., eastern time, for the following purposes:
 
       1.        To elect the directors for the ensuing year;
 
       2. To consider and act upon a proposal to adopt an amendment to the Company’s Amended Articles of Incorporation;
 
       3. To consider and act upon a proposal to ratify the selection of independent auditors for the year 2010;
 
       4. To act upon a shareholder proposal, if properly presented at the annual meeting; and
 
       5. To transact such other business as may properly be brought before the meeting;
 
all as set forth in the Proxy Statement accompanying this Notice. Holders of common shares of record at the close of business on April 26, 2010 will be entitled to vote at the meeting.
 
ATTENDANCE
 
     Only shareholders and persons holding proxies from shareholders may attend the meeting. Please bring to the meeting the notice of the meeting or the top portion of your proxy card that was mailed to you as this will serve as your admission ticket. Several parking areas are located in close proximity to the Duke Energy Convention Center, including the Sixth Street Parking Garage that connects to the Convention Center via the Skywalk.
 
     YOUR MANAGEMENT DESIRES TO HAVE A LARGE NUMBER OF SHAREHOLDERS REPRESENTED AT THE MEETING, IN PERSON OR BY PROXY. PLEASE VOTE YOUR PROXY ELECTRONICALLY VIA THE INTERNET OR BY TELEPHONE. IF YOU HAVE ELECTED TO RECEIVE PRINTED MATERIALS, YOU MAY SIGN AND DATE THE PROXY AND MAIL IT IN THE SELF-ADDRESSED ENVELOPE PROVIDED. NO POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES.
 
     If you are unable to attend the annual meeting, you may listen to a live webcast of the meeting, which will be accessible through our website, www.thekrogerco.com, at 11 a.m., eastern time.
 
By order of the Board of Directors,
Paul W. Heldman, Secretary
 
6


PROXY STATEMENT
 
Cincinnati, Ohio, May 14, 2010
 
     Your proxy is solicited by the Board of Directors of The Kroger Co., and the cost of solicitation will be borne by Kroger. We will reimburse banks, brokers, nominees, and other fiduciaries for postage and reasonable expenses incurred by them in forwarding the proxy material to their principals. Kroger has retained D.F. King & Co., Inc., 48 Wall Street, New York, New York, to assist in the solicitation of proxies and will pay that firm a fee estimated at present not to exceed $15,000. Proxies may be solicited personally, by telephone, electronically via the Internet, or by mail.
 
     David B. Dillon, John T. LaMacchia, and Bobby S. Shackouls, all of whom are Kroger directors, have been named members of the Proxy Committee.
 
     The principal executive offices of The Kroger Co. are located at 1014 Vine Street, Cincinnati, Ohio 45202-1100. Our telephone number is 513-762-4000. This Proxy Statement and Annual Report, and the accompanying proxy, were first furnished to shareholders on May 14, 2010.
 
     As of the close of business on April 26, 2010, our outstanding voting securities consisted of 644,849,993 shares of common stock, the holders of which will be entitled to one vote per share at the annual meeting. The shares represented by each proxy will be voted unless the proxy is revoked before it is exercised. Revocation may be in writing to Kroger’s Secretary, or in person at the meeting, or by appointment of a subsequent proxy. Shareholders may not cumulate votes in the election of directors.
 
     The effect of broker non-votes and abstentions on matters presented for shareholder vote is as follows:
 
     Item No. 1, Election of Directors – The election of directors is determined by plurality. Broker non-votes and abstentions will have no effect on this proposal.
 
     Item No. 2, Amendment to Amended Articles of Incorporation – The affirmative vote representing a majority of the outstanding common shares is required to amend Kroger’s Amended Articles of Incorporation as set forth in this Proxy Statement. Accordingly, broker non-votes and abstentions will have the same effect as votes against this proposal.
 
     Item No. 3, Selection of Auditors – Ratification by shareholders of the selection of auditors requires the affirmative vote of the majority of shares participating in the voting. Accordingly, abstentions will have no effect on this proposal.
 
     Item No. 4, Shareholder Proposal – The affirmative vote of a majority of shares participating in the voting on a shareholder proposal is required for its adoption. Proxies will be voted AGAINST this proposal unless the Proxy Committee is otherwise instructed on a proxy properly executed and returned. Abstentions and broker non-votes will have no effect on this proposal.
 
7


PROPOSALS TO SHAREHOLDERS
 
ELECTION OF DIRECTORS
(ITEM NO. 1)
 
     The Board of Directors, as now authorized, consists of fourteen members. All members are to be elected at the annual meeting to serve until the annual meeting in 2011, or until their successors have been elected by the shareholders or by the Board of Directors pursuant to Kroger’s Regulations, and qualified. Candidates for director receiving the greatest number of votes cast by holders of shares entitled to vote at a meeting at which a quorum is present are elected, up to the maximum number of directors to be chosen at the meeting. Pursuant to guidelines adopted by the Board, in an uncontested election where cumulative voting is not in effect, any nominee who receives a greater number of votes “withheld” from his or her election than votes “for” such election promptly will tender his or her resignation following certification of the shareholder vote. The Corporate Governance Committee of our Board of Directors will consider the resignation offer and recommend to the Board whether to accept the resignation.
 
     The experience, qualifications, attributes, and skills that led the Corporate Governance Committee and the Board to conclude that the following individuals should serve as directors are set forth opposite each individual’s name. The committee memberships stated below are those in effect as of the date of this proxy statement. It is intended that, except to the extent that authority is withheld, proxies will be voted for the election of the following persons:
 
Professional Director
Name       Occupation (1)       Age       Since
NOMINEES FOR DIRECTOR FOR TERMS OF OFFICE
CONTINUING UNTIL 2011
Reuben V. Anderson
 
  
Mr. Anderson is a Senior Partner in the Jackson, Mississippi office of Phelps Dunbar, a regional law firm based in New Orleans. Prior to joining this law firm, he was a justice of the Supreme Court of Mississippi. Mr. Anderson is a director of AT&T Inc., and during the past five years was a director of AT&T Inc., BellSouth Corporation, Burlington Resources Inc., and Trustmark Corporation. He is a member of the Corporate Governance and Public Responsibilities Committees.
 
Mr. Anderson has extensive litigation experience, and he served as the first African-American Justice on the Mississippi Supreme Court. His knowledge and judgment gained through years of legal practice are of great value to the Board. In addition, as former Chairman of the Board of Trustees of Tougaloo College and a resident of Mississippi, he brings to the Board his insights into the African-American community and the southern region of the United States. Mr. Anderson has served on numerous board committees, including audit, public policy, finance, executive, and nominating committees.
  
67
 
  
1991
 

8


Professional Director
Name       Occupation (1)       Age       Since
Robert D. Beyer
 
  
Mr. Beyer is Chairman of Chaparal Investments LLC, a private investment firm and holding company that he founded in 2009. From 2005 to 2009, Mr. Beyer served as Chief Executive Officer of The TCW Group, Inc., a global investment management firm. From 2000 to 2005, he served as President and Chief Investment Officer of Trust Company of the West, the principal operating subsidiary of TCW. Mr. Beyer is a member of the Board of Directors of The Allstate Corporation, and in the past five years was a director of The TCW Group, Inc. and its parent, Société Générale Asset Management, S.A. He is chair of the Financial Policy Committee and a member of the Compensation Committee.
 
Mr. Beyer brings to Kroger his experience as CEO of TCW, a global investment management firm serving many of the largest institutional investors in the U.S. He has exceptional insight into Kroger’s financial strategy, and his experience qualifies him to chair the Financial Policy Committee. While at TCW, he also conceived and developed the firm’s risk management infrastructure, an experience that is useful to the Kroger Board in performing its risk management oversight functions. His experience in managing compensation programs makes him a valued member of the Compensation Committee. His abilities and service as a director were recognized by his peers, who selected Mr. Beyer as an Outstanding Director in 2008 as part of the Outstanding Directors Program of the Financial Times.
  
50
 
  
1999
 
 
David B. Dillon
 
Mr. Dillon was elected Chairman of the Board of Kroger in 2004, Chief Executive Officer in 2003, and President and Chief Operating Officer in 2000. He served as President in 1999, and as President and Chief Operating Officer from 1995 to 1999. Mr. Dillon was elected Executive Vice President of Kroger in 1990 and President of Dillon Companies, Inc. in 1986. He is a director of Convergys Corporation, and has served on that board during the past five years.
 
Mr. Dillon brings to Kroger his extensive knowledge of the supermarket business, having over 30 years of experience with Kroger and Dillon Companies. In addition to his depth of knowledge of Kroger and the fiercely competitive industry in which Kroger operates, he has gained a wealth of experience by serving on compensation and governance committees of another board.
59
 
1995
 

9


Professional Director
Name       Occupation (1)       Age       Since
Susan J. Kropf
 
  
Ms. Kropf was President and Chief Operating Officer of Avon Products Inc., a manufacturer and marketer of beauty care products, from 2001 until her retirement in January 2007. She joined Avon in 1970. Prior to her most recent assignment, Ms. Kropf had been Executive Vice President and Chief Operating Officer, Avon North America and Global Business Operations from 1998 to 2000. From 1997 to 1998 she was President, Avon U.S. Ms. Kropf was a member of Avon’s Board of Directors from 1998 to 2006. She currently is a member of the Board of Directors of Coach, Inc., MeadWestvaco Corporation, and Sherwin Williams Company. Ms. Kropf has served on those boards, as well as the board of Avon Products, during the past five years. She is a member of the Audit and Public Responsibilities Committees.
 
Ms. Kropf has gained a unique consumer insight, having led a major beauty care company. She has extensive experience in manufacturing, marketing, supply chain operations, customer service, and product development, all of which assist her in her role as a member of Kroger’s Board. Ms. Kropf has a strong financial background, and has served on compensation, audit, and corporate governance committees of other boards. She was inducted into the YWCA Academy of Women Achievers.
  
61
 
  
2007
 
 
John T. LaMacchia
 
Mr. LaMacchia served as Chairman of the Board of Tellme Networks, Inc., a provider of voice application networks, from September 2001 to May 2007. From September 2001 through December 2004 he was also Chief Executive Officer of Tellme Networks. From May 1999 to May 2000 Mr. LaMacchia was Chief Executive Officer of CellNet Data Systems, Inc., a provider of wireless data communications. From October 1993 through February 1999, he was President and Chief Executive Officer of Cincinnati Bell Inc. During the past five years, Mr. LaMacchia served on the board of Burlington Resources Inc. He is chair of the Compensation Committee and a member of the Corporate Governance Committee.
 
Mr. LaMacchia brings to Kroger his tenure leading both large and small companies. He has developed expertise in compensation and governance issues through his experience on compensation and corporate governance committees of Kroger and other boards.
68
 
1990
 

10


  Professional   Director
Name       Occupation (1)       Age       Since
David B. Lewis  
Mr. Lewis is Chairman of Lewis & Munday, a Detroit based law firm with offices in Washington, D.C., Seattle, and Hartford. He is a director of H&R Block, and has served on that Board during the past five years. Previously, Mr. Lewis has served on the Board of Directors of Conrail, Inc., LG&E Energy Corp., Lewis & Thompson Agency, Inc., M.A. Hanna, TRW, Inc., and Comerica, Inc. He is a member of the Financial Policy Committee and vice chair of the Public Responsibilities Committee.
 
In addition to his background as a practicing attorney and expertise in bond financing, Mr. Lewis brings to Kroger’s Board his financial background gained while earning his MBA in Finance as well as his service and leadership on Kroger’s and other audit committees. He is a former chairman of the National Association of Securities Professionals.
 65 2002
 
 
      
W. Rodney McMullen
 
Mr. McMullen was elected President and Chief Operating Officer of Kroger in August 2009. Prior to that he was elected Vice Chairman in 2003, Executive Vice President in 1999, and Senior Vice President in 1997. Mr. McMullen is a director of Cincinnati Financial Corporation, and has served on that Board during the past five years.
 
Mr. McMullen has broad experience in the supermarket business, having spent his career spanning over 30 years with Kroger. He has a strong financial background and played a major role as architect of Kroger’s strategic plan. Mr. McMullen is actively involved in the day-to-day operations of Kroger. His service on the compensation, executive, and investment committees of Cincinnati Financial Corporation adds depth to his extensive retail experience.
   49 2003
       
Jorge P. Montoya
Mr. Montoya was President of The Procter & Gamble Company’s Global Snacks & Beverage division, and President of Procter & Gamble Latin America, from 1999 until his retirement in 2004. Prior to that, he was an Executive Vice President of Procter & Gamble, a provider of branded consumer packaged goods, from 1995 to 1999. Mr. Montoya is a director of The Gap, Inc., and served on the Board of Rohm & Haas Company during the past five years. He is chair of the Public Responsibilities Committee and a member of the Compensation Committee.
 
Mr. Montoya brings to Kroger’s Board over 30 years of leadership experience at a premier consumer products company. He has a deep knowledge of the Hispanic market, as well as consumer products and retail operations. Mr. Montoya has vast experience in marketing and general management, including international business. He was named among the 50 most important Hispanics in Business & Technology, in Hispanic Engineer & Information Technology Magazine.
 63 2007
 
11
 

  Professional   Director
Name       Occupation (1)       Age       Since
Clyde R. Moore  
Mr. Moore is the Chairman and Chief Executive Officer of First Service Networks, a national provider of facility and maintenance repair services. He is a director of First Service Networks. Mr. Moore is a member of the Compensation and Corporate Governance Committees.
 
Mr. Moore has over 25 years of general management experience in public and private companies. He has sound experience as a corporate leader overseeing all aspects of a facilities management firm and a manufacturing concern. Mr. Moore’s expertise broadens the scope of the Board’s experience to provide oversight to Kroger’s facilities and manufacturing businesses.
 56 1997
 
 
      
Susan M. Phillips
 
Dr. Phillips is Dean and Professor of Finance at The George Washington University School of Business, a position she has held since 1998. She was a member of the Board of Governors of the Federal Reserve System from December 1991 through June 1998. Before her Federal Reserve appointment, Dr. Phillips served as Vice President for Finance and University Services and Professor of Finance in The College of Business Administration at the University of Iowa from 1987 through 1991. She is a director of State Farm Mutual Automobile Insurance Company, State Farm Life Insurance Company, State Farm Companies Foundation, National Futures Association, and the Chicago Board Options Exchange. Dr. Phillips also is a trustee of the Financial Accounting Foundation. She is a member of the Audit and Financial Policy Committees.
 
Dr. Phillips brings to the Board strong financial acumen, along with a deep understanding of, and involvement with, the relationship between corporations and the government. Her experience in academia brings a unique and diverse viewpoint to the deliberations of the Board. Dr. Phillips has been designated an Audit Committee financial expert.
   65 2003
 
12
 

  Professional   Director
Name       Occupation (1)       Age       Since
Steven R. Rogel  
Mr. Rogel was elected Chairman of the Board of Weyerhaeuser Company, a forest products company, in 1999 and was President and Chief Executive Officer and a director thereof from December 1997 to January 1, 2008 when he relinquished the role of President. He relinquished the CEO role in April of 2008 and retired as Chairman as of April 2009. Before that time Mr. Rogel was Chief Executive Officer, President and a director of Willamette Industries, Inc. He served as Chief Operating Officer of Willamette Industries, Inc. until October 1995 and, before that time, as an executive and group vice president for more than five years. Mr. Rogel is a director of Union Pacific Corporation and EnergySolutions, Inc. He is a member of the Corporate Governance and Financial Policy Committees.
 
Mr. Rogel has extensive experience in management of large corporations at all levels. He brings to the Board a unique perspective, having led a national supplier of paper products prior to his recent retirement. Mr. Rogel previously served as Kroger’s Lead Director, and has served on compensation, finance, audit, and governance committees of other corporations.
 67 1999
 
 
      
James A. Runde
 
Mr. Runde is a special advisor and a former Vice Chairman of Morgan Stanley, a financial services provider, where he has been employed since 1974. He was a member of the Board of Directors of Burlington Resources Inc. prior to its acquisition by ConocoPhillips in 2006. Mr. Runde serves as a trustee of Marquette University and the Pierpont Morgan Library. He is a member of the Compensation and Financial Policy Committees.
 
Mr. Runde brings to Kroger’s Board a strong financial background, having led a major financial services provider. He has served on the compensation committee of a major corporation.
   63 2006
 
Ronald L. Sargent  
Mr. Sargent is Chairman and Chief Executive Officer of Staples, Inc., a consumer products retailer, where he has been employed since 1989. Prior to joining Staples, Mr. Sargent spent 10 years with Kroger in various positions. In addition to serving as a director of Staples, Mr. Sargent is a director of Mattel, Inc. He is chair of the Audit Committee and a member of the Public Responsibilities Committee.
 
Mr. Sargent has over 30 years of retail experience, first with Kroger and then with increasing levels of responsibility and leadership at Staples, Inc. His efforts helped carve out a new market niche for the international retailer that he leads. His understanding of retail operations and consumer insights are of particular value to the Board. Mr. Sargent has been designated an Audit Committee financial expert.
 54 2006

13
 

  Professional   Director
Name       Occupation (1)       Age       Since
Bobby S. Shackouls  
Until the merger of Burlington Resources Inc. and ConocoPhillips, which became effective in 2006, Mr. Shackouls was Chairman of the Board of Burlington Resources Inc., a natural resources business, since July 1997 and its President and Chief Executive Officer since December 1995. He had been a director of that company since 1995 and President and Chief Executive Officer of Burlington Resources Oil and Gas Company (formerly known as Meridian Oil Inc.), a wholly-owned subsidiary of Burlington Resources, since 1994. Mr. Shackouls is a director of ConocoPhillips. He has been appointed by Kroger’s Board to serve as Lead Director. Mr. Shackouls is chair of the Corporate Governance Committee and a member of the Audit Committee.
 
Mr. Shackouls brings to the Board the critical thinking that comes with a chemical engineering background. His guidance of a major natural resources company, coupled with his corporate governance expertise, forms the foundation of his leadership role on Kroger’s Board.
 59 1999
____________________
 
(1)       Except as noted, each of the directors has been employed by his or her present employer (or a subsidiary) in an executive capacity for at least five years.
 
14
 

INFORMATION CONCERNING THE BOARD OF DIRECTORS
 
COMMITTEES OF THE BOARD
 
     The Board of Directors has a number of standing committees including Audit, Compensation, and Corporate Governance Committees. All standing committees are composed exclusively of independent directors. All Board committees have charters that can be found on our corporate website at www.thekrogerco.com under Guidelines on Issues of Corporate Governance. During 2009, the Audit Committee met seven times, the Compensation Committee met six times, and the Corporate Governance Committee met two times. Committee memberships are shown on pages 8 through 14 of this Proxy Statement. The Audit Committee reviews financial reporting and accounting matters pursuant to its charter and selects our independent accountants. The Compensation Committee recommends for determination by the independent members of our Board the compensation of the Chief Executive Officer, determines the compensation of Kroger’s other senior management, and administers some of our incentive programs. Additional information on the Compensation Committee’s processes and procedures for consideration of executive compensation are addressed in the Compensation Discussion and Analysis below. The Corporate Governance Committee develops criteria for selecting and retaining members of the Board, seeks out qualified candidates for the Board, and reviews the performance of Kroger, the Board, and along with the other independent board members, the CEO.
 
     The Corporate Governance Committee will consider shareholder recommendations for nominees for membership on the Board of Directors. Recommendations relating to our annual meeting in June 2011, together with a description of the proposed nominee’s qualifications and other relevant information, must be submitted in writing to Paul W. Heldman, Secretary, and received at our executive offices not later than January 14, 2011. Shareholders who desire to submit a candidate for director should send the name of the proposed candidate, along with information regarding the proposed candidate’s background and experience, to the attention of Kroger’s Secretary at our executive offices. The shareholder also should indicate the number of shares beneficially owned by the shareholder. The Secretary will forward the information to the Corporate Governance Committee for its consideration. The Committee will use the same criteria in evaluating candidates submitted by shareholders as it uses in evaluating candidates identified by the Committee. These criteria are:
     Racial, ethnic, and gender diversity is an important element in promoting full, open, and balanced deliberations of issues presented to the Board, and is considered by the Corporate Governance Committee. Some consideration also is given to the geographic location of director candidates in order to provide a reasonable distribution of members from the operating areas of the Company.
 
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     The Corporate Governance Committee typically recruits candidates for Board membership through its own efforts and through suggestions from other directors and shareholders. The Committee on occasion has retained an outside search firm to assist in identifying and recruiting Board candidates who meet the criteria established by the Committee.
 
CORPORATE GOVERNANCE
 
     The Board of Directors has adopted Guidelines on Issues of Corporate Governance. These Guidelines, which include copies of the current charters for the Audit, Compensation, and Corporate Governance Committees, and the other committees of the Board of Directors, are available on our corporate website at www.thekrogerco.com. Shareholders may obtain a copy of the Guidelines by making a written request to Kroger’s Secretary at our executive offices.
 
INDEPENDENCE
 
     The Board of Directors has determined that all of the directors, with the exception of Messrs. Dillon and McMullen, have no material relationships with Kroger and therefore are independent for purposes of the New York Stock Exchange listing standards. The Board made its determination based on information furnished by all members regarding their relationships with Kroger. After reviewing the information, the Board determined that all of the non-employee directors were independent because (i) they all satisfied the independence standards set forth in Rule 10A-3 of the Securities Exchange Act of 1934, (ii) they all satisfied the criteria for independence set forth in Rule 303A.02 of the New York Stock Exchange Listed Company Manual, and (iii) other than business transactions between Kroger and entities with which the directors are affiliated, the value of which falls below the thresholds identified by the New York Stock Exchange listing standards, none had any material relationships with us except for those arising directly from their performance of services as a director for Kroger.
 
LEAD DIRECTOR
 
     The Lead Director presides over all executive sessions of the non-management directors, serves as the principal liaison between the non-management directors and management, and consults with the Chairman regarding information to be sent to the Board, meeting agendas, and establishing meeting schedules. Unless otherwise determined by the Board, the chair of the Corporate Governance Committee is designated as the Lead Director.
 
AUDIT COMMITTEE EXPERTISE
 
     The Board of Directors has determined that Susan M. Phillips and Ronald L. Sargent, independent directors who are members of the Audit Committee, are “audit committee financial experts” as defined by applicable SEC regulations and that all members of the Audit Committee are “financially literate” as that term is used in the NYSE listing standards.
 
CODE OF ETHICS
 
     The Board of Directors has adopted The Kroger Co. Policy on Business Ethics, applicable to all officers, employees and members of the Board of Directors, including Kroger’s principal executive, financial, and accounting officers. The Policy is available on our corporate website at www.thekrogerco.com. Shareholders may obtain a copy of the Policy by making a written request to Kroger’s Secretary at our executive offices.
 
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COMMUNICATIONS WITH THE BOARD
 
     The Board has established two separate mechanisms for shareholders and interested parties to communicate with the Board. Any shareholder or interested party who has concerns regarding accounting, improper use of Kroger assets, or ethical improprieties may report these concerns via the toll-free hotline (800-689-4609) or email address (helpline@kroger.com) established by the Board’s Audit Committee. The concerns are investigated by Kroger’s Vice President of Auditing and reported to the Audit Committee as deemed appropriate by the Vice President of Auditing.
 
     Shareholders or interested parties also may communicate with the Board in writing directed to Kroger’s Secretary at our executive offices. The Secretary will consider the nature of the communication and determine whether to forward the communication to the chair of the Corporate Governance Committee. Communications relating to personnel issues or our ordinary business operations, or seeking to do business with us, will be forwarded to the business unit of Kroger that the Secretary deems appropriate. All other communications will be forwarded to the chair of the Corporate Governance Committee for further consideration. The chair of the Corporate Governance Committee will take such action as he or she deems appropriate, which may include referral to the Corporate Governance Committee or the entire Board.
 
ATTENDANCE
 
     The Board of Directors met seven times in 2009. During 2009, all incumbent directors attended at least 75% of the aggregate number of meetings of the Board and committees on which that director served. Members of the Board are expected to use their best efforts to attend all annual meetings of shareholders. All fifteen members of the Board then in office attended last year’s annual meeting.
 
COMPENSATION CONSULTANTS
 
     The Compensation Committee directly engages a compensation consultant from Mercer Human Resource Consulting to advise the Committee in the design of compensation for executive officers. In 2009, Kroger paid that consultant $158,839 for work conducted for the Committee. Kroger, on management’s recommendation, retained the parent and affiliated companies of Mercer Human Resource Consulting to perform other services for Kroger in 2009, for which Kroger paid $5,234,161. These other services primarily related to insurance claims (for which Kroger was reimbursed by insurance carriers as claims were adjusted), insurance brokerage and bonding commissions, and pension consulting. Kroger also made payments to affiliated companies for insurance premiums that were collected by the affiliated companies on behalf of insurance carriers, but these amounts are not included in the totals referenced above, as the amounts were paid over to insurance carriers for services provided by those carriers. Although neither the Committee nor the Board expressly approved the other services, the Committee determined that the consultant is independent because (a) he was first engaged by the Committee before he became associated with Mercer; (b) he works exclusively for the Committee and not for our management; (c) he does not benefit from the other work that Mercer’s parent and affiliated companies perform for Kroger; and (d) neither the consultant nor the consultant’s team perform any other services on behalf of Kroger.
 
     In 2009 the Compensation Committee also directly engaged a second compensation consultant, from Frederick W. Cook & Co., Inc., to review Kroger’s executive compensation. The Committee determined that the consultant is independent because neither he nor his company provide any other services for Kroger.
 
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BOARD OVERSIGHT OF ENTERPRISE RISK
 
     While risk management is primarily the responsibility of Kroger’s management team, the Board of Directors is responsible for the overall supervision of our risk management activities. The Board’s oversight of the material risks faced by Kroger occurs at both the full Board level and at the committee level.
 
     The Board’s Audit Committee has oversight responsibility not only for financial reporting of Kroger’s major financial exposures and the steps management has taken to monitor and control those exposures, but also for the effectiveness of management’s processes that monitor and manage key business risks facing Kroger, as well as the major areas of risk exposure and management’s efforts to monitor and control that exposure. The Audit Committee also discusses with management its policies with respect to risk assessment and risk management.
 
     Management provides regular updates throughout the year to the respective committees regarding the management of the risks they oversee, and each of these committees reports on risk to the full Board at each regular meeting of the Board.
 
     In addition to the reports from the committees, the Board receives presentations throughout the year from various department and business unit leaders that include discussion of significant risks as necessary. At each Board meeting, the Chairman and CEO addresses matters of particular importance or concern, including any significant areas of risk that require Board attention. Additionally, through dedicated sessions focusing entirely on corporate strategy, the full Board reviews in detail Kroger’s short- and long-term strategies, including consideration of significant risks facing Kroger and their potential impact. The independent directors, in executive sessions led by the Lead Director, address matters of particular concern, including significant areas of risk, that warrant further discussion or consideration outside the presence of Kroger employees.
 
     We believe that our approach to risk oversight, as described above, optimizes our ability to assess inter-relationships among the various risks, make informed cost-benefit decisions, and approach emerging risks in a proactive manner for Kroger. We also believe that our risk structure complements our current Board leadership structure, as it allows our independent directors, through the five fully independent Board committees, and in executive sessions of independent directors led by an independent Lead Director, to exercise effective oversight of the actions of management, led by Mr. Dillon as Chairman and CEO, in identifying risks and implementing effective risk management policies and controls.
 
BOARD LEADERSHIP STRUCTURE
 
     Our Board is composed of twelve independent directors and two management directors, Mr. Dillon, the Chairman of the Board and CEO, and Mr. McMullen, President and Chief Operating Officer. In addition, as provided in our Guidelines on Issues of Corporate Governance, the Board has designated one of the independent directors as Lead Director. The Board has established five standing committees — audit, compensation, corporate governance, financial policy, and public responsibilities. Each of the Board committees is composed solely of independent directors, each with a different independent director serving as committee chair. We believe that the mix of experienced independent and management directors that make up our Board, along with the independent role of our Lead Director and our independent Board committees, benefits Kroger and its shareholders.
 
     The Board believes that it is beneficial to Kroger and its shareholders to designate one of the directors as a Lead Director. The Lead Director serves a variety of roles, including reviewing and approving Board agendas, meeting materials and schedules to confirm the appropriate topics are reviewed and sufficient time is allocated to each; serving as liaison between the Chairman of the Board, management, and the
 
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non-management directors; presiding at the executive sessions of independent directors and at all other meetings of the Board of Directors at which the Chairman of the Board is not present; and calling an executive session of independent directors at any time. Bobby Shackouls, an independent director and the chair of the Corporate Governance Committee, is currently our Lead Director. Mr. Shackouls is an effective Lead Director for Kroger due to, among other things, his independence, his deep strategic and operational understanding of Kroger obtained while serving as a Kroger director, his corporate governance knowledge acquired during his tenure as a member of our Corporate Governance Committee, his previous experience on other boards, and his prior experience as a CEO of a Fortune 500 company.
 
     With respect to the roles of Chairman and CEO, the Guidelines provide that the Board believes that it is in the best interests of Kroger and its shareholders for one person to serve as Chairman and CEO. The Board recognizes that there may be circumstances in which it is in the best interests of Kroger and its shareholders for the roles to be separated, and the Board exercises its discretion as it deems appropriate in light of prevailing circumstances. The Board believes that the combination or separation of these positions should continue to be considered as part of the succession planning process, as was the case in 2003 when the roles were separated. Since 2004, the roles have been combined.
 
     Our Board and each of its committees conduct an annual evaluation to determine whether they are functioning effectively. As part of this annual self-evaluation, the Board assesses whether the current leadership structure continues to be appropriate for Kroger and its shareholders. Our Guidelines provide the flexibility for our Board to modify our leadership structure in the future as appropriate. We believe that Kroger, like many U.S. companies, has been well-served by this flexible leadership structure.
 
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COMPENSATION DISCUSSION AND ANALYSIS

EXECUTIVE COMPENSATION – GENERAL PRINCIPLES
 
     The Compensation Committee of the Board has the primary responsibility for establishing the compensation of Kroger’s executive officers, including the named executive officers who are identified in the Summary Compensation Table below, with the exception of the Chief Executive Officer. The Committee’s role regarding the CEO’s compensation is to make recommendations to the independent members of the Board; those independent Board members establish the CEO’s compensation.
 
     The Committee’s philosophy on compensation generally applies to all levels of Kroger management. It requires Kroger to:
     The following discussion and analysis addresses the compensation of the named executive officers, and the factors considered by the Committee in setting compensation for the named executive officers and making recommendations to the independent Board members in the case of the CEO’s compensation. Additional detail is provided in the compensation tables and the accompanying narrative disclosures that follow this discussion and analysis.
 
EXECUTIVE COMPENSATION – OBJECTIVES
 
     The Committee has several related objectives regarding compensation. First, the Committee believes that compensation must be designed to attract and retain those best suited to fulfill the challenging roles that executive officers play at Kroger. Second, some elements of compensation should help align the interests of the officers with your interests as shareholders. Third, compensation should create strong incentives for the officers (a) to achieve the annual business plan targets established by the Board, and (b) to achieve Kroger’s long-term strategic objectives. In developing compensation programs and amounts to meet these objectives, the Committee exercises judgment to ensure that executive officer compensation does not exceed reasonable and competitive levels in light of Kroger’s performance and the needs of the business.
 
     To meet these objectives, the Committee has taken a number of steps over the last several years, including the following:
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restricted stock values; the value of any perquisites; retirement benefits; severance benefits available under The Kroger Co. Employee Protection Plan; and earnings and payouts available under Kroger’s nonqualified deferred compensation program.
ESTABLISHING EXECUTIVE COMPENSATION
 
     The independent members of the Board have the exclusive authority to determine the amount of the CEO’s salary; the bonus potential for the CEO; the nature and amount of any equity awards made to the CEO; and any other compensation questions related to the CEO. In setting the annual bonus potential for the CEO, the independent directors determine the dollar amount that will be multiplied by the percentage payout under the annual bonus plan applicable to all corporate management, including the named executive officers. The independent directors retain discretion to reduce the percentage payout the CEO would otherwise receive. The independent directors thus make a separate determination annually concerning both the CEO’s bonus potential and the percentage of bonus paid.
 
     The Committee performs the same function and exercises the same authority as to the other named executive officers. The Committee’s annual review of compensation for the named executive officers includes the following:
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     In considering each of the factors above, the Committee does not make use of a formula, but rather subjectively reviews each in making its compensation determination.
 
THE COMMITTEE’S COMPENSATION CONSULTANTS AND BENCHMARKING
 
     As referenced earlier in this proxy statement, the Committee directly engages a compensation consultant from Mercer Human Resource Consulting to advise the Committee in the design of compensation for executive officers. The Mercer consultant conducts an annual competitive assessment of executive positions at Kroger for the Committee. The assessment is one of several bases, as described above, on which the Committee determines compensation. The consultant assesses base salary; target annual performance-based bonus; target cash compensation (the sum of salary and bonus); annualized long-term incentive awards, such as stock options, other equity awards, and performance-based long-term bonuses; and total direct compensation (the sum of all these elements). The consultant compares these elements against those of other companies in a group of publicly-traded food and drug retailers. For 2009, the group consisted of:
 
Costco Wholesale Supervalu
CVS Target
Great Atlantic & Pacific Tea Walgreens
Rite Aid Wal-Mart
Safeway  

This peer group is the same group as was used in 2008.
 
     The make-up of the compensation peer group is reviewed annually and modified as circumstances warrant. Industry consolidation and other competitive forces will change the peer group used over time. The consultant also provides the Committee data from companies in “general industry,” a representation of major publicly-traded companies. These data are reference points, particularly for senior staff positions where competition for talent extends beyond the retail sector.
 
     In 2009, the Committee directly engaged an additional compensation consultant to conduct a review of Kroger’s executive compensation. This consultant, from Frederic W. Cook & Co., Inc., examined the compensation philosophy, peer group composition, annual cash bonus, and long-term incentive compensation including equity awards. The consultant concluded that Kroger’s executive compensation program met the Committee’s objectives, and that it provides a strong linkage between pay and performance.
 
     Kroger is the second-largest company as measured by annual revenues when compared with the peer group referenced above and is the largest traditional food and drug retailer. The Committee has therefore sought to ensure that salaries paid to our executive officers are at or above the median paid by competitors for comparable positions and to provide annual bonus potentials to our executive officers that, if annual business plan objectives are achieved, would cause their total cash compensation to be meaningfully above the median.
 
COMPONENTS OF EXECUTIVE COMPENSATION AT KROGER
 
     Compensation for our named executive officers is comprised of the following:
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SALARY
 
     We provide our named executive officers and other employees a fixed amount of cash compensation – salary – for their work. Salaries for named executive officers (with the exception of the CEO) are established each year by the Committee. The CEO’s salary is established by the independent directors. Salaries for the named executive officers were reviewed in June.
 
     The amount of each executive’s salary is influenced by numerous factors including:
     The assessment of individual contribution is based on a subjective determination, without the use of performance targets, in the following areas:
     The named executive officers received salary increases, to the amounts shown below, following the annual review of their compensation in June.
 
Salaries
       2007         2008        2009
David B. Dillon $ 1,185,000 $ 1,220,000 $ 1,260,000
J. Michael Schlotman $ 525,000 $ 545,000 $ 567,000
W. Rodney McMullen $ 833,000 $ 860,000 $ 890,000
Don W. McGeorge   $ 833,000 $ 860,000   $ 890,000
Donald E. Becker $ 600,000   $ 620,000 $ 645,000
Paul W. Heldman $ 665,000 $ 685,000 $ 710,000

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PERFORMANCE-BASED ANNUAL CASH BONUS
 
     A large percentage of our employees at all levels, including the named executive officers, are eligible to receive a performance-based annual cash bonus based on Kroger or unit performance. The Committee establishes bonus potentials for each executive officer, other than the CEO whose bonus potential is established by the independent directors. Actual payouts, which can exceed 100% of the potential amounts, represent the extent to which performance meets or exceeds the thresholds established by the Committee.
 
     The Committee considers several factors in making its determination or recommendation as to bonus potentials. First, the individual’s level within the organization is a factor in that the Committee believes that more senior executives should have a substantial part of their compensation dependent upon Kroger’s performance. Second, the individual’s salary is a factor so that a substantial portion of a named executive officer’s total cash compensation is dependent upon Kroger’s performance. Finally, the Committee considers the reports of its compensation consultants to assess the bonus potentials of the named executive officers in light of total compensation paid to comparable executive positions in the industry.
 
     The annual cash bonus potential in effect at the end of the year for each named executive officer is shown below. Actual bonus payouts are prorated to reflect changes, if any, to bonus potentials during the year.
 
Annual Bonus Potential
       2007        2008        2009
David B. Dillon $ 1,500,000   $ 1,500,000   $ 1,500,000
J. Michael Schlotman $ 500,000 $ 500,000   $ 500,000
W. Rodney McMullen   $ 1,000,000   $ 1,000,000   $ 1,000,000
Don W. McGeorge $ 1,000,000   $ 1,000,000   $ 1,000,000
Donald E. Becker $ 550,000 $ 550,000 $ 550,000
Paul W. Heldman $ 550,000 $ 550,000 $ 550,000

     The amount of bonus that the named executive officers earn each year is determined by Kroger’s performance compared to targets established by the Committee based on the business plan adopted by the Board of Directors. In 2009, thirty percent of bonus was earned based on an identical sales target for Kroger’s supermarkets and other business operations; thirty percent was based on a target for EBITDA, excluding supermarket fuel; thirty percent was based on implementation and results of a set of measures under our strategic plan; and ten percent was based on the performance of new capital projects compared to their budgets. An additional 5% would be earned if Kroger achieved three goals with respect to its supermarket fuel operations; achievement of at least 80% of the targeted fuel EBITDA as set forth in the business plan, increase of at least 3% in gallons sold at identical fuel centers, and achievement of the planned number of fuel centers placed in service. Likewise, a 5% reduction in bonus would result if any of the three fuel goals was not achieved.
 
     Over time the Committee has placed an increased emphasis on the strategic plan by making the target more difficult to achieve. The bonus plan allows for minimal bonus to be earned at relatively low levels to provide incentive for achieving even higher levels of performance.
 
     Following the close of the year, the Committee reviewed Kroger’s performance against the identical sales, EBITDA, strategic plan, and capital projects objectives and determined the extent to which Kroger achieved those objectives. Kroger’s EBITDA, excluding impairment charges, for 2009 was $3.655 billion, and Kroger’s identical sales for 2009 were 2.3%. In 2009, Kroger’s supermarket fuel EBITDA was $89.192 million, or 81.1% of the goal established at the beginning of the year. Kroger’s sale of fuel in identical
 
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supermarket fuel centers was 591.6 million gallons, or 5.3% over the prior year. We placed 117 supermarket fuel centers in operation during 2009, exceeding our goal of 111 centers. As a result, the officers earned the additional 5% fuel bonus. As a result of the Company’s performance when compared to the targets established by the Committee, and based on the business plan adopted by the Board of Directors, the named executive officers earned 38.450% of their bonus potentials, which percentage payout is substantially lower than the bonus payouts over the last several years, principally reflecting the degree to which Kroger failed to achieve its EBITDA and sales goals.
 
     The 2009 targets established by the Committee for annual bonus amounts based on identical sales and EBITDA results, the actual 2009 results, and the bonus percentage earned in each of the components of named executive officer bonus, were as follows:
 
Targets
Component        Minimum        100%        Result        Amount Earned
Identical Sales 2.0%   4.0%/5.0%* 2.3%   2.001 %
EBITDA   $4.005 Billion $4.152 Billion $3.655 Billion 0 %
Strategic Plan**       21.951 %
Capital Projects** 9.498 %
Fuel Bonus [as described in the text above]   5.000 %
38.450 %
____________________
 
*        Identical sales of 4% pay at 100% if EBITDA goal is achieved. If EBITDA goal is not achieved, identical sales of 5% pay at 100%.
 
** The Strategic Plan and Capital Projects components also were established by the Committee but are not disclosed as they are competitively sensitive.
 
     In 2009, as in all years, the Committee retained discretion to reduce the bonus payout for named executive officers if the Committee determined for any reason that the bonus payouts were not appropriate. The independent directors retained that discretion for the CEO’s bonus. Those bodies also retained discretion to adjust the targets under the plan should unanticipated developments arise during the year. No adjustments were made to the payout or the targets during 2009.
 
     The percentage paid for 2009 represented and resulted from performance that, due to a weak economy and persistent deflation, did not meet our original business plan objectives. A comparison of bonus percentages for the named executive officers in prior years demonstrates the variability of incentive compensation:
 
       Annual Cash Bonus
Fiscal Year Percentage
2009 38.450 %
2008 104.948 %
2007 128.104 %
2006 141.118 %
2005 132.094 %
2004 55.174 %
2003 24.100 %
2002   9.900 %
2001 31.760 %
2000 80.360 %

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     The actual amounts of annual performance-based cash bonuses paid to the named executive officers for 2009 are shown in the Summary Compensation Table under the heading “Non-Equity Incentive Plan Compensation.” These amounts represent the bonus potentials for each named executive officer multiplied by the percentage earned in 2009. In no event can any participant receive a performance-based annual cash bonus in excess of $5,000,000. Beginning with the 2009 annual cash bonus, the maximum amount that a participant, including each named executive officer, can earn is further limited to 200% of the participant’s potential amount.
 
     After considering recommendations made by its compensation consultants, the Committee determined to reduce the number of metrics considered for purposes of calculating annual bonuses. Beginning with the annual bonus for 2010, thirty percent of bonus will be based on an identical sales target for Kroger’s supermarkets and other business operations; thirty percent will be based on a target for EBITDA, excluding supermarket fuel; and forty percent will be based on implementation and results of a set of measures under our strategic plan. An additional 5% will be earned if Kroger achieves three goals with respect to its supermarket fuel operations, subject to adjustment by the Committee based on the effects of certain fuel programs; achievement of at least 80% of the targeted fuel EBITDA as set forth in the business plan, increase of at least 3% in gallons sold at identical fuel centers, and achievement of the planned number of fuel centers placed in service.
 
PERFORMANCE-BASED LONG-TERM CASH BONUS
 
     After reviewing executive compensation with its consultant in 2005, the Committee determined that the long-term component, which was made up of equity awards, of Kroger’s executive compensation was not competitive. The Committee developed a plan to provide an incentive to the named executive officers to achieve the long-term goals established by the Board of Directors by conditioning a portion of compensation on the achievement of those goals. Beginning in 2006, approximately 140 Kroger executives, including the named executive officers, are eligible to participate in a performance-based cash bonus plan designed to reward participants for improving the long-term performance of Kroger. Bonuses are earned based on the extent to which Kroger advances its strategic plan by:
     The 2006 plan consisted of two components. The phase-in component measured improvements through fiscal year 2007. The other component measured the improvements through fiscal year 2009. Actual payouts were based on the degree to which improvements were achieved, and were awarded in increments based on the participant’s salary at the end of fiscal year 2005. Participants received a 1% payout for each point by which the performance in the key categories increased, and a 0.25% payout for each percentage reduction in operating costs. The Committee administers the plan and determined the bonus payout amounts based on achievement of the performance criteria. Total operating costs as a percentage of sales, excluding fuel, at the commencement of the 2006 plan were 28.78%, and at the end of the phase-in period were 27.89%. Combining this operating cost improvement with our performance in our key categories resulted in payouts for the phase-in component of 36.25% of the participant’s annual salary in effect at the end of fiscal year 2005. Total operating costs as a percentage of sales, excluding fuel, at the end of fiscal year 2009 were 27.38%. Combining this operating cost improvement with our performance in our key categories resulted in payouts for the full four-year performance period of 59.75% of the participant’s annual salary in effect at the end of fiscal year 2005.
 
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     After reviewing an analysis conducted by its independent compensation consultant in 2007, the Committee determined that continuation of the long-term cash bonus was necessary in order for long-term compensation for the named executive officers to be competitive and to continue to focus the officers on achieving Kroger’s long-term business objectives. As a result, the Committee adopted a 2008 long-term bonus plan under which bonuses are earned based on the extent to which Kroger advances its strategic plan by:
     The 2008 plan measures improvements through fiscal year 2011. Participants receive a 1% payout for each point by which the performance in the key categories increases, a 0.25% payout for each percentage reduction in operating costs, and a 1% payout based on improvement in associate engagement measures. Total operating costs as a percentage of sales, excluding fuel, at the commencement of the 2008 plan were 27.89%. Actual payouts are based on the degree to which improvements are achieved, and will be awarded based on the participant’s salary at the end of fiscal year 2007. In no event can any participant receive a performance-based long-term cash bonus in excess of $5,000,000.
 
     Although the Committee is considering adoption of a new 2010 long-term bonus plan, that plan has not yet been adopted.
 
EQUITY
 
     Awards based on Kroger’s common stock are granted periodically to the named executive officers and a large number of other employees. Equity participation aligns the interests of employees with your interests as shareholders, and Kroger historically has distributed equity awards widely. In 2009, Kroger granted 3,598,620 stock options to approximately 7,100 employees, including the named executive officers, under one of Kroger’s long-term incentive plans. The options permit the holder to purchase Kroger common stock at an option price equal to the closing price of Kroger common stock on the date of the grant. The Committee adopted a policy of granting options only at one of the four Committee meetings conducted shortly following Kroger’s public release of its quarterly earnings results.
 
     Kroger’s long-term incentive plans also provide for other equity-based awards, including restricted stock. During 2009 Kroger awarded 2,575,994 shares of restricted stock to approximately 11,130 employees, including the named executive officers. This amount is comparable to amounts awarded over the past few years as we began reducing the number of stock options granted and increasing the number of shares of restricted stock awards. The change in Kroger’s broad-based equity program from predominantly stock options to a mixture of options and restricted shares was precipitated by (a) the perception of increased value that restricted shares offer, (b) the retention benefit to Kroger of restricted shares, and (c) accounting conventions that now require stock options to be expensed, making the change cost-neutral to Kroger.
 
     The Committee considers several factors in determining the amount of options and restricted shares awarded to the named executive officers or, in the case of the CEO, recommending to the independent directors the amount awarded. These factors include:
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     The Committee has long recognized that the amount of compensation provided to the named executive officers through equity-based pay is often below the amount paid by our competitors. Lower equity-based awards for the named executive officers and other senior management permit a broader base of Kroger associates to participate in equity awards.
 
     Amounts of equity awards issued and outstanding for the named executive officers are set forth in the tables that follow this discussion and analysis.
 
RETIREMENT AND OTHER BENEFITS
 
     Kroger maintains a defined benefit and several defined contribution retirement plans for its employees. The named executive officers participate in one or more of these plans, as well as one or more excess plans designed to make up the shortfall in retirement benefits created by limitations under the Internal Revenue Code on benefits to highly compensated individuals under qualified plans. Additional details regarding retirement benefits available to the named executive officers can be found in the 2009 Pension Benefits table and the accompanying narrative description that follows this discussion and analysis.
 
     Kroger also maintains an executive deferred compensation plan in which some of the named executive officers participate. This plan is a nonqualified plan under which participants can elect to defer up to 100% of their cash compensation each year. Compensation deferred bears interest, until paid out, at the rate representing Kroger’s cost of ten-year debt in the year of deferral as determined by Kroger’s CEO prior to the beginning of each deferral year. In 2009, that rate was 6.15%. Deferred amounts are paid out only in cash, in accordance with a deferral option selected by the participant at the time the deferral election is made.
 
     We adopted The Kroger Co. Employee Protection Plan, or KEPP, during fiscal year 1988. That plan was amended and restated in 2007. All of our management employees and administrative support personnel whose employment is not covered by a collective bargaining agreement, with at least one year of service, are covered. KEPP provides for severance benefits and extended Kroger-paid health care, as well as the continuation of other benefits as described in the plan, when an employee is actually or constructively terminated without cause within two years following a change in control of Kroger (as defined in the plan). Participants are entitled to severance pay of up to 24 months’ salary and bonus. The actual amount is dependent upon pay level and years of service. KEPP can be amended or terminated by the Board at any time prior to a change in control.
 
     Stock option and restricted stock agreements with participants in Kroger’s long-term incentive plans provide that those awards “vest,” with options becoming immediately exercisable and restrictions on restricted stock lapsing, upon a change in control as described in the agreements.
 
     None of the named executive officers, except Mr. McGeorge, is party to an employment agreement. Under that agreement, Mr. McGeorge, former President and Chief Operating Officer, and former member of Kroger’s Board of Directors, will continue as an active Kroger employee, and will continue to receive his salary and other active employee benefits through October 1, 2011. During that period, Mr. McGeorge will not engage in any business activity in competition with Kroger’s retail business. Thereafter, his active employment will cease and he will be eligible to receive retirement benefits.
 
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PERQUISITES
 
     The Committee does not believe that it is necessary for the attraction or retention of management talent to provide the named executive officers a substantial amount of compensation in the form of perquisites. In 2009, the only perquisites provided were:
     The life insurance benefit, along with reimbursement of the tax effect of that benefit, was offered beginning several years ago to replace a split-dollar life insurance benefit that was substantially more costly to Kroger. Currently, 157 active executives, including the named executive officers, and 65 retired executives, receive this benefit. Beginning in 2010, Kroger no longer will reimburse the tax effects of insurance premiums or participation in a nonqualified retirement plan, as these “gross-ups” have been eliminated.
 
     In addition, the named executive officers are entitled to the following benefit that does not constitute a perk as defined by the SEC rules:
     The total amount of perquisites furnished to the named executive officers is shown in the Summary Compensation Table and described in more detail in footnote 6 to that table.
 
EXECUTIVE COMPENSATION RECOUPMENT POLICY
 
     If a material error of facts results in the payment to an executive officer at the level of Group Vice President or higher of an annual bonus or a long-term bonus in an amount higher than otherwise would have been paid, as determined by the Committee, then the officer, upon demand from the Committee, will reimburse Kroger for the amounts that would not have been paid if the error had not occurred. This recoupment policy applies to those amounts paid by Kroger within 36 months prior to the detection and public disclosure of the error. In enforcing the policy, the Committee will take into consideration all factors that it deems appropriate, including:
SECTION 162 (M) OF THE INTERNAL REVENUE CODE
 
     Tax laws place a limit of $1,000,000 on the amount of some types of compensation for the CEO and the next four most highly compensated officers that is tax deductible by Kroger. Compensation that is deemed to be “performance-based” is excluded for purposes of the calculation and is tax deductible. Awards under Kroger’s long-term incentive plans, when payable upon achievement of stated performance criteria, should
 
29
 

be considered performance-based and the compensation paid under those plans should be tax deductible. Generally, compensation expense related to stock options awarded to the CEO and the next four most highly compensated officers should be deductible. On the other hand, Kroger’s awards of restricted stock that vest solely upon the passage of time are not performance-based. As a result, compensation expense for those awards to the CEO and the next four most highly compensated officers is not deductible, to the extent that the related compensation expense, plus any other expense for compensation that is not performance-based, exceeds $1,000,000.
 
     Kroger’s bonus plans rely on performance criteria, and have been approved by shareholders. As a result, bonuses paid under the plans to the CEO and the next four most highly compensated officers will be deductible by Kroger. In Kroger’s case, this group of individuals is not identical to the group of named executive officers.
 
     Kroger’s policy is, primarily, to design and administer compensation plans that support the achievement of long-term strategic objectives and enhance shareholder value. Where it is material and supports Kroger’s compensation philosophy, the Committee also will attempt to maximize the amount of compensation expense that is deductible by Kroger.
 
 
COMPENSATION COMMITTEE REPORT
 
     The Compensation Committee has reviewed and discussed with management of the Company the Compensation Discussion and Analysis contained in this proxy statement. Based on its review and discussions with management, the Compensation Committee has recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in the Company’s proxy statement and incorporated by reference into its annual report on Form 10-K.
 
Compensation Committee: 
     John T. LaMacchia, Chair
     Robert D. Beyer
     Jorge P. Montoya
     Clyde R. Moore
     James A. Runde
 
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EXECUTIVE COMPENSATION
 
SUMMARY COMPENSATION TABLE
 
     The following table shows the compensation of the Chief Executive Officer, Chief Financial Officer, each of the Company’s three most highly compensated executive officers other than the CEO and CFO, and one additional former executive officer (the “named executive officers”) during the fiscal years presented:
 
SUMMARY COMPENSATION TABLE
Change in
Pension
Value and
Nonqualified
Non-Equity Deferred
Stock Option Incentive Plan Compensation All Other
Name and Principal         Salary     Bonus     Awards     Awards     Compensation     Earnings     Compensation     Total
Position Year ($) ($) ($) ($) ($) ($) ($) ($)
(3) (3) (4) (5)   (6)  
David B. Dillon 2009 $ 1,239,822 —   $ 2,569,100   $ 1,494,000   $ 1,234,000   $ 3,630,041   $ 172,430 $ 10,339,393
       Chairman and CEO 2008 $ 1,204,758 —   $ 3,290,150   $ 2,015,123   $ 1,574,220   $ 2,191,743 $ 170,307 $ 10,446,301
2007 $ 1,173,291 —   $ 3,109,700   $ 2,302,901   $ 2,320,310 $ 922,570 $ 168,543 $ 9,997,315
  
J. Michael Schlotman  2009 $ 556,280 — $ 223,400 $ 132,800 $ 461,125 $ 795,146 $ 42,609 $ 2,211,360
       Senior Vice 2008 $ 537,124 — $ 286,100 $ 179,122 $ 524,740 $ 292,491   $ 41,135   $ 1,860,712
       President 2007 $ 518,726 — $ 282,700 $ 209,355 $ 788,864 $ 202,069 $ 38,690 $ 2,040,404
       and CFO
  
W. Rodney McMullen(1) 2009 $ 875,062 —   $ 2,345,700 $ 431,600 $ 846,368   $ 1,301,742 $ 56,639 $ 5,857,111
       President and COO 2008 $ 848,686 —   $ 1,001,350 $ 582,147   $ 1,049,480 $ 348,933 $ 59,900 $ 3,890,496
2007 $ 823,948 — $ 848,100 $ 628,064   $ 1,546,472 $ 216,946 $ 57,367 $ 4,120,897
 
Don W. McGeorge(2) 2009 $ 875,062 — $ 781,900 $ 431,600 $ 846,368   $ 1,975,403 $ 104,523 $ 5,014,856
       Former President   2008   $ 848,686 —   $ 1,001,350 $ 582,147   $ 1,049,480   $ 723,203 $ 107,203 $ 4,312,069
       and COO and 2007 $ 823,948 — $ 848,100 $ 628,064   $ 1,546,472 $ 536,736 $ 105,803 $ 4,489,123
       Former Special                                                              
       Advisor to CEO                                                                
 
Donald E. Becker 2009 $ 632,816 — $ 279,250 $ 166,000 $ 534,125   $ 1,773,062 $ 127,387 $ 3,512,640
       Executive Vice 2008 $ 611,712 —   $ 1,215,925 $ 233,903 $ 577,214 $ 902,879 $ 120,668 $ 3,662,301
       President 2007 $ 592,312 — $ 353,375 $ 261,693 $ 900,322 $ 657,628 $ 121,428 $ 2,886,758
 
Paul W. Heldman 2009 $ 697,638 — $ 279,250 $ 166,000 $ 580,730   $ 1,275,401 $ 96,421 $ 3,095,440
       Executive Vice                                                              
       President, Secretary                                                              
       and General Counsel                                                                 
____________________

(1)       Effective August 1, 2009, Mr. McMullen relinquished his position as Vice Chairman and became President and Chief Operating Officer.
(2) Effective August 1, 2009, Mr. McGeorge relinquished his positions as President and Chief Operating Officer and became Special Advisor to the Chief Executive Officer. Effective December 1, 2009, Mr. McGeorge relinquished his responsibilities as Special Advisor to the Chief Executive Officer and was no longer an executive officer.
(3) These amounts represent the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718.
(4) Non-equity incentive plan compensation for 2009 consists of payments under an annual cash bonus and a long-term cash bonus program. In accordance with the terms of the 2009 performance-based annual cash bonus program, Kroger paid 38.45% of bonus potentials for the executive officers including the named executive officers, as follows: Mr. Dillon: $576,750; Mr. Schlotman: $192,250; Mr. McMullen: $384,500; Mr. McGeorge: $384,500; Mr. Becker: $211,475; and Mr. Heldman: $211,475. These amounts
 
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  were earned with respect to performance in 2009, and paid in March 2010. The 2006 Long-Term Bonus Plan is a performance-based cash bonus plan designed to reward participants for improving the long-term performance of the Company. The first component of the plan covered performance during fiscal years 2006 and 2007, and the second component of the plan covered performance during fiscal years 2006, 2007, 2008, and 2009. The following amounts, representing payouts at 59.75% of bonus potentials, were earned under the second component of the plan and were paid in March 2010: Mr. Dillon: $657,250; Mr. Schlotman: $268,875; Mr. McMullen: $461,868; Mr. McGeorge: $461,868; Mr. Becker: $322,650; and Mr. Heldman: $369,255.
(5)       Amounts are attributable to change in pension value and preferential earnings on nonqualified deferred compensation. Earnings on nonqualified deferred compensation are deemed to be preferential to the extent that they exceed 120% of the applicable federal long-term rate that corresponds most closely to the rate, when set, under the plan. Amounts deferred in 2009 bear interest at the average cost of Kroger’s ten-year debt, or 6.15%. One hundred twenty percent of the applicable federal rate is 5.26%. The rate of preferential earnings for amounts deferred in 2009 is 0.89%. During 2009, pension values increased primarily due to: (i) a one percent decrease in the discount rate as determined by the plan actuary; (ii) increases in final average earnings used in determining pension benefits; (iii) an additional year of credited service; and (iv) an increase in present value due to participant aging. Since the benefits are based on final average earnings and service, the effect of the final average earnings increase is larger for those with longer service. Please refer to the 2009 Pension Benefits table for further information regarding credited service. The amount listed for Mr. Dillon includes preferential earnings on nonqualified deferred compensation in the amount of $557 and change in pension value in the amount of $3,629,484. The amount listed for Mr. McMullen includes preferential earnings on nonqualified deferred compensation in the amount of $4,891 and change in pension value in the amount of $1,296,851. The amount listed for Mr. Heldman includes preferential earnings on nonqualified deferred compensation in the amount of $1,347 and change in pension value in the amount of $1,274,054. The amounts for the remaining named executive officers represent only change in pension value.
(6) The following table provides the items and amounts included in All Other Compensation for 2009:

          Accidental Tax Effect of Tax Effect of
  Tax Effect Death and Accidental Long-Term   Participation in
  Life of Life Dismemberment   Death and Disability Nonqualified
  Insurance Insurance Insurance Dismemberment Insurance Retirement
         Premium        Premium        Premium        Premium        Premium        Plan
  Mr. Dillon   $99,247 $59,675 $228 $108 —     $ 13,172
  Mr. Schlotman $23,455 $13,546 $228 $115 — $ 5,265
  Mr. McMullen $28,367   $16,539 $228 $104   $ 2,778   $ 8,623
  Mr. McGeorge $55,989 $32,770 $228 $117   —   $ 15,419  
  Mr. Becker $64,715 $38,788 $228 $108 $ 2,942   $ 20,606  
  Mr. Heldman $52,913 $31,816   $228 $108 —   $ 11,356

         
The life insurance and payment of the tax effect of the premium payment by Kroger have been offered over the past several years to a large number of executives, including the named executive officers, in substitution for split-dollar life insurance coverage that was substantially more costly to Kroger. Excluded from the amounts shown in the table is income imputed to the named executive officer when accompanied on our aircraft during business travel by non-business travelers. These amounts for Mr. Dillon, Mr. Schlotman, and Mr. Heldman, calculated using the applicable terminal charge and Standard Industry Fare Level (SIFL) mileage rates, were $8,233, $1,443, and $818, respectively. The other named executive officers had no such imputed income for 2009. Separately, we require that
 
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officers who make personal use of our aircraft reimburse us for the average variable cost associated with the operation of the aircraft on such flights in accordance with a time-sharing arrangement consistent with FAA regulations. Beginning in 2010, Kroger no longer will compensate for the tax effects of the insurance premiums or the nonqualified retirement plan.
 
GRANTS OF PLAN-BASED AWARDS
 
     The following table provides information about equity and non-equity awards granted to the named executive officers in 2009:
 
2009 GRANTS OF PLAN-BASED AWARDS
Estimated Possible    
Payouts Under Estimated Future Exercise Grant
Non-Equity Payouts Under or Base Date Fair
Incentive Plan Equity Incentive Price of Value of
Awards Plan Awards Option Stock and
Grant Target Maximum Target Awards Option
Name        Date        ($)        ($)        (#)        ($/Sh)        Awards
(1) (2) (5)  
David B. Dillon $ 1,500,000 $ 3,000,000
6/25/2009 115,000 (3) $ 2,569,100
6/25/2009 225,000 (4) $ 22.34 $ 1,494,000
J. Michael Schlotman $ 500,000 $ 1,000,000
6/25/2009 10,000 (3) $ 223,400
6/25/2009 20,000 (4) $ 22.34 $ 132,800
W. Rodney McMullen $ 1,000,000 $ 2,000,000
6/25/2009 105,000 (3) $ 2,345,700
6/25/2009   65,000 (4) $ 22.34 $ 431,600
Don W. McGeorge $ 1,000,000 $ 2,000,000
  6/25/2009 35,000 (3)   $ 781,900  
6/25/2009     65,000 (4)     $ 22.34 $ 431,600
Donald E. Becker $ 550,000   $ 1,100,000        
6/25/2009       12,500 (3) $ 279,250
6/25/2009 25,000 (4) $ 22.34 $ 166,000
Paul W. Heldman $ 550,000 $ 1,100,000  
6/25/2009 12,500 (3)   $ 279,250
6/25/2009 25,000 (4) $ 22.34 $ 166,000
____________________

(1)       These amounts represent the bonus potential of the named executive officer under the Company’s 2009 performance-based annual cash bonus program.
(2) By the terms of this plan, no single cash bonus to a participant may exceed $5,000,000, and payouts are further limited to no more than 200% of a participant’s potential. The amount actually earned under this plan is shown in the Summary Compensation Table.
(3) This amount represents the number of restricted shares awarded under one of the Company’s long-term incentive plans.
(4) This amount represents the number of stock options granted under one of the Company’s long-term incentive plans.
(5) Options are granted at fair market value of Kroger common stock on the date of the grant. Fair market value is defined as the closing price of Kroger stock on the date of the grant.
 
     The Compensation Committee of the Board of Directors, and the independent members of the Board in the case of the CEO, established bonus potentials, shown in this table as “target” amounts, for the performance-based annual cash bonus award for the named executive officers. Amounts were payable
 
33
 

to the extent that performance met specific objectives established at the beginning of the performance period. As described in the Compensation Discussion and Analysis, actual earnings can exceed the target amounts if performance exceeds the thresholds.
 
     Restrictions on restricted stock awards made to the named executive officers lapse, as long as the officer is then in our employ, in equal amounts on each of the five anniversaries of the date the award is made, except that: restrictions on 30,000 shares awarded to Mr. Becker in 2008 lapse in 2011; 70,000 shares awarded to Mr. McMullen in 2009 vest as follows: 15,000 shares on 6/25/2012, 20,000 shares on 6/25/2013, and 35,000 shares on 6/25/2014; 11,000 shares awarded to Mr. Heldman in 2006 vest as follows: 3,000 shares on 5/4/2010 and 8,000 shares on 5/4/2011; and 30,000 shares awarded to Mr. Heldman in 2008 vest as follows: 6,000 shares on 6/26/2011, 12,000 shares on 6/26/2012, and 12,000 shares on 6/26/2013. Any dividends declared on Kroger common stock are payable on restricted stock. Nonqualified stock options granted to the named executive officers vest in equal amounts on each of the five anniversaries of the date of grant. Those options were granted at the fair market value of Kroger common stock on the date of the grant. Options are granted only on one of the four dates of regularly scheduled Compensation Committee meetings conducted shortly following Kroger’s public release of its quarterly earnings results.
 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
 
     The following table discloses outstanding equity-based incentive compensation awards for the named executive officers as of the end of fiscal year 2009. Each outstanding award is shown separately. Option awards include performance-based nonqualified stock options. The vesting schedule for each award is described in the footnotes to this table.
 
OUTSTANDING EQUITY AWARDS AT 2009 FISCAL YEAR-END
Option Awards Stock Awards
Equity
Incentive
Plan Awards: Market
Number of Number of Number of Value of
Securities Securities Securities Number of Shares or
Underlying Underlying Underlying Shares or Units of
Unexercised Unexercised Unexercised Option Units of Stock Stock That
Options Options Unearned Exercise Option That Have Have Not
(#) (#) Options Price Expiration        Not Vested        Vested
Name        Exercisable        Unexercisable        (#)        ($)        Date (#) ($)
David B. Dillon   35,000 $ 24.43 5/10/2011 48,000 (8) $ 1,028,640
35,000 (6) $ 24.43 5/10/2011 66,000 (9) $ 1,414,380
70,000 $ 23.00 5/9/2012 92,000 (10) $ 1,971,560
35,000 (7) $ 23.00 5/9/2012 115,000 (11) $ 2,464,450
210,000   $ 14.93 12/12/2012
  300,000     $ 17.31 5/6/2014
240,000     60,000 (1) $ 16.39 5/5/2015    
144,000 96,000 (2)     $ 19.94   5/4/2016    
88,000 132,000 (3) $ 28.27 6/28/2017    
  45,000 180,000 (4) $ 28.61 6/26/2018    
225,000 (5)   $ 22.34 6/25/2019  

34
 

OUTSTANDING EQUITY AWARDS AT 2009 FISCAL YEAR-END
Option Awards Stock Awards
Equity
Incentive
Plan Awards: Market
Number of Number of Number of Value of
Securities Securities Securities Number of Shares or
Underlying Underlying Underlying Shares or Units of
Unexercised Unexercised Unexercised Option Units of Stock Stock That
Options Options Unearned Exercise Option That Have Have Not
(#) (#) Options Price Expiration Not Vested Vested
Name Exercisable      Unexercisable      (#)      ($)      Date      (#)      ($)
J. Michael Schlotman 10,000 $ 24.43 5/10/2011 4,000 (8) $ 85,720
10,000 (6) $ 24.43 5/10/2011 6,000 (9) $ 128,580
20,000 $ 23.00 5/9/2012 8,000 (10) $ 171,440
10,000 (7) $ 23.00 5/9/2012 10,000 (11) $ 214,300
60,000 $ 14.93 12/12/2012
40,000 $ 17.31 5/6/2014
32,000 8,000 (1) $ 16.39 5/5/2015
12,000 8,000 (2) $ 19.94 5/4/2016
8,000 12,000 (3) $ 28.27 6/28/2017
4,000 16,000 (4)   $ 28.61 6/26/2018
20,000 (5)   $ 22.34 6/25/2019
W. Rodney McMullen 125,000   $ 16.59 2/11/2010 12,000 (8) $ 257,160
25,000   $ 24.43 5/10/2011 18,000 (9) $ 385,740
25,000 (6) $ 24.43 5/10/2011 28,000 (10) $ 600,040
50,000 $ 23.00 5/9/2012 35,000 (11) $ 750,050
25,000 (7) $ 23.00 5/9/2012 70,000 (13) $ 1,500,100
150,000 $ 14.93 12/12/2012
75,000 $ 17.31 5/6/2014
60,000 15,000 (1) $ 16.39 5/5/2015
36,000 24,000 (2) $ 19.94 5/4/2016
24,000 36,000 (3) $ 28.27 6/28/2017
13,000 52,000 (4) $ 28.61 6/26/2018
65,000 (5) $ 22.34 6/25/2019
Don W. McGeorge 25,000 $ 24.43 5/10/2011 12,000 (8) $ 257,160
25,000 (6) $ 24.43 5/10/2011 18,000 (9) $ 385,740
50,000 $ 23.00 5/9/2012 28,000 (10) $ 600,040
25,000 (7) $ 23.00 5/9/2012 35,000 (11) $ 750,050
150,000 $ 14.93 12/12/2012
75,000 $ 17.31 5/6/2014
60,000 15,000 (1) $ 16.39 5/5/2015
36,000 24,000 (2) $ 19.94 5/4/2016
24,000 36,000 (3) $ 28.27 6/28/2017
13,000 52,000 (4) $ 28.61 6/26/2018
65,000 (5) $ 22.34 6/25/2019  

35


OUTSTANDING EQUITY AWARDS AT 2009 FISCAL YEAR-END
Option Awards Stock Awards
Equity
Incentive
Plan Awards: Market
Number of Number of Number of Value of
Securities Securities Securities Number of Shares or
Underlying Underlying Underlying Shares or Units of
Unexercised Unexercised Unexercised Option Units of Stock Stock That
Options Options Unearned Exercise Option That Have Have Not
(#)      (#)      Options      Price      Expiration      Not Vested      Vested
Name Exercisable Unexercisable (#) ($) Date (#) ($)
Donald E. Becker 12,500     $ 24.43 5/10/2011 5,000 (8) $ 107,150
12,500 (6) $ 24.43 5/10/2011 7,500 (9) $ 160,725
26,667   $ 23.00 5/9/2012 10,000 (10) $ 214,300
13,333 (7) $ 23.00 5/9/2012 12,500 (11) $ 267,875
80,000 $ 14.93 12/12/2012 30,000 (12) $ 642,900
40,000 $ 17.31 5/6/2014
32,000 8,000 (1) $ 16.39 5/5/2015
15,000 10,000 (2) $ 19.94 5/4/2016
10,000 15,000 (3) $ 28.27 6/28/2017    
5,000 20,000 (4) $ 28.61 6/26/2018
  25,000 (5) $ 22.34 6/25/2019
Paul W. Heldman 12,500 $ 24.43 5/10/2011 5,000 (8) $ 107,150
  12,500 (6) $ 24.43   5/10/2011 7,500 (9) $ 160,725
26,667 $ 23.00 5/9/2012 10,000 (10) $ 214,300
13,333 (7) $ 23.00 5/9/2012 12,500 (11) $ 267,875
80,000 $ 14.93 12/12/2012 11,000 (14) $ 235,730
40,000 $ 17.31 5/6/2014 30,000 (15) $ 642,900
32,000 8,000 (1) $ 16.39 5/5/2015
15,000 10,000 (2) $ 19.94 5/4/2016
10,000 15,000 (3) $ 28.27 6/28/2017
5,000 20,000 (4) $ 28.61 6/26/2018
25,000 (5) $ 22.34 6/25/2019  
____________________
 
(1) Stock options vest on 5/5/2010.
     
(2) Stock options vest in equal amounts on 5/4/2010 and 5/4/2011.
 
(3) Stock options vest in equal amounts on 6/28/2010, 6/28/2011, and 6/28/2012.
 
(4) Stock options vest in equal amounts on 6/26/2010, 6/26/2011, 6/26/2012, and 6/26/2013.
 
(5) Stock options vest in equal amounts on 6/25/2010, 6/25/2011, 6/25/2012, 6/25/2013, and 6/25/2014.
 
(6) Performance stock options vest on 11/10/2010 or earlier if performance criteria is satisfied prior to such date.
 
(7) Performance stock options vest on 11/9/2011 or earlier if performance criteria is satisfied prior to such date.
 
(8) Restricted stock vests in equal amounts on 5/4/2010 and 5/4/2011.
 
(9) Restricted stock vests in equal amounts on 6/28/2010, 6/28/2011, and 6/28/2012.
 
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(10) Restricted stock vests in equal amounts on 6/26/2010, 6/26/2011, 6/26/2012, and 6/26/2013.
     
(11) Restricted stock vests in equal amounts on 6/25/2010, 6/25/2011, 6/25/2012, 6/25/2013, and 6/25/2014.
 
(12) Restricted stock vests as follows: 30,000 shares on 6/26/2011.
 
(13) Restricted stock vests as follows: 15,000 shares on 6/25/2012, 20,000 shares on 6/25/2013, and 35,000 shares on 6/25/2014.
 
(14) Restricted stock vests as follows: 3,000 shares on 5/4/2010 and 8,000 shares on 5/4/2011.
 
(15) Restricted stock vests as follows: 6,000 shares on 6/26/2011, 12,000 shares on 6/26/2012, and 12,000 shares on 6/26/2013.
 
     From 1997 through 2002, Kroger granted to the named executive officers performance-based nonqualified stock options. These options, having a term of ten years, vest six months prior to their date of expiration unless earlier vesting because Kroger’s stock price achieved the specified annual rate of appreciation set forth in the stock option agreement. That rate ranged from 13% to 16%. To date, only the performance-based options granted in 1997, 1998, 1999, and 2000 have vested, and those granted in 1997, 1998, and 1999 expired if not earlier exercised.
 
OPTION EXERCISES AND STOCK VESTED
 
     The following table provides the stock options exercised and restricted stock vested during 2009.
 
2009 OPTION EXERCISES AND STOCK VESTED
Option Awards Stock Awards
Number of Number of
Shares Acquired Value Realized Shares Acquired Value Realized
on Exercise on Exercise on Vesting on Vesting
Name (#)      ($)      (#)      ($)
David B. Dillon 210,000    $ 842,352      69,000 $ 1,537,740 
J. Michael Schlotman 10,000 $ 41,462    6,000 $ 133,740 
W. Rodney McMullen 25,000 $ 98,530    19,000 $ 423,600 
Don W. McGeorge 150,000 $ 718,380    19,000 $ 423,600 
Donald E. Becker 15,000 $ 56,793    7,500 $ 167,175 
Paul W. Heldman 120,000 $ 484,944    10,500 $ 233,505 

     Options granted under our various long-term incentive plans have a ten-year life and expire if not exercised within that ten-year period.
 
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PENSION BENEFITS
 
     The following table provides information on pension benefits as of 2009 year-end for the named executive officers.
 
2009 PENSION BENEFITS
Number Present Payments
of Years Value of During
Credited Accumulated Last Fiscal
Service Benefit Year
Name      Plan Name      (#)      ($)      ($)
David B. Dillon   The Kroger Consolidated Retirement Benefit Plan   14 $ 411,308 $0
The Kroger Co. Excess Benefit Plan 14 $ 5,255,296 $0
Dillon Companies, Inc. Excess Benefit Pension Plan 20 $ 6,307,670 $0
 
J. Michael Schlotman The Kroger Consolidated Retirement Benefit Plan 24 $ 484,669 $0
The Kroger Co. Excess Benefit Plan 24 $ 1,882,087 $0
 
W. Rodney McMullen The Kroger Consolidated Retirement Benefit Plan 24 $ 425,557 $0
The Kroger Co. Excess Benefit Plan 24 $ 3,419,640 $0
 
Don W. McGeorge The Kroger Consolidated Retirement Benefit Plan 30 $ 717,122 $0
The Kroger Co. Excess Benefit Plan 30 $ 5,856,870 $0
 
Donald E. Becker The Kroger Consolidated Retirement Benefit Plan 35 $ 1,190,343 $0
The Kroger Co. Excess Benefit Plan 35 $ 5,594,503   $0
 
Paul W. Heldman The Kroger Consolidated Retirement Benefit Plan 27 $ 800,055 $0
The Kroger Co. Excess Benefit Plan 27 $ 4,074,513 $0

     The named executive officers all participate in The Kroger Consolidated Retirement Benefit Plan (the “Consolidated Plan”), which is a qualified defined benefit pension plan. The Consolidated Plan generally determines accrued benefits using a cash balance formula, but retains benefit formulas applicable under prior plans for certain “grandfathered participants” who were employed by Kroger on December 31, 2000. Each of the named executive officers is eligible for these grandfathered benefits under the Consolidated Plan. Their benefits, therefore, are determined using formulas applicable under prior plans, including the Kroger formula covering service to The Kroger Co. and the Dillon Companies, Inc. Pension Plan formula covering service to Dillon Companies, Inc.
 
     The named executive officers also are eligible to receive benefits under The Kroger Co. Excess Benefit Plan (the “Kroger Excess Plan”), and Mr. Dillon also is eligible to receive benefits under the Dillon Companies, Inc. Excess Benefit Pension Plan (the “Dillon Excess Plan”). These plans are collectively referred to as the “Excess Plans.” The Excess Plans are each considered to be nonqualified deferred compensation plans as defined in Section 409A of the Internal Revenue Code. The purpose of the Excess Plans is to make up the shortfall in retirement benefits caused by the limitations on benefits to highly compensated individuals under qualified plans in accordance with the Internal Revenue Code.
 
     Each of the named executive officers will receive benefits under the Consolidated Plan and the Excess Plans, determined as follows:
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     Although participants generally receive credited service beginning at age 21, those participants who commenced employment prior to 1986, including all of the named executive officers, began to accrue credited service after attaining age 25. In the event of a termination of employment, Messrs. Becker, Dillon, Heldman, and McGeorge currently are eligible for a reduced early retirement benefit, as they each have attained age 55.
 
     Mr. Dillon also participates in the Dillon Employees’ Profit Sharing Plan (the “Dillon Plan”). The Dillon Plan is a qualified defined contribution plan under which Dillon Companies, Inc. and its participating subsidiaries may choose to make discretionary contributions each year that are then allocated to each participant’s account. Participation in the Dillon Plan was frozen effective January 1, 2001. Participants in the Dillon Plan elect from among a number of investment options and the amounts in their accounts are invested and credited with investment earnings in accordance with their elections. Prior to July 1, 2000, participants could elect to make voluntary contributions under the Dillon Plan, but that option was discontinued effective as of July 1, 2000. Participants can elect to receive their Dillon Plan benefit in the form of either a lump sum payment or installment payments.
 
     Due to offset formulas contained in the Consolidated Plan and the Dillon Excess Plan, Mr. Dillon’s accrued benefit under the Dillon Plan offsets a portion of the benefit that would otherwise accrue for him under those plans for his service with Dillon Companies, Inc. Although benefits that accrue under defined contribution plans are not reportable under the accompanying table, we have added narrative disclosure of the Dillon Plan because of the offsetting effect that benefits under that plan has on benefits accruing under the Consolidated Plan and the Dillon Excess Plan.
 
     The assumptions used in calculating the present values are set forth in Note 13 to the consolidated financial statements in Kroger’s Form 10-K for fiscal year 2009 ended January 30, 2010. The discount rate used to determine the present values is 6%, which is the same rate used at the measurement date for financial reporting purposes.
 
NONQUALIFIED DEFERRED COMPENSATION
 
     The following table provides information on nonqualified deferred compensation for the named executive officers for 2009.
 
2009 NONQUALIFIED DEFERRED COMPENSATION
Executive Registrant Aggregate Aggregate Aggregate
Contributions Contributions Earnings Withdrawals/ Balance at
in Last FY      in Last FY      in Last FY      Distributions      Last FYE
Name ($) ($) ($) ($) ($)
David B. Dillon $ 60,000 (1) $0 $ 48,893 $0 $ 709,833
J. Michael Schlotman $ 0   $0 $ 0 $0 $ 0
W. Rodney McMullen $ 209,896 (1) $0 $ 313,596 $0 $ 4,657,327
Don W. McGeorge $ 0 $0 $ 16,828 $0 $ 210,591
Donald E. Becker $ 0 $0 $ 0 $0 $ 0
Paul W. Heldman $ 0 $0 $ 29,955 $0 $ 502,669
____________________
 
(1)       These amounts represent the deferral of annual bonus earned in fiscal year 2008 and paid in March 2009. These amounts are included in the Summary Compensation Table for 2008.
 
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     Eligible participants may elect to defer up to 100% of the amount of their salary that exceeds the sum of the FICA wage base and pre-tax insurance and other Internal Revenue Code Section 125 plan deductions, as well as 100% of their annual and long-term bonus compensation. Deferral account amounts are credited with interest at the rate representing Kroger’s cost of ten-year debt as determined by Kroger’s CEO prior to the beginning of each deferral year. The interest rate established for deferral amounts for each deferral year will be applied to those deferral amounts for all subsequent years until the deferred compensation is paid out. Participants can elect to receive lump sum distributions or quarterly installments for periods up to ten years. Participants also can elect between lump sum distributions and quarterly installments to be received by designated beneficiaries if the participant dies before distribution of deferred compensation is completed.
 
DIRECTOR COMPENSATION
 
     The following table describes the fiscal year 2009 compensation for non-employee directors. Employee directors receive no compensation for their Board service.
 
2009 DIRECTOR COMPENSATION
Change in
Pension Value
and
Fees Nonqualified
Earned Non-Equity Deferred All
or Paid Stock Option Incentive Plan Compensation Other
in Cash Awards Awards Compensation Earnings Compensation Total
Name      ($)      ($)      ($)      ($)      ($)      ($)      ($)
(1) (1) (10)  
Reuben V. Anderson $ 74,795 $ 65,195 (2) $ 38,755 (3) $0 — (8) $114 $ 178,859
Robert D. Beyer $ 86,762 $ 65,195 (2) $ 38,755 (3) $0 $ 1,036 (9) $114 $ 191,862
Susan J. Kropf $ 84,763 $ 65,195 (2) $ 38,755 (4) $0 N/A $114 $ 188,827
John T. LaMacchia $ 86,762 $ 65,195 (2) $ 38,755 (3) $0 $ 3,900 (8) $114 $ 194,726
David B. Lewis $ 83,960 $ 65,195 (2) $ 38,755 (5) $0 N/A $114   $ 188,024
Jorge P. Montoya $ 86,762 $ 65,195 (2) $ 38,755 (4) $0 N/A $114 $ 190,826
Clyde R. Moore $ 74,795 $ 65,195 (2) $ 38,755 (3) $0 $ 900 (8) $114 $ 179,759
Susan M. Phillips $ 84,775 $ 65,195 (2) $ 38,755 (6) $0 $ 510 (9) $114 $ 189,349
Steven R. Rogel $ 74,795 $ 65,195 (2) $ 38,755 (3) $0 N/A $114 $ 178,859
James A. Runde $ 74,795 $ 65,195 (2) $ 38,755 (7) $0 N/A $114 $ 178,859
Ronald L. Sargent $ 91,730 $ 65,195 (2) $ 38,755 (7) $0 $ 9 (9) $114 $ 195,803
Bobby S. Shackouls $ 116,679 $ 65,195 (2) $ 38,755 (3) $0 N/A $114 $ 220,743
____________________
 
(1) These amounts represent the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718.
     
(2) Aggregate number of stock awards outstanding at fiscal year end was 4,875 shares.
 
(3) Aggregate number of stock options outstanding at fiscal year end was 47,000 shares.
 
(4) Aggregate number of stock options outstanding at fiscal year end was 18,000 shares.
 
(5) Aggregate number of stock options outstanding at fiscal year end was 43,000 shares.
 
(6) Aggregate number of stock options outstanding at fiscal year end was 33,000 shares.
 
(7) Aggregate number of stock options outstanding at fiscal year end was 23,000 shares.
 
(8) This amount reflects the change in pension value for the applicable directors. Only those directors elected to the Board prior to July 17, 1997 are eligible to participate in the outside director retirement plan. Mr. Anderson’s pension value decreased by $700. In accordance with SEC rules, negative amounts are required to be disclosed, but not reflected in the sum of total compensation.
 
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(9) This amount reflects preferential earnings on nonqualified deferred compensation. For a complete explanation of preferential earnings, please refer to footnote 5 to the Summary Compensation Table.
     
(10) This amount reflects the cost to the Company per director for providing accidental death and dismemberment insurance coverage for non-employee directors. These premiums are paid on an annual basis in February.
 
     Each non-employee director receives an annual retainer of $75,000. The chair of each committee receives an additional annual retainer of $12,000. Each member of the Audit Committee receives an additional annual retainer of $10,000. The director designated as the “Lead Director” receives an additional annual retainer of $20,000. Each non-employee director also receives annually, at the regularly scheduled Board meeting held in December, restricted stock and nonqualified stock option awards. On December 10, 2009 each non-employee director received 3,250 shares of restricted stock and an award of 6,500 nonqualified stock options.
 
     Non-employee directors first elected prior to July 17, 1997 receive a major medical plan benefit as well as an unfunded retirement benefit. The retirement benefit equals the average cash compensation for the five calendar years preceding retirement. Participants who retire from the Board prior to age 70 will be credited with 50% vesting after five years of service, and 10% for each additional year up to a maximum of 100%. Benefits for participants who retire prior to age 70 begin at the later of actual retirement or age 65.
 
     We also maintain a deferred compensation plan, in which all non-employee members of the Board are eligible to participate. Participants may defer up to 100% of their cash compensation. They may elect from either or both of the following two alternative methods of determining benefits:
     In both cases, deferred amounts are paid out only in cash, based on deferral options selected by the participants at the time the deferral elections are made. Participants can elect to have distributions made in a lump sum or in quarterly installments, and may make comparable elections for designated beneficiaries who receive benefits in the event that deferred compensation is not completely paid out upon the death of the participant.
 
     The Board has determined that compensation of non-employee directors must be competitive on an on-going basis to attract and retain directors who meet the qualifications for service on Kroger’s Board. Non-employee director compensation will be reviewed from time to time as the Corporate Governance Committee deems appropriate.
 
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
 
     Other than an agreement with Mr. McGeorge, Kroger has no contracts, agreements, plans or arrangements that provide for payments to the named executive officers in connection with resignation, severance, retirement, termination, or change in control, except for those available generally to salaried employees. The Kroger Co. Employee Protection Plan, or KEPP, applies to all management employees and administrative support personnel who are not covered by a collective bargaining agreement, with at least one year of service, and provides severance benefits when a participant’s employment is terminated actually or constructively within two years following a change in control of Kroger. For purposes of KEPP, a change in control occurs if:
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     Assuming that a change in control occurred on the last day of Kroger’s fiscal year 2009, and the named executive officers had their employment terminated, they would receive a maximum payment, or, in the case of group term life insurance, a benefit having a cost to Kroger, in the amounts shown below:
 
Additional Accrued
Severance Vacation and and Banked Group Term Tuition Outplacement
Name Benefit      Bonus      Vacation      Life Insurance      Reimbursement      Reimbursement
David B. Dillon $4,620,000 $99,615 $630,000 $29 $5,000 $10,000
J. Michael Schlotman $1,834,000   $34,619 $283,500   $29   $5,000   $10,000
W. Rodney McMullen $3,180,000 $66,891 $445,000 $29 $5,000 $10,000
Don W. McGeorge $3,180,000 $66,891 $222,500 $29 $5,000 $10,000
Donald E. Becker $2,060,000 $38,285 $496,154 $29 $5,000 $10,000
Paul W. Heldman $2,190,000 $38,910 $150,192 $29 $5,000 $10,000

     Each of the named executive officers also is entitled to continuation of health care coverage for up to 24 months at the same contribution rate as existed prior to the change in control. The cost to Kroger cannot be calculated, as Kroger self insures the health care benefit and the cost is based on the health care services utilized by the participant and eligible dependents.
 
     Under KEPP benefits will be reduced, to the extent necessary, so that payments to an executive officer will in no event exceed 2.99 times the officer’s average W-2 earnings over the preceding five years.
 
     Kroger’s change in control benefits under KEPP and under stock option and restricted stock agreements are discussed further in the Compensation Discussion and Analysis section under the “Retirement and Other Benefits” heading.
 
     On June 24, 2009, we entered into an agreement with Don W. McGeorge regarding an orderly transition of his responsibilities and his retirement. Pursuant to that agreement, effective August 1, 2009, Mr. McGeorge relinquished his duties and responsibilities as President and Chief Operating Officer and assumed the office of Special Advisor to the CEO. Effective December 1, 2009, Mr. McGeorge relinquished his responsibilities as Special Advisor, was no longer an officer of Kroger, and retired from the Board. Mr. McGeorge will continue as an active employee through October 1, 2011, after which he will retire and will be eligible to receive retirement benefits. Prior to that time, he will continue to receive his annual salary of $890,000 and his annual performance-based bonus, based on his bonus potential of $1,000,000, at the same rate earned by the other participants in the corporate plan. Mr. McGeorge will be eligible for a performance-based long-term bonus under the 2008 Long-Term Bonus Plan, based on his potential for that plan of $833,000, at the same rate earned by the other participants under that plan. He will continue to be treated as an active employee under Kroger’s stock incentive and employee benefit plans, and will not engage in any business activity in competition with Kroger’s retail business through October 1, 2011.
 
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COMPENSATION POLICIES AS THEY RELATE TO RISK MANAGEMENT
 
     Kroger’s compensation policies and practices for its employees are designed to attract and retain highly qualified and engaged employees, and to minimize risks that would have a material adverse effect on Kroger. One of these policies, the executive compensation recoupment policy, is more particularly described in the Compensation Discussion and Analysis. Kroger does not believe that its compensation policies and practices create risks that are reasonably likely to have a material adverse effect on Kroger.
 
BENEFICIAL OWNERSHIP OF COMMON STOCK
 
     As of February 13, 2010, Kroger’s directors, the named executive officers, and the directors and executive officers as a group, beneficially owned shares of Kroger’s common stock as follows:
 
Amount and Nature
of
Name       Beneficial Ownership
Reuben V. Anderson   74,065 (1)
Donald E. Becker 398,305 (2)(3)(4)
Robert D. Beyer 116,112 (1)
David B. Dillon 2,240,058 (2)(3)(5)
Paul W. Heldman 523,519 (2)(3)(6)
Susan J. Kropf 14,300 (7)
John T. LaMacchia 86,900 (1)
David B. Lewis 45,800 (8)
Don W. McGeorge 741,216 (2)(9)
W. Rodney McMullen 1,053,125 (2)(3)
Jorge P. Montoya 11,437 (7)
Clyde R. Moore 64,500 (1)
Susan M. Phillips 46,335 (10)
Steven R. Rogel 63,328 (1)
James A. Runde 20,800 (11)
Ronald L. Sargent 19,800 (11)
J. Michael Schlotman 287,125 (2)(3)
Bobby S. Shackouls 50,300 (1)
Directors and Executive Officers as a group (including those named above) 8,371,137 (2)(3)

(1) This amount includes 29,300 shares that represent options that are or become exercisable on or before April 14, 2010.
     
(2) This amount includes shares that represent options that are or become exercisable on or before April 14, 2010, in the following amounts: Mr. Becker, 221,167; Mr. Dillon, 1,132,000; Mr. Heldman, 221,167; Mr. McGeorge, 433,000; Mr. McMullen, 433,000; Mr. Schlotman, 186,000; and all directors and executive officers as a group, 4,157,834.
 
(3) The fractional interest resulting from allocations under Kroger’s defined contribution plans has been rounded to the nearest whole number.
 
(4) This amount includes 10,228 shares owned by Mr. Becker’s wife. Mr. Becker disclaims beneficial ownership of these shares.
 
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(5) This amount includes 168,432 shares owned by Mr. Dillon’s wife, and 18,008 shares in his children’s trust. Mr. Dillon disclaims beneficial ownership of these shares.
     
(6) This amount includes 320 shares owned by Mr. Heldman’s children. Mr. Heldman disclaims beneficial ownership of these shares.
 
(7) This amount includes 3,300 shares that represent options that are or become exercisable on or before April 14, 2010.
 
(8) This amount includes 25,300 shares that represent options that are or become exercisable on or before April 14, 2010.
 
(9) This amount includes 10,115 shares owned by Mr. McGeorge’s wife. Mr. McGeorge disclaims beneficial ownership of these shares.
 
(10) This amount includes 15,300 shares that represent options that are or become exercisable on or before April 14, 2010.
 
(11) This amount includes 6,300 shares that represent options that are or become exercisable on or before April 14, 2010.
 
     No director or officer owned as much as 1% of the common stock of Kroger. The directors and executive officers as a group beneficially owned 1% of the common stock of Kroger.
 
     No director or officer owned Kroger common stock pledged as security.
 
     As of February 13, 2010, the following reported beneficial ownership of Kroger common stock based on reports on Schedule 13G filed with the Securities and Exchange Commission or other reliable information as follows:
 
Amount and
Nature of Percentage
Name Address of Beneficial Owner       Ownership       of Class
BlackRock, Inc. 55 East 52nd Street   41,036,784   6.3%
New York, NY 10055
 
The Kroger Co. Savings Plan 1014 Vine Street 33,902,651 (1) 5.4%
  Cincinatti, OH 45202          
____________________
 
(1)       Shares beneficially owned by plan trustees for the benefit of participants in employee benefit plan.
 
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Those officers, directors and shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
 
     Based solely on our review of the copies of forms received by Kroger, and any written representations from certain reporting persons that no Forms 5 were required for those persons, we believe that during fiscal year 2009 all filing requirements applicable to our officers, directors and 10% beneficial owners were timely satisfied, with one exception. Mr. Ronald L. Sargent filed a Form 4 three days late reporting phantom shares received in connection with a deferred compensation plan due to a technical failure by the plan record keeper that caused him to receive late notification of the transaction.
 
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RELATED PERSON TRANSACTIONS
 
     Pursuant to our Statement of Policy with Respect to Related Person Transactions and the rules of the SEC, Kroger has the following related person transactions, which were approved by Kroger’s Audit Committee, to disclose:
     Director independence is discussed above under the heading “Information Concerning the Board of Directors.” Kroger’s policy on related person transactions is as follows:
 
STATEMENT OF POLICY
WITH RESPECT TO
RELATED PERSON TRANSACTIONS
 
A. INTRODUCTION
 
     It is the policy of Kroger’s Board of Directors that any Related Person Transaction may be consummated or may continue only if the Committee approves or ratifies the transaction in accordance with the guidelines set forth in this policy. The Board of Directors has determined that the Audit Committee of the Board is best suited to review and approve Related Person Transactions.
 
      For the purposes of this policy, a “Related Person” is:
 
      1.       any person who is, or at any time since the beginning of Kroger’s last fiscal year was, a director or executive officer of Kroger or a nominee to become a director of Kroger;
 
2. any person who is known to be the beneficial owner of more than 5% of any class of Kroger’s voting securities; and
 
3. any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the director, executive officer, nominee or more than 5% beneficial owner, and any person (other than a tenant or employee) sharing the household of such director, executive officer, nominee or more than 5% beneficial owner.
 
     For the purposes of this policy, a “Related Person Transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) since the beginning of Kroger’s last fiscal year in which Kroger (including any of its subsidiaries) was, is or will be a participant
 
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and the amount involved exceeds $120,000, and in which any Related Person had, has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10 percent beneficial owner of another entity).
 
     Notwithstanding the foregoing, the Audit Committee has reviewed the following types of transactions and has determined that each type of transaction is deemed to be pre-approved, even if the amount involved exceeds $120,000.
 
      1.       Certain Transactions with Other Companies. Any transaction for property or services in the ordinary course of business involving payments to or from another company at which a Related Person’s only relationship is as an employee (including an executive officer), director, or beneficial owner of less than 10% of that company’s shares, if the aggregate amount involved in any fiscal year does not exceed the greater of $1,000,000 or 2 percent of that company’s annual consolidated gross revenues.
 
2. Certain Company Charitable Contributions. Any charitable contribution, grant or endowment by Kroger (or one of its foundations) to a charitable organization, foundation, university or other not for profit organization at which a Related Person’s only relationship is as an employee (including an executive officer) or as a director, if the aggregate amount involved does not exceed $250,000 or 5 percent, whichever is lesser, of the charitable organization’s latest publicly available annual consolidated gross revenues.
 
3. Transactions where all Shareholders Receive Proportional Benefits. Any transaction where the Related Person’s interest arises solely from the ownership of Kroger common stock and all holders of Kroger common stock received the same benefit on a pro rata basis.
 
4. Executive Officer and Director Compensation. (a) Any employment by Kroger of an executive officer if the executive officer’s compensation is required to be reported in Kroger’s proxy statement, (b) any employment by Kroger of an executive officer if the executive officer is not an immediate family member of a Related Person and the Compensation Committee approved (or recommended that the Board approve) the executive officer’s compensation, and (c) any compensation paid to a director if the compensation is required to be reported in Kroger’s proxy statement.
 
5. Other Transactions. (a) Any transaction involving a Related Person where the rates or charges involved are determined by competitive bids, (b) any transaction with a Related Person involving the rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority, or (c) any transaction with a Related Person involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture or similar services.
 
B. AUDIT COMMITTEE APPROVAL
 
     In the event management becomes aware of any Related Person Transactions that are not deemed pre-approved under paragraph A of this policy, those transactions will be presented to the Committee for approval at the next regular Committee meeting, or where it is not practicable or desirable to wait until the next regular Committee meeting, to the Chair of the Committee (who will possess delegated authority to act between Committee meetings) subject to ratification by the Committee at its next regular meeting. If advance approval of a Related Person Transaction is not feasible, then the Related Person Transaction will
 
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be presented to the Committee for ratification at the next regular Committee meeting, or where it is not practicable or desirable to wait until the next regular Committee meeting, to the Chair of the Committee for ratification, subject to further ratification by the Committee at its next regular meeting.
 
    In connection with each regular Committee meeting, a summary of each new Related Person Transaction deemed pre-approved pursuant to paragraphs A(1) and A(2) above will be provided to the Committee for its review.
 
    If a Related Person Transaction will be ongoing, the Committee may establish guidelines for management to follow in its ongoing dealings with the Related Person. Thereafter, the Committee, on at least an annual basis, will review and assess ongoing relationships with the Related Person to see that they are in compliance with the Committee’s guidelines and that the Related Person Transaction remains appropriate.
 
    The Committee (or the Chair) will approve only those Related Person Transactions that are in, or are not inconsistent with, the best interests of Kroger and its shareholders, as the Committee (or the Chair) determines in good faith in accordance with its business judgment.
 
    No director will participate in any discussion or approval of a Related Person Transaction for which he or she, or an immediate family member (as defined above), is a Related Person except that the director will provide all material information about the Related Person Transaction to the Committee.
 
C. DISCLOSURE
 
    Kroger will disclose all Related Person Transactions in Kroger’s applicable filings as required by the Securities Act of 1933, the Securities Exchange Act of 1934 and related rules.
 
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AUDIT COMMITTEE REPORT
 
    The primary function of the Audit Committee is to represent and assist the Board of Directors in fulfilling its oversight responsibilities regarding the Company’s financial reporting and accounting practices including the integrity of the Company’s financial statements; the Company’s compliance with legal and regulatory requirements; the independent public accountants’ qualifications and independence; the performance of the Company’s internal audit function and independent public accountants; and the preparation of this report that SEC rules require be included in the Company’s annual proxy statement. The Audit Committee performs this work pursuant to a written charter approved by the Board of Directors. The Audit Committee charter most recently was revised during fiscal 2010 and is available on the Company’s website at http://www.thekrogerco.com/documents/GuidelinesIssues.pdf. The Audit Committee has implemented procedures to assist it during the course of each fiscal year in devoting the attention that is necessary and appropriate to each of the matters assigned to it under the Committee’s charter. The Audit Committee held seven meetings during fiscal year 2009. The Audit Committee meets separately with the Company’s internal auditor and PricewaterhouseCoopers LLP, the Company’s independent public accountants, without management present, to discuss the results of their audits, their evaluations of the Company’s internal control over financial reporting, and the overall quality of the Company’s financial reporting. The Audit Committee also meets separately with the Company’s Chief Financial Officer and General Counsel when needed. Following these separate discussions, the Audit Committee meets in executive session.
 
    Management of the Company is responsible for the preparation and presentation of the Company’s financial statements, the Company’s accounting and financial reporting principles and internal controls, and procedures that are designed to provide reasonable assurance regarding compliance with accounting standards and applicable laws and regulations. The independent public accountants are responsible for auditing the Company’s financial statements and expressing opinions as to the financial statements’ conformity with generally accepted accounting principles and the effectiveness of the Company’s internal control over financial reporting.
 
    In the performance of its oversight function, the Audit Committee has reviewed and discussed with management and PricewaterhouseCoopers LLP the audited financial statements for the year ended January 30, 2010, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of January 30, 2010, and PricewaterhouseCoopers’ evaluation of the Company’s internal control over financial reporting as of that date. The Audit Committee has also discussed with the independent public accountants the matters that the independent public accountants must communicate to the Audit Committee under applicable requirements of the Public Company Accounting Oversight Board.
 
    With respect to the Company’s independent public accountants, the Audit Committee, among other things, discussed with PricewaterhouseCoopers LLP matters relating to its independence and has received the written disclosures and the letter from the independent public accountants required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent public accountants’ communications with the Audit Committee concerning independence. The Audit Committee has reviewed and approved in advance all services provided to the Company by PricewaterhouseCoopers LLP. The Audit Committee conducted a review of services provided by PricewaterhouseCoopers LLP which included an evaluation by management and members of the Audit Committee.
 
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    Based upon the review and discussions described in this report, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended January 30, 2010, as filed with the SEC.
 
    This report is submitted by the Audit Committee.
 
Ronald L. Sargent, Chair
Susan J. Kropf
Susan M. Phillips
Bobby S. Shackouls
 
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AMENDMENT TO THE COMPANY’S ARTICLES OF INCORPORATION
(ITEM NO. 2)
 
    The Board of Directors recommends that shareholders approve an amendment to Kroger’s articles of incorporation requiring a majority vote for the election of directors.
 
    Ohio law provides that, unless otherwise specified in a company’s articles of incorporation, a director is elected by a plurality of the votes cast. Kroger’s articles of incorporation do not specify the voting standard required in director elections, so Kroger directors currently are elected by a plurality vote; that is, a director nominee who receives the highest number of affirmative votes cast is elected, whether or not those votes constitute a majority including withheld votes.
 
    In 2006, Kroger’s Board of Directors adopted as Kroger policy a form of majority voting for uncontested director elections, implementing this policy through its Guidelines on Issues of Corporate Governance. Under this policy, directors continue to be elected by a plurality vote, but the policy requires that a director nominee who receives a greater number of “withheld” votes than “for” votes must immediately tender his or her resignation from the Board. The Board then would decide, through a process managed by the Corporate Governance Committee and excluding the nominee in question, whether to accept the resignation. The Board’s explanation of its decision would be promptly disclosed in a publicly issued press release.
 
    At the annual meeting of shareholders held in 2009, Kroger’s shareholders adopted a proposal that requested the Board of Directors take steps to amend the articles of incorporation to provide for majority voting for directors in uncontested elections. After consideration of the shareholder proposal, the Board has authorized, and recommends that shareholders approve, an amendment to Kroger’s articles of incorporation that would specify that director nominees in an uncontested election would be elected by a majority vote. Under this provision, each vote is specifically counted “for” or “against” the director’s election. An affirmative majority of the total number of votes cast “for” or “against” a director nominee will be required for election. Shareholders also will be entitled to abstain with respect to the election of a director. Abstentions will have no effect in determining whether the required affirmative majority vote has been obtained.
 
    Under Ohio law, shareholders must approve an amendment to Kroger’s articles of incorporation to change the voting standard in director elections. If the proposed amendment is approved, a new paragraph will be added as ARTICLE SIXTH of Kroger’s articles of incorporation (with succeeding articles renumbered accordingly), that reads as follows:
 
    “The vote required for election of a director by the shareholders will, except in a contested election or when cumulative voting is in effect, be the affirmative vote of a majority of the votes cast in favor of or against the election of a nominee at a meeting of shareholders. In a contested election or when cumulative voting is in effect, directors will be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. An election will be considered contested if as of the record date there are more nominees for election than positions on the Board of Directors to be filled by election at the meeting.”
 
    In addition, we propose to make minor statutory conforming changes. All changes are shown on Appendix 1, with additions shown underlined and deletions shown as strikeouts.
 
    If approved, this amendment will become effective upon the filing with the Ohio Secretary of State of Amended Articles of Incorporation. Kroger would make such a filing promptly after the annual meeting.
 
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     Upon approval of this proposal and the filing of the Amended Articles of Incorporation, an incumbent director who does not receive the requisite affirmative majority of the votes cast for his or her re-election must tender his or her resignation. Under Ohio law, an incumbent director who is not re-elected may remain in office until his or her successor is elected and qualified, continuing as a “holdover” director until his or her position is filled. The Board will adopt a holdover director resignation policy to address the continuation in office of a director that would result from application of the holdover director provision. Under the holdover director resignation policy, the Board will decide whether to accept the resignation in a process similar to the one the Board currently uses pursuant to the existing policy.
 
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
 
SELECTION OF AUDITORS
(ITEM NO. 3)
 
    The Audit Committee of the Board of Directors is responsible for the appointment, compensation and retention of Kroger’s independent auditor, as required by law and by applicable NYSE rules. On March 10, 2010, the Audit Committee appointed PricewaterhouseCoopers LLP as Kroger’s independent auditor for the fiscal year ending January 29, 2011. While shareholder ratification of the selection of PricewaterhouseCoopers LLP as Kroger’s independent auditor is not required by Kroger’s Regulations or otherwise, the Board of Directors is submitting the selection of PricewaterhouseCoopers LLP to shareholders for ratification, as it has in past years, as a good corporate governance practice. If the shareholders fail to ratify the selection, the Audit Committee may, but is not required to, reconsider whether to retain that firm. Even if the selection is ratified, the Audit Committee in its discretion may direct the appointment of a different auditor at any time during the year if it determines that such a change would be in the best interests of Kroger and its shareholders.
 
    A representative of PricewaterhouseCoopers LLP is expected to be present at the meeting to respond to appropriate questions and to make a statement if he or she desires to do so.
 
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THIS PROPOSAL.
 
DISCLOSURE OF AUDITOR FEES
 
    The following describes the fees billed to Kroger by PricewaterhouseCoopers LLP related to the fiscal years ended January 30, 2010 and January 31, 2009:
 
Fiscal Year 2009       Fiscal Year 2008
Audit Fees    $ 4,155,234        $ 4,093,444    
Audit-Related Fees   38,254   54,248
Tax Fees —   —  
All Other Fees — —
Total $ 4,193,488 $ 4,147,692
 
    Audit Fees for the years ended January 30, 2010 and January 31, 2009, respectively, were for professional services rendered for the audits of Kroger’s consolidated financial statements, the issuance of comfort letters to underwriters, consents, income tax provision procedures, and assistance with the review of documents filed with the SEC.
 
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    Audit-Related Fees for the years ended January 30, 2010 and January 31, 2009, respectively, were for assurance and related services pertaining to accounting consultation in connection with acquisitions, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards.
 
    Tax Fees. We did not engage PricewaterhouseCoopers LLP for other tax services for the years ended January 30, 2010 and January 31, 2009.
 
    All Other Fees. We did not engage PricewaterhouseCoopers LLP for other services for the years ended January 30, 2010 and January 31, 2009.
 
    The Audit Committee requires that it approve in advance all audit and non-audit work performed by PricewaterhouseCoopers LLP. On March 10, 2010, the Audit Committee approved services to be performed by PricewaterhouseCoopers LLP for the remainder of fiscal year 2010 that are related to the audit of Kroger or involve the audit itself. In 2007, the Audit Committee adopted an audit and non-audit service pre-approval policy. Pursuant to the terms of that policy, the Committee will annually pre-approve certain defined services that are expected to be provided by the independent auditors. If it becomes appropriate during the year to engage the independent accountant for additional services, the Audit Committee must first approve the specific services before the independent accountant may perform the additional work.
 
    PricewaterhouseCoopers LLP has advised the Audit Committee that neither the firm, nor any member of the firm, has any financial interest, direct or indirect, in any capacity in Kroger or its subsidiaries.
 
SHAREHOLDER PROPOSAL
(ITEM NO. 4)
 
    We have been notified by a shareholder, the name and shareholdings of which will be furnished promptly to any shareholder upon written or oral request to Kroger’s Secretary at Kroger’s executive offices, that it intends to propose the following resolution at the annual meeting:
 
SHAREHOLDER RESOLUTION
 
    WHEREAS, in 2007, the Intergovernmental Panel on Climate Change’s (IPCC) Fourth Assessment Report states it is “very likely” that anthropogenic greenhouse gas emissions have heavily contributed to global warming. Furthermore, “Impacts of climate change will vary regionally but, aggregated and discounted to the present, they are very likely to impose net annual costs which will increase over time as global temperatures increase.”
 
    WHEREAS, in 2008, the United States Department of Agriculture (USDA) reported that, “No matter the region, weather and climate factors such as temperature, precipitation, CO2 concentrations, and water availability directly impact the health and well-being of plants, pasture, rangeland, and livestock.” Specifically, “Climate change affects average temperatures and temperature extremes; timing and geographical patterns of precipitation; snowmelt, runoff, evaporation, and soil moisture; the frequency of disturbances, such as drought, insect and disease outbreaks, severe storms, and forest fires; atmospheric composition and air quality; and patterns of human settlement and land use change,” which directly impact crop yields and meat production.
 
    WHEREAS, in 2008, Acclimatise, a risk management firm, reported that climate-related “impacts will be felt throughout a company’s business model, with consequences for its raw materials, supply chains, essential utilities, assets and operations, markets, customers and products, its workforce and the communities in which it is located.”
 
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    WHEREAS, increasingly investors believe that there is an intersection between climate change and corporate financial performance. Goldman Sachs reported in May, 2009, “We find that while many companies acknowledge the challenges climate change presents … there are significant differences in the extent to which companies are taking action. Differences in the effectiveness of response across industries create opportunities to lose or establish competitive advantage, which we believe will prove increasingly important to investment performance.”
 
    WHEREAS, a 2008 report by Ceres and RiskMetrics ranked Kroger’s corporate climate change governance in the bottom-half of an industry peer group and the bottom third of all companies analyzed, representing 63 of the world’s largest retail, pharmaceutical, technology, apparel and other consumer-facing companies.
 
    WHEREAS, the Carbon Disclosure Project (CDP), representing 475 institutional investors with assets of more than $55 trillion under management, requested 3,700 corporations to disclose their climate-related risks in February, 2009. Kroger currently does not publicly respond to the CDP questionnaire.
 
    WHEREAS, leading companies in the food retailing industry, such Tesco, Wal-Mart, and Sainsbury’s, publicly report on risks, including implications to their product and manufacturing supply chain, from climate change.
 
    WHEREAS, information from corporations on their climate change risks and strategies is essential to investors as they assess the strengths of corporate securities in the context of climate change.
 
    RESOLVED: Shareholders request that within 6 months of the 2010 annual meeting, the Board of Directors provide a report to shareholders, prepared at reasonable cost and omitting proprietary information, describing how Kroger will assess and manage the impacts of climate change on the corporation, with specific regard to its supply chain, and plans to disclose such information through public reporting mechanisms.
 
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS PROPOSAL FOR THE FOLLOWING REASONS:
 
    Kroger recognizes the important role it plays as a good steward of the environment. We have numerous “green” initiatives in place to save energy and preserve our natural resources. For each of the past several years Kroger has published on-line The Kroger Co. Public Responsibilities Report and Doing Our Part – The Kroger Co.’s Green Report that highlight the company’s “green” initiatives in greater detail.
 
    This proposal is similar to one submitted by a shareholder in each of the annual meetings held in 2007 and 2008. Those proposals were defeated by shareholders.
 
    This proposal requests assessment of climate change and furnishing a report to shareholders. We believe such a report in many ways would be duplicative of the current efforts underway, and would provide little benefit to shareholders beyond what Kroger already has furnished. We believe it would be a waste of time, resources, and money for Kroger and our shareholders.
 
    We have developed our own form of reporting that we believe provides beneficial and cost effective disclosure to our shareholders on the environmental issues that are relevant to our business operations. These reports are published on the Kroger website.
 
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__________________
 
    SHAREHOLDER PROPOSALS – 2011 ANNUAL MEETING. Shareholder proposals intended for inclusion in our proxy material relating to Kroger’s annual meeting in June 2011 should be addressed to the Secretary of Kroger and must be received at our executive offices not later than January 14, 2011. These proposals must comply with the proxy rules established by the SEC. In addition, the proxy solicited by the Board of Directors for the 2011 annual meeting of shareholders will confer discretionary authority to vote on any shareholder proposal presented at the meeting unless we are provided with notice of the proposal on or before March 31, 2011. Please note, however, that Kroger’s Regulations require a minimum of 45 days’ advance notice to Kroger in order for a matter to be brought before shareholders at the annual meeting. As a result, any attempt to present a proposal without notifying Kroger on or before March 31, 2011, will be ruled out of order and will not be permitted.
__________________
 
    Attached to this Proxy Statement is Kroger’s 2009 Annual Report which includes a brief description of Kroger’s business, including the general scope and nature thereof during 2009, together with the audited financial information contained in our 2009 report to the SEC on Form 10-K. A copy of that report is available to shareholders on request by writing to: Scott M. Henderson, Treasurer, The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100 or by calling 1-513-762-1220. Our SEC filings are available to the public from the SEC’s web site at www.sec.gov.
 
    The management knows of no other matters that are to be presented at the meeting but, if any should be presented, the Proxy Committee expects to vote thereon according to its best judgment.
 
By order of the Board of Directors,
Paul W. Heldman, Secretary

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Appendix 1
 
FILED WITH SECRETARY OF STATE OF OHIO
JUNE 22, 2006
__________________, 2010
 
AMENDED ARTICLES OF INCORPORATION
OF
THE KROGER CO.
 
    The Kroger Co., a corporation for profit, heretofore organized and now existing under the laws of the State of Ohio, makes and files these Amended Articles of Incorporation and states:
 
    FIRST. The name of the Corporation is THE KROGER CO.
 
    SECOND. The principal office of the Corporation is located at Cincinnati, in Hamilton County, Ohio.
 
    THIRD. The purpose of said Corporation is to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 to 1701.9899, inclusive, of the Ohio Revised Code.
 
    FOURTH. SECTION A. The maximum number of shares which the Corporation is authorized to have outstanding is one billion five million (1,005,000,000), classified as follows: five million (5,000,000) Cumulative Preferred Shares of the par value of $100.00 each; and one billion (1,000,000,000) Common Shares of the par value of $1.00 each.
 
    The express terms and provisions of the shares of the foregoing classes of stock of the Corporation shall be as follows:
 
    SECTION B. The holders of Common Shares shall have no pre-emptive rights to subscribe for or purchase any shares of any class.
 
    SECTION C. 1. The authorized shares of Cumulative Preferred Shares may be issued in series from time to time. All shares of any one series of Cumulative Preferred Shares shall be alike in every particular and all shares of Cumulative Preferred Shares shall rank equally. The express terms and provisions of shares of different series shall be identical except that there may be variations in respect of the dividend rate, dates of payment of dividends and dates from which they are cumulative, redemption rights and price, liquidation price, sinking fund requirements, conversion rights, and restrictions on issuance of shares of the same series or of any other class or series. The Board of Directors of the Corporation is authorized to fix, by the adoption of an amendment to the Articles creating each such series of the Cumulative Preferred Shares, (a) the designation and number of shares of such series, (b) the dividend rate of such series, (c) the dates of payment of dividends on shares of such series and the dates from which they are cumulative, (d) the redemption rights of the Corporation with respect to shares of such series and the price or prices at which shares of such series may be redeemed, (e) the amount or amounts payable to holders of shares of such series on any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, which may be different for voluntary and involuntary liquidation, dissolution, or winding up, (f) the amount of the sinking fund, if any, to be applied to the purchase or redemption of shares of such series and the manner of its application, (g) whether or not the shares of such series shall be made convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same class of stock of the Corporation, and if made so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments, if any, at which such conversion or exchange may be made, and (h) whether or not the issue of any additional shares of such series or any future series in addition to such series or any other class of stock shall be subject to any restrictions and, if so, the nature of such restrictions.
 
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    2. Dividends on Cumulative Preferred Shares of any series shall be payable at rates and on dates to be fixed by the Board of Directors at the time of the creation of such series. Dividends of the Cumulative Preferred Shares of all series shall be cumulative, and no dividends shall be declared or paid upon or set apart for the Common Stock Shares unless and until full dividends on the outstanding Cumulative Preferred Shares of all series shall have been paid or declared and set apart for payment with respect to all past dividend periods and the current dividend period. In case of any series of Cumulative Preferred Shares, dividends shall accrue from and be cumulative from such dates as may be fixed by the Board of Directors at the time of the creation of such series. In the event of the issue of additional Cumulative Preferred Shares of any series after the initial issue of shares of such series all dividends paid on Cumulative Preferred Shares of such series prior to the issue of such additional Cumulative Preferred Shares and all dividends declared and payable to holders of record of Cumulative Preferred Shares of such series on a date prior to such additional issue shall be deemed to have been paid on the additional shares so issued.
 
    3. If upon any liquidation, dissolution or winding up, the assets distributable among the holders of the Cumulative Preferred Shares of all series shall be insufficient to permit the payment of the full preferential amounts to which they shall be entitled, then the entire assets of the Corporation shall be distributed among the holders of the Cumulative Preferred Shares of all series then outstanding, ratably in proportion to the full preferential amounts to which they are respectively entitled. Nothing in this paragraph shall be deemed to prevent the purchase, acquisition or other retirement by the Corporation of any shares of its outstanding stock as now or in the future authorized or permitted by the laws of Ohio. A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale or transfer of all or substantially all of its property, shall not be deemed to be a liquidation, dissolution or winding up of the Corporation.
 
    4. Notice of any proposed redemption of Cumulative Preferred Shares of any series shall be given by the Corporation by publication at least once in one daily newspaper printed in the English language and of general circulation in the Borough of Manhattan, City of New York, State of New York, and in the City of Cincinnati, State of Ohio, the first publication to be at least sixty (60) days, and not more than ninety (90) days, prior to the date fixed for such redemption. Notice of any proposed redemption of Cumulative Preferred Shares of any series also shall be given by the Corporation by mailing a copy of such notice, at least sixty (60) days, and not more than ninety (90) days, prior to the date fixed for such redemption, to the holders of record of the Cumulative Preferred Shares to be redeemed, at their respective addresses then appearing upon the books of the Corporation; but no failure to mail such notice, or defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption. In case of the redemption of a part only of the Cumulative Preferred Shares of any series at the time outstanding, the shares to be redeemed shall be selected by lot or pro rata, as the Board of Directors may determine. The Board of Directors shall have full power and authority, subject to the limitations and provisions herein contained, to prescribe the manner in which, and the terms and conditions upon which, the shares of the Cumulative Preferred Shares of any series shall be redeemed from time to time. On or at any time before the redemption date specified in such notice, the Corporation shall deposit in trust, for the holders of the shares to be redeemed, funds necessary for such redemption with a bank or trust company organized under the laws of the United States of America or the State of New York and doing business in the Borough of Manhattan, City of New York, or organized under the laws of the United States of America or of the State of Ohio and doing business in the City of Cincinnati, Ohio; and designated in such notice of redemption. Upon the publication of the notice of redemption as above provided, or upon the making of such deposit, whichever is later, all shares with respect to the redemption of which such notice and deposit shall have been given and made shall, whether or not the certificates therefor shall have been surrendered for cancellation, be deemed to be no longer outstanding for any purpose, and all rights with respect to such shares shall thereupon cease and terminate, except only the rights of the holders of the certificates for such shares to
 
56


receive, out of the funds so deposited in trust, from and after the date of such deposit, the amount payable upon the redemption thereof, without interest; provided, however, that no right of conversion, if any, belonging to such shares, if such right of conversion is, by its terms, to exist for a period beyond the date of the publication of such notice or the making of such deposit, shall be impaired by the publication of such notice or the making of such deposit. At the expiration of six (6) years after the date of such deposit, such trust shall terminate. Any such moneys then remaining on deposit with such bank or trust company shall be paid over to the Corporation, and thereafter the holders of the certificates for such shares shall have no claims against such bank or trust company, but only claims as unsecured creditors against the Corporation for the amount payable upon the redemption thereof without interest.
 
    5. At all meetings of the shareholders, every holder of record of shares of Cumulative Preferred Shares and every holder of record of Common Stock Shares shall be entitled to vote and shall have one vote for each share outstanding in his name on the books of the Corporation on the record date fixed for such purpose, or if no record date is fixed, on the date next preceding the day of such meeting, provided that (1) in the event that the Corporation should have failed to pay dividends on any series of Cumulative Preferred Shares for six or more quarterly dividends, the holders of Cumulative Preferred Shares of all series, voting as a single class, shall be entitled to elect two directors, each for a one-year term, at the meeting of shareholders for the election of directors next succeeding the time such failure to pay these six dividends first occurs, and (2) no amendment to the Articles of Incorporation or Regulations shall be made which would be substantially prejudicial to the holders of outstanding Cumulative Preferred Shares or any series thereof without the favorable vote of the holders of two-thirds of the Cumulative Preferred Shares, voting as a single class, then outstanding, unless such amendment shall not equally affect all series, in such case the favorable vote of the holders of two-thirds of the adversely affected series shall also be required. The right of holders of Cumulative Preferred Shares to elect these two directors shall terminate when all such unpaid dividends on Cumulative Preferred Shares have been paid and the directors then in office and elected by the holders of Cumulative Preferred Shares shall forthwith cease to hold office upon such payments.
 
    6. The holders of the Cumulative Preferred Shares shall have no pre-emptive rights to subscribe for or purchase any shares of any class.
 
    FIFTH. SECTION A. Section 1701.831 of the Ohio Revised Code does not apply to the Corporation.
 
    SECTION B. Shareholders are not permitted to vote cumulatively in the election of directors. Any amendment to this Section B of Article Fifth will require the affirmative vote of the holders of record of shares entitling them to exercise 75% of the voting power on such proposal.
 
    SIXTH. The vote required for election of a director by the shareholders will, except in a contested election or when cumulative voting is in effect, be the affirmative vote of a majority of the votes cast in favor of or against the election of a nominee at a meeting of shareholders. In a contested election or when cumulative voting is in effect, directors will be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. An election will be considered contested if as of the record date there are more nominees for election than positions on the Board of Directors to be filled by election at the meeting.
 
   SEVENTH. The following provisions are hereby agreed to for the purpose of defining, limiting and regulating the exercise of the authority of the Corporation or of its shareholders, or of any class of its shareholders, or of its directors, or for the purpose of creating and defining rights and privileges of the shareholders among themselves.
 
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    (a) This Corporation reserves the right to amend, alter, change or repeal any provision contained in these Amended Articles of Incorporation in the manner now or hereafter prescribed by law, and all rights conferred on officers, directors, and shareholders herein, including but not limited to the rights of dissenting shareholders conferred by Ohio law, are granted subject to this reservation.
 
    (b) Action on any matter at any shareholders’ meeting, or without such meeting, regarding which the statutes of Ohio provide that unless otherwise provided in the articles of incorporation or regulations of a corporation, there shall be the affirmative vote or consent of a larger portion than the holders of a majority of the shares entitled to vote thereon or consent thereto, may be taken by the affirmative vote or consent of the holders of a majority of shares entitled to vote thereon or consent thereto, but in the event that the vote or consent is required to be by classes, then, except as otherwise provided herein, action may be taken on such matter by the affirmative vote or consent of the holders of a majority of each class of shares entitled to vote by classes on such matter.
 
    (c) The Corporation may, when authorized by the Board of Directors and without any action by the shareholders, purchase, hold, sell and reissue any of its shares in such manner and under such terms and conditions as may be prescribed by the directors.
 
    (d) The Board of Directors shall have the power and authority to determine the fair value of any property other than money to be received by the Corporation in payment of its shares.
 
    (e) The foregoing clauses shall be construed both as objects and powers, and it is hereby expressly provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the powers of this Corporation, and are in furtherance of and in addition to, and not in limitation of, the general powers conferred by the laws of the State of Ohio.
 
   SEVENTHEIGHTH. These Amended Articles of Incorporation supersede and take the place of the existing Amended Articles of Incorporation.
 
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________
 
 
 
2009 ANNUAL REPORT
 

________
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 


FINANCIAL REPORT 2009
 
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
 
     The management of The Kroger Co. has the responsibility for preparing the accompanying financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis and are not misstated due to material error or fraud. The financial statements include amounts that are based on management’s best estimates and judgments. Management also prepared the other information in the report and is responsible for its accuracy and consistency with the financial statements.
 
     The Company’s financial statements have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose selection has been approved by the shareholders. Management has made available to PricewaterhouseCoopers LLP all of the Company’s financial records and related data, as well as the minutes of the shareholders’ and directors’ meetings. Furthermore, management believes that all representations made to PricewaterhouseCoopers LLP during its audit were valid and appropriate.
 
     Management also recognizes its responsibility for fostering a strong ethical climate so that the Company’s affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in The Kroger Co. Policy on Business Ethics, which is publicized throughout the Company and available on the Company’s website at www.thekrogerco.com. The Kroger Co. Policy on Business Ethics addresses, among other things, the necessity of ensuring open communication within the Company; potential conflicts of interests; compliance with all domestic and foreign laws, including those related to financial disclosure; and the confidentiality of proprietary information. The Company maintains a systematic program to assess compliance with these policies.
 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
     The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that the Company’s internal control over financial reporting was effective as of January 30, 2010.
 
David B. Dillon J. Michael Schlotman
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer

A-1


SELECTED FINANCIAL DATA
 
Fiscal Years Ended
     January 30,      January 31,      February 2,      February 3,      January 28,
2010 2009 2008 2007 2006
(52 weeks) (52 weeks)* (52 weeks)* (53 weeks)* (52 weeks)*
(In millions, except per share amounts)
Sales $ 76,733 $ 76,148 $ 70,336 $ 66,166 $ 60,589
Net earnings including noncontrolling
       interests 57 1,250 1,224 1,126 964
Net earnings attributable to
       The Kroger Co. 70 1,249 1,209 1,115 958
Net earnings attributable to
       The Kroger Co. per diluted
       common share 0.11 1.89 1.73 1.54 1.31
Total assets 23,093 23,257 22,339   21,210 20,478  
Long-term liabilities, including obligations  
       under capital leases and financing  
       obligations 10,473 10,311 8,696 8,711 9,377
Total Shareowners’ equity –  
       The Kroger Co. 4,832 5,205 4,942 4,923   4,390
Cash dividends per common share   0.365   0.345 0.29 0.195 —
  
*      Certain prior year amounts have been revised or reclassified to conform to the current year presentation. For further information, see note 1 to the Consolidated Financial Statements.
 
COMMON STOCK PRICE RANGE
 
2009 2008
Quarter      High      Low      High      Low
1st $ 23.01 $ 19.39 $ 28.13 $ 23.39
2nd $ 23.63 $ 20.51 $ 30.99 $ 25.86
3rd $ 24.80 $ 20.13 $ 29.91 $ 22.30
4th $ 24.12 $ 19.45 $ 29.03 $ 22.40
 
Main trading market: New York Stock Exchange (Symbol KR)
 
Number of shareholders of record at year-end 2009: 41,307
 
Number of shareholders of record at March 26, 2010: 40,478

     During 2008, the Company paid one quarterly dividend of $0.075 and three quarterly dividends of $0.09. During 2009, the Company paid three quarterly dividends of $0.09 and one quarterly dividend of $0.095. On March 1, 2010, the Company paid a quarterly dividend of $0.095 per share. On March 10, 2010, the Company announced that its Board of Directors has declared a quarterly dividend of $0.095 per share, payable on June 1, 2010, to shareholders of record at the close of business on May 14, 2010.
 
A-2


PERFORMANCE GRAPH
 
     Set forth below is a line graph comparing the five-year cumulative total shareholder return on Kroger’s common stock, based on the market price of the common stock and assuming reinvestment of dividends, with the cumulative total return of companies in the Standard & Poor’s 500 Stock Index and a peer group composed of food and drug companies.
 
     Historically, our peer group has consisted of the major food store companies. In recent years there have been significant changes in the industry, including consolidation and increased competition from supercenters, drug chains, and discount stores. As a result, several years ago we changed our peer group to include companies operating supermarkets, supercenters and warehouse clubs in the United States as well as the major drug chains with which Kroger competes. Last year, we changed our peer group (the “Peer Group”) once again to add Tesco plc, as it has become a competitor in the U.S. market.
 
COMPARISON OF CUMULATIVE FIVE-YEAR TOTAL RETURN*
Among The Kroger Co., the S&P 500, and Peer Group**
 
 
Base INDEXED RETURNS
Period Years Ending
Company Name/Index      2004      2005      2006      2007      2008      2009
The Kroger Co. 100 107.71 151.31 153.71   134.81 130.01
S&P 500 Index   100   111.63   128.37   126.05 76.43 101.76
Peer Group 100 98.97 112.15 115.56 93.85 116.27

     Kroger’s fiscal year ends on the Saturday closest to January 31.
 
A-3


____________________
 
*      Total assumes $100 invested on January 30, 2005, in The Kroger Co., S&P 500 Index, and the Peer Group, with reinvestment of dividends.
 
** The Peer Group consists of Albertson’s, Inc., Costco Wholesale Corp., CVS Corp, Delhaize Group SA (ADR), Great Atlantic & Pacific Tea Company, Inc., Koninklijke Ahold NV (ADR), Marsh Supermarkets Inc. (Class A), Safeway, Inc., Supervalu Inc., Target Corp., Tesco plc, Wal-Mart Stores Inc., Walgreen Co., Whole Foods Market Inc. and Winn-Dixie Stores, Inc. Albertson’s, Inc., was substantially acquired by Supervalu in July 2006, and is included through 2005. Marsh Supermarkets was acquired by Marsh Supermarkets Holding Corp. in September 2006, and is included through 2005. Winn-Dixie emerged from bankruptcy in 2006 as a new issue and returns for the old and new issue were calculated then weighted to determine the 2006 return.
 
     Data supplied by Standard & Poor’s.
 
     The foregoing Performance Graph will not be deemed incorporated by reference into any other filing, absent an express reference thereto.
 
A-4


ISSUER PURCHASES OF EQUITY SECURITES
 
               Total Number of      Maximum Dollar
Shares Value of Shares
Purchased as that May Yet Be
Part of Publicly Purchased Under
Total Number Average Announced the Plans or
of Shares Price Paid Plans or Programs (3)
Period (1) Purchased Per Share Programs (2)   (in millions)
First period - four weeks
     November 8, 2009 to December 5, 2009 600,030   $22.89 600,030 $379
Second period - four weeks        
     December 6, 2009 to January 2, 2010 1,644,922   $20.83 1,526,102 $362
Third period – four weeks  
     January 3, 2010 to January 30, 2010 2,262,717   $20.72 2,069,474 $337
Total 4,507,669   $21.05 4,195,606 $337
 
__________________
 
(1)      The reported periods conform to the Company’s fiscal calendar composed of thirteen 28-day periods. The fourth quarter of 2009 contained three 28-day periods.
 
(2) Shares were repurchased under (i) a $1 billion stock repurchase program, authorized by the Board of Directors on January 18, 2008, and (ii) a program announced on December 6, 1999, to repurchase common stock to reduce dilution resulting from our employee stock option and long-term incentive plans, which program is limited to proceeds received from exercises of stock options and associated tax benefits. The programs have no expiration date but may be terminated by the Board of Directors at any time. Total shares purchased include shares that were surrendered to the Company by participants in the Company’s long-term incentive plans to pay for taxes on restricted stock awards.
 
(3) Amounts shown in this column reflect amounts remaining under the $1 billion stock repurchase program referenced in clause (i) of Note 2 above. Amounts to be repurchased under the program utilizing option exercise proceeds are dependent upon option exercise activity.
 
A-5


BUSINESS
 
     The Kroger Co. was founded in 1883 and incorporated in 1902. As of January 30, 2010, the Company was one of the largest retailers in the United States based on annual sales. The Company also manufactures and processes some of the food for sale in its supermarkets. The Company’s principal executive offices are located at 1014 Vine Street, Cincinnati, Ohio 45202, and its telephone number is (513) 762-4000. The Company maintains a web site (www.kroger.com) that includes additional information about the Company. The Company makes available through its web site, free of charge, its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and its interactive data files, including amendments. These forms are available as soon as reasonably practicable after the Company has filed with, or furnished them electronically to, the SEC.
 
     The Company’s revenues are earned and cash is generated as consumer products are sold to customers in its stores. The Company earns income predominantly by selling products at price levels that produce revenues in excess of its costs to make these products available to its customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses. The Company’s fiscal year ends on the Saturday closest to January 31.
 
EMPLOYEES
 
     As of January 30, 2010, the Company employed approximately 334,000 full and part-time employees. A majority of the Company’s employees are covered by collective bargaining agreements negotiated with local unions affiliated with one of several different international unions. There are approximately 305 such agreements, usually with terms of three to five years.
 
     During 2010, the Company has major labor contracts to be negotiated covering store employees in Albuquerque, Cincinnati, Dallas, Detroit, Ft. Wayne, Houston, Little Rock, Portland, Seattle and Toledo. The Company will also negotiate agreements with the Teamsters for employees in California and Portland. Negotiations in 2010 will be challenging as the Company must have competitive cost structures in each market while meeting our associates’ needs for good wages, affordable health care and increases in Company pension contributions.
 
STORES
 
     As of January 30, 2010, the Company operated, either directly or through its subsidiaries, 2,468 supermarkets and multi-department stores, 893 of which had fuel centers. Approximately 43% of these supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land. The Company’s current strategy emphasizes self-development and ownership of store real estate. The Company’s stores operate under several banners that have strong local ties and brand equity. Supermarkets are generally operated under one of the following formats: combination food and drug stores (“combo stores”); multi-department stores; marketplace stores; or price impact warehouses.
 
     The combo stores are the primary food store format. They typically draw customers from a 2 – 2½ mile radius. The Company believes this format is successful because the stores are large enough to offer the specialty departments that customers desire for one-stop shopping, including natural food and organic sections, pharmacies, general merchandise, pet centers and high-quality perishables such as fresh seafood and organic produce.
 
     Multi-department stores are significantly larger in size than combo stores. In addition to the departments offered at a typical combo store, multi-department stores sell a wide selection of general merchandise items such as apparel, home fashion and furnishings, electronics, automotive products, toys and fine jewelry.
 
A-6


     Marketplace stores are smaller in size than multi-department stores. They offer full-service grocery and pharmacy departments as well as an expanded general merchandise area that includes outdoor living products, electronics, home goods and toys.
 
     Price impact warehouse stores offer a “no-frills, low cost” warehouse format and feature everyday low prices plus promotions for a wide selection of grocery and health and beauty care items. Quality meat, dairy, baked goods and fresh produce items provide a competitive advantage. The average size of a price impact warehouse store is similar to that of a combo store.
 
     Many of the stores mentioned above, with exception of the price impact warehouse stores, include fuel centers.
 
     In addition to the supermarkets, as of January 30, 2010, the Company operated through subsidiaries, 777 convenience stores and 374 fine jewelry stores. All of our fine jewelry stores located in malls are operated in leased locations. In addition, 87 convenience stores were operated through franchise agreements. Approximately 51% of the convenience stores operated by subsidiaries were operated in Company-owned facilities. The convenience stores offer a limited assortment of staple food items and general merchandise and, in most cases, sell gasoline.
 
SEGMENTS
 
     The Company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the United States. The Company’s retail operations, which represent substantially all of the Company’s consolidated sales, earnings and total assets, are its only reportable segment. All of the Company’s operations are domestic. Revenues, profit and losses, and total assets are shown in the Company’s Consolidated Financial Statements set forth in Item 8 below.
 
MERCHANDISING AND MANUFACTURING
 
     Corporate brand products play an important role in the Company’s merchandising strategy. Our supermarkets, on average, stock approximately 11,000 private label items. The Company’s corporate brand products are produced and sold in three “tiers.” Private Selection is the premium quality brand designed to be a unique item in a category or to meet or beat the “gourmet” or “upscale” brands. The “banner brand” (Kroger, Ralphs, King Soopers, etc.), which represents the majority of the Company’s private label items, is designed to satisfy customers with quality products. Before Kroger will carry a banner brand product, the product quality must meet our customers’ expectations in taste and efficacy, and we guarantee it. Kroger Value is the value brand, designed to deliver good quality at a very affordable price.
 
     Approximately 39% of the corporate brand units sold are produced in the Company’s manufacturing plants; the remaining corporate brand items are produced to the Company’s strict specifications by outside manufacturers. The Company performs a “make or buy” analysis on corporate brand products and decisions are based upon a comparison of market-based transfer prices versus open market purchases. As of January 30, 2010, the Company operated 40 manufacturing plants. These plants consisted of 18 dairies, 10 deli or bakery plants, five grocery product plants, three beverage plants, two meat plants and two cheese plants.
 
A-7


MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OUR BUSINESS
 
     The Kroger Co. was founded in 1883 and incorporated in 1902. It is one of the nation’s largest retailers, as measured by revenue, operating 2,468 supermarket and multi-department stores under two dozen banners including Kroger, Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smith’s, Fry’s, Fry’s Marketplace, Dillons, QFC and City Market. Of these stores, 893 have fuel centers. We also operate 777 convenience stores and 374 fine jewelry stores.
 
     Kroger operates 40 manufacturing plants, primarily bakeries and dairies, which supply approximately 39% of the corporate brand units sold in our retail outlets.
 
     Our revenues are earned and cash is generated as consumer products are sold to customers in our stores. We earn income predominately by selling products at price levels that produce revenues in excess of the costs we incur to make these products available to our customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses. Our operations are reported as a single reportable segment: the retail sale of merchandise to individual customers.
 
OUR 2009 PERFORMANCE
 
     By focusing on the customer through our Customer 1st strategy, we were able to report solid results in 2009 (excluding the non-cash asset impairment charges totaling $1.14 billion, pre-tax ($1.05 billion, after-tax), related to our division in southern California) during what continues to be a difficult operating environment. In 2009, our identical supermarket sales increased 2.1%, excluding fuel. Our 2009 earnings were $0.11 per diluted share or $1.71 per diluted share, excluding the non-cash asset impairment charges referred to above. We did not achieve our original goals for identical supermarket sales growth of 3% to 4% and earnings per share of $2.00 to $2.05 per diluted share, as cautious consumers, significant deflation, and intense competition affected margins and sales growth. Nonetheless, we strengthened our overall competitive position by increasing the number of households that are loyal to Kroger and we are earning a greater share of their business. As a result, we continue to generate tonnage growth in both perishable and non-perishable categories that is among the strongest in the industry. Sustainable identical sales and earnings growth remains one of our key long-term objectives. We continue to widen the gap between our identical supermarkets sales growth trends and those of several of our competitors. We believe this has extremely positive implications for our associates, customers and shareholders now and as we grow our business in the future.
 
     Market share is an important part of our long-term strategy. Market share is important to us because it allows us to leverage the fixed costs in our business over a wider revenue base. Our fundamental operating philosophy is to maintain and increase market share. Based on Nielsen Homescan Data, our estimated market share increased in total by approximately 60 basis points in 2009 across the 17 divisions in which we operate. Nielsen Homescan Data includes scanned products across many retail channels, not including restaurants. This information also indicates that our market share increased in 13 of the divisions, declined in three, and remained unchanged in one. These market share results are consistent with our long-term strategy.
 
A-8


RESULTS OF OPERATIONS
 
     The following discussion summarizes our operating results for 2009 compared to 2008 and for 2008 compared to 2007. Comparability is affected by income and expense items that fluctuated significantly between and among the periods.
 
   Net Earnings
 
     Net earnings totaled $70 million for 2009, compared to net earnings totaling $1.2 billion in each of 2008 and 2007. The net earnings for 2009 include non-cash asset impairment charges totaling $1.05 billion, after-tax, related to a division in southern California (the “non-cash impairment charges”). The impairment primarily resulted from the write-off of the Ralphs division goodwill balance. Excluding these impairment charges, adjusted net earnings for the year would have been $1.1 billion. Additionally, the decrease in net earnings for 2009, compared to 2008, resulted from lower retail fuel margins and decreased operating profit, partially offset by a LIFO charge of $49 million pre-tax, compared to a LIFO charge of $196 million pre-tax in 2008. 2008 net earnings also included after-tax costs of $16 million from disruption and damage caused by Hurricane Ike. The slight increase in our net earnings for 2008, compared to 2007, resulted from strong non-fuel identical supermarket sales growth and strong fuel results.
 
     Management believes adjusted net earnings (and adjusted earnings per share) in 2009 are useful metrics to investors and analysts because impairment charges are non-recurring, non-cash charges that are not directly related to our day-to-day business. We also excluded these charges from our incentive plan calculations for the year.
 
     2009 earnings per diluted share totaled $0.11 and 2009 adjusted earnings per diluted share totaled $1.71, compared to $1.89 in 2008, or $1.91, excluding the $.02 per diluted share for costs for damage and disruption caused by Hurricane Ike, and $1.73 in 2007. The decline in adjusted net earnings per share in 2009, compared to 2008, resulted from lower retail fuel margins and decreased operating profit, partially offset by lower LIFO charges and after-tax costs of $16 million from disruption and damage caused by Hurricane Ike in 2008. Our earnings per share growth in 2008, compared to 2007, resulted from increased net earnings, strong identical sales growth and the repurchase of Kroger stock.
 
   Sales
 
Total Sales
(in millions)
Percentage Percentage
     2009      Increase      2008      Increase      2007
Total supermarket sales without fuel $ 65,649 2.9 % $ 63,795 6.1 % $ 60,142
Total supermarket fuel sales   6,671 (10.6 %) 7,464 30.0 % 5,741
Total supermarket sales $ 72,320   1.5 % $ 71,259 8.2 % $ 65,883
Other sales (1) 4,413 (9.7 %) 4,889   9.8 %   4,453
Total sales $ 76,733 0.8 % $ 76,148 8.3 % $ 70,336
 
____________________
 
(1)      Other sales primarily relate to sales at convenience stores, including fuel, jewelry stores, sales by our manufacturing plants to outside customers, and variable interest entities.
 
A-9


     The slight increase in total sales and the decrease in other sales and total supermarket fuel sales for 2009 compared to 2008 was attributable to the year-over-year decline in retail fuel prices. The change in our total supermarket sales without fuel for 2009 over 2008 was primarily the result of increases in identical supermarket sales and retail square footage. Identical supermarket sales, excluding fuel, increased due to increased transaction count offset partially by a lower average sale per shopping trip.
 
     We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Fuel center discounts received at our fuel centers and earned based on in-store purchases are included in all of the supermarket identical sales results calculations illustrated below. Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. Identical supermarket sales include all sales at identical Fred Meyer multi-department stores. We calculate annualized identical supermarket sales by adding together four quarters of identical supermarket sales. Our identical supermarket sales results are summarized in the table below, based on the 52-week period of 2009, compared to the 52-week period of the previous year. The identical store count in the table below represents the total number of identical supermarkets as of January 30, 2010 and January 31, 2009.
 
Identical Supermarket Sales
(in millions)
 
     2009      2008
Including supermarket fuel centers $ 68,981 $ 68,600
Excluding supermarket fuel centers $ 62,734 $ 61,414
 
Including supermarket fuel centers 0.6 % 6.9 %
Excluding supermarket fuel centers   2.1 %   5.0 %
Identical 4th Quarter store count 2,325   2,369

     We define a supermarket as comparable when it has been in operation for five full quarters, including expansions and relocations. As is the case for identical supermarket sales, fuel center discounts received at our fuel centers and earned based on in-store purchases are included in all of the supermarket comparable sales results calculations illustrated below. Comparable supermarket sales include all sales at comparable Fred Meyer multi-department stores. We calculate annualized comparable supermarket sales by adding together four quarters of comparable sales. Our annualized comparable supermarket sales results are summarized in the table below, based on the 52-week period of 2009, compared to the same 52-week period of the previous year. The comparable store count in the table below represents the total number of comparable supermarkets as of January 30, 2010 and January 31, 2009.
 
Comparable Supermarket Sales
(in millions)