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Kroger ( KR) is having a tough year. The grocery chain has tumbled more than 10% so far in 2012, poor performance given the fact that the S&P 500 is up 11.5% over that same period. That performance has come at the hands of some serious headwinds pressuring the grocery business. Input costs are on the rise quickly as a bull market for agricultural commodities pushes into full swing, and competition and consolidation remain fierce among grocery stores.

Combine either of those factors with the thin margins that grocers book, and it's not hard to see why KR is under pressure.

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But Kroger remains a best-in-breed grocery chain in spite of those problems. And the firm has a plan to deal with both of those industry headwinds. More private-label offerings in Kroger stores should help to fight off some of the margin squeeze the company has seen lately -- particularly if Kroger is successful at targeting products that have the biggest margin problems right now.

At the same time, Kroger has been the biggest challenge for its rivals, gaining market share through loss leaders like discounted gasoline and a tempered acquisition strategy.

So despite challenges, Kroger remains in solid shape for an increase to its quarterly 11.5-cent dividend. With a cash position that's ballooned in the last couple of quarters, KR is one grocer that's capable of hiking its payouts in 2012.

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