Grocery consolidation continues with Kroger’s expansion

The grocery space is getting a little less crowded with yet another consolidation that will give No. 2 Kroger an expanded reach into the mid-Atlantic region, in the face of Wal-Mart and Publix.

Cincinnati-based Kroger said Tuesday it would buy regional grocer Harris Teeter Supermarkets for $2.5 billion, the second largest grocery deal this year behind a $3.3 billion sell-off of SuperValu banners.

Regional chains like Harris Teeter are smaller fish in the what is becoming a shark tank of bigger players like Wal-Mart Stores Inc. and its rapid expansion of Neighborhood Markets and other smaller format stores in North Carolina and the mid-Atlantic region.

Costco and Target are also big boxes in large metro areas that have invested in their grocery departments over the past year. Even so, food retail remains fragmented and largely a marketshare game.

THE DEAL
Kroger will assume $100 million of Harris Teeter debt and acquire the outstanding stock for $49.38 per share in cash. The terms of the agreement were approved by the boards of directors of both companies on Monday evening (July 8).

Harris Teeter operates 212 supermarkets in North Carolina, Virginia, South Carolina, Maryland, Tennessee, Delaware, Florida, Georgia and the District of Columbia. It reported revenue of  $4.535 billion for 2012, growing sales at 5.8%. The regional chain ranked No. 81 on STORES’ 2013 Top Retailers List.

Kroger Chief Financial Officer Mike Schlotman said during a conference call that the company is excited about entering markets such as Charlotte, N.C., and Washington, D.C.

Harris Teeter has stores in affluent vacation destinations, university communities and markets where populations are growing faster than the national average, Schlotman said.

The company said Harris Teeter's top management will continue to lead the business out of its North Carolina headquarters and no store closures are expected. However, there are some overlapping territories in North Carolina and Nashville, Tenn., which will likely be evaluated by the U.S. Federal Trade Commission.

Kroger is already the largest pure-play grocer in the country with $92.165 billion in sales last year. With this merger Kroger will operate 2,631 supermarkets and employ more than 368,300 workers in 34 states and the District of Columbia.  

Kroger said it expects the acquisition to add 6 to 9 cents to its earnings per share in the first full year after close, excluding transition and transaction expenses.

Schlotman said Kroger plans to refinance bonds that matured earlier this year and later on issue debt at different maturities to finance the merger and the company secured  a bridge loan commitment to provide the liquidity to fund the deal.

Investors approved of the merger sending Kroger shares up $1 to $37.19, while Harris Teeter shares rose 1.36% to $49.18. Harris Teeter shares are up more than 30% over recent weeks since the company acknowledged it was looking for a suitor.

CHANGING LANDSCAPE
Grocery is one of the most competitive channels in retail, complicated by traditionally low margins. Just a few years ago, some analysts expected traditional supermarkets would be extinct in two or three generations as one-stop shopping was the popular trend.

But today big boxes are streamlining food and consumables into smaller formats because they can be run more efficiently than sprawling retail stores.

Wal-Mart, master of the big box concept, said recently its comparable sales in the smaller format Neighborhood Markets were better than 15%, which is why the retailer is rolling out more of them this year and next.

Mike Paglia, principal grocery analyst for Kantar Retail, said the channel remains highly fragmented with a few giants in the pool.

He said much of the changing landscape seen in recent years from the SuperValu and Safeway divestitures to the Kroger-Harris Teeter merger, are efforts by companies to realign themselves in a world that uses mobile and digital technology, expects fresh and local selections and occasionally wants home delivery.

“I think we will continue to see some players get larger, but not at the exclusion of a wide range of niche players who are able to develop and retain loyal shoppers who are not necessarily motivated by price,” Paglia said.

He said the Kroger-Harris merger is interesting because it does give Kroger an instant foothold in some key markets.

“Kroger has barely tipped their toe into the mobile and social space but with this acquisition they will get the benefit of the ‘click and collect’ and home delivery programs used by Harris Teeter for some time. It remains to be seen if they will adopt those programs for broader use. Kroger generally proceeds cautiously, so it might be awhile,” Paglia said