BUSINESS

Will Kroger speed up acquisitions?

Alexander Coolidge
acoolidge@enquirer.com
Kroger is the nation's No. 1 supermarket chain.

With half a dozen deals in two years, Kroger is on an acquisition spree.

Kroger became the nation's largest supermarket operator in 1998 when it merged with Fred Meyer. It went more than 15 years before another major acquisition until it bought North Carolina's Harris Teeter for $2.5 billion in 2014. Since then, Kroger has bought a consumer insights firm, a digital health food retailer and a Michigan supermarket chain.

Its latest proposed acquisition is Milwaukee-based Roundy's, which will add 150 stores in Wisconsin and Chicago for $800 million. Analysts say Kroger's latest deal could also signal a new willingness to acquire troubled rivals that it has avoided for years.

"They've got a better mousetrap," said Scott Mushkin, an analyst with Wolfe Research in New York, adding the Downtown Cincinnati-based retailer's previous resistance to take over battered rivals is softening. "We could get more deals by Kroger – and we should get more deals, more stores and more growth."

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A choosy buyer, Kroger increases deal-making

Until recently, Kroger has had a well-earned reputation for being extremely picky about acquisitions. Kroger executives told analysts they weren't good at turnarounds and preferred to buy well-run rivals they admire.

After the $12.6 billion merger with Fred Meyer in 1998, Kroger did plenty of deals, but they were small, bite-sized acquisitions where the grocer added handfuls of stores in a few markets at a time. From 1999 to 2012, Kroger made 25 acquisitions – the largest was $20 million where the company acquired 11 supermarkets in 2005.

But since closing on the Harris Teeter deal in early 2014, Kroger has since made a spate of other deals:

  • Hiller supermarkets for an undisclosed sum in May, which added seven stores in Michigan.
  • Downtown-based consumer insights firm dunnhumbyUSA, formerly a Kroger joint venture and renamed it 84.51°.
  • In July 2014, it bought online health retailer Vitacost.com for $280 million.
  • In early 2014, it bought digital coupon and promotions company You Technology Brand Service.

Still, analysts say Kroger has been smart to avoid flashy deals that could also buy it trouble. If an operator's troubles are too severe, they could become a costly distraction and expense to a suitor.

For more than a decade, Kroger has thrived in increasingly competitive environment where traditional supermarkets found themselves besieged by nontraditional competitors – from mass discounters such as Walmart, drug stores such as Walgreen's and dollar stores such as Dollar General – that turned to groceries as a way to drive foot traffic.

In 2003, Kroger developed its Customer 1st strategy where the chain offered lower prices – but not the lowest prices – while also stressing a wider product variety, customer service and better overall shopping experience. As a result, the company has reported nearly 12 straight years of increasing market share.

But as Kroger grows larger, acquisitions become more enticing as a way to continue the momentum. Buying a competitor in a new market can be a faster, more cost-effective way of moving into a new market.

"If they get them into new territory at the right price, Kroger would be willing to do more deals," said Morningstar analyst Ken Perkins.

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Acquisition strategy shows signs of evolving

Analysts say Kroger is mostly sticking with its playbook in its latest deal, but even Kroger executives admitted Roundy's was more of a "fixer-upper."

The crown jewel Kroger gets by taking over Roundy's is the 34-store Chicago chain Mariano's, an upscale urban concept with a loyal and growing following. Kroger believes it can study the concept and expand the chain or apply its practices in other cities – including possibly Downtown Cincinnati.

But outside of Chicago, Roundy's is struggling, losing market share in the last two years in 15 of 16 markets, according to industry-tracker Chain Store Guide.

While Roundy's three other banners – PIck 'n Save, Copps and Metro Markets – make it a Top 3 supermarket operator in 13 of its markets, the company is saddled with $641.2 million worth of debt that has squeezed cash flow and prevented it from investing more in the company.

Analysts say Roundy's small size relative to Kroger should prevent the deal from bogging Kroger down. With nearly $110 billion in annual sales, Kroger is more than 30 times larger than Roundy's.

"This is a snack to Kroger, Roundy's is a rounding error to them," Mushkin said. "Kroger has become an enormous company."

Kroger's deep pockets will allow it invest more aggressively in lower grocery prices and remodeling than Roundy's could afford.

Kroger executives told analysts last month they have no plans to close Roundy's stores and would keep senior management in place, including CEO Robert Mariano. They indicated Kroger would also overhaul some stores in the MIlwaukee and Madison markets.

"We think we'll be able to hit the ground running very quickly. Bob (Mariano) knows investments he wants to make," said Kroger chief financial officer Michael Schlotman. "He has been somewhat hamstrung with the leverage (debt) they've had."

Kroger officials declined to comment for this story, noting the Roundy's acquisition has not closed.

While Kroger has avoided turnaround acquisitions, Mushkin said the company might consider more if it can fix Roundy's.

"It's what they need to start doing," Mushkin said. "This could prove their business model is superior and transferable."

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