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Retail View: Could Kroger acquisition signal new cycle of mergers?

The Kroger Co. announced July 9 that it has agreed to acquire Harris Teeter Supermarkets for about $2.5 billion, which has led some to speculate that a round of supermarket acquisitions may be in the offing.

Retail mergers seem to be cyclical, and in the past, one merger often seemed to beget another.

"I do think we might see a number of them," said Ed Odron, who for many years was in retail produce management with Lucky Stores and now operates Ed Odron Produce Marketing Consulting in Stockton, CA. "The economy has bottomed out and is turning around, and I think there are a lot of candidates for acquisitions."

Another longtime retailer-turned-consultant is Dick Spezzano of Spezzano Consulting Service in Monrovia, CA, who said, "I think this could be the start of a cycle."

Spezzano reasoned that most of the retail giants that are public companies are not experiencing significant dollar growth rates; in fact 1-2 percent gain in sales is commonplace. They also aren't building stores, so in order to satisfy Wall Street's expectation of growth, "they have to add stores," he said.

Both men applauded the Kroger acquisition, saying it appears to be a good fit.

Also articulating that position was Reggie Griffin, the longtime Kroger produce executive who retired from the organization about 18 months ago.

"I view this as a great merger of two well-run companies who share a common culture of customer service, quality and value," Griffin told The Produce News. "Geographically, there is very little overlap so this allows expansion into other markets that Kroger currently doesn't service or has a minor presence today."

Spezzano said many acquisitions and mergers require the divestiture of some stores by the Federal Trade Commission if the resulting chain has too big a presence in any one market.

"I don't think that's going to be a problem here," Spezzano said. "There is very little crossover."

He said it gives Kroger a strong presence in the middle-southeast to compete against other strong retailers like Publix and Safeway.

Spezzano said the price paid for Harris Teeter is definitely on the high end but he said Kroger, better than most any other chain, does an excellent job of integrating acquisitions under its umbrella. He said the Harris Teeter name will almost assuredly remain the banner for the division with Kroger creating efficiencies in areas such as warehousing, real estate, accounting and taxation.

Odron echoed those thoughts. "One thing about Kroger, when they take over a company they have a real good handle on how to deal with the transition. Other major chains would do well to take a page out of their book."

He said there are many traditional chains as well as others that might be looking at acquisitions over the next several years.

"Safeway is always a candidate," said Odron. "And I don't think Kroger is done. I have always though that Jewell in Chicago would be a great possibility for them."

He also speculated that Aldi's, the Midwest chain of smaller-format discount stores, could be a purchaser of real estate, especially the smaller format Fresh & Easy stores in California.

"They fly under the radar, but they are very well established in the Midwest and I could see them coming out to California," Odron said.

He added that the retail food landscape has changed tremendously in the past decade so the type of operations adding stores over the next decade will also be different. He said non-traditional food retailers, such as dollar stores, might also be buyers when supermarket real estate becomes available through acquisitions and mergers. And he said this is a good trend for produce suppliers, as a diversity in retail outlets also leads to a diversity of product.

Odron said the larger chains tend to mimic each other and they each want the same specs on their fruit, for example.

"These dollar stores open up opportunities for smaller sizes that taste just as good but used to go for cattle feed," he said. "They can take a five-pound bag and sell it for 99 cents."

Spezzano said many of the smaller regional players in the less-than-100-store category might be ripe for a takeover. He added that these size chainstores exist in every region of the country.

He has also been surprised that none of the major chains have made a play for the fast-growing ethnic chainstores that are experiencing real growth.

Just singling out two examples in California - Superior Grocers and Northgate Markets - he said both could offer an entry into an ethnic niche for a larger chain. Because those markets tend to be located in different demographic areas than conventional large supermarkets, there would not be need for much divestiture.

He said the larger player could allow these smaller operations to operate as separate divisions, again creating efficiencies in the administrative part of the business.

Spezzano agreed that Safeway could be an acquisition player, since it is flush with cash with the recent sale of its Canadian division. He said there are several other potential buyers as well as each of the top supermarkets across the country look to grow.

Turning back to the Harris Teeter purchase by Kroger, Ron Pelger chairman of the FreshXperts consulting group, said it should be a very good fit. "Both parties will be a lot stronger."

He worries about the human side of the transaction, since he said there are always duplicative jobs and someone has to go. "I've seen a lot of friends lose their jobs this way, but it happens."

But like the others, Pelger said Kroger has proven in the past that "it has its act together" and tends to do a much better job of assimilating an acquired chain into its organization.

Griffin said there will also be consternation at the produce and floral supplier level as these types of acquisitions always bring speculation about which suppliers will survive.

"For suppliers of Harris Teeter who currently aren't suppliers of Kroger, they should view this as a great opportunity to showcase their ability to partner with another quality minded grocer, albeit a larger one," he said.