Taking Stock

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Competitors Beware: Kroger Express Headed For Further Mid-Atlantic Market Penetration

Consumers won’t see an immediate change now that the FTC has given its final blessing of Kroger’s nearly $2.5 billion acquisition of Harris Teeter. In fact, the nation’s largest pure play supermarket operator has made it very clear that it wants the successful Harris Teeter “brand” to remain very much in place for shoppers and associates who have helped make the Matthews, NC upscale (former) regional chain highly successful both in its core markets in the Carolinas, as well as in emerging markets in Virginia, Maryland, Delaware and Washington, DC.

And for consumers in those emerging areas, all stores will continue to carry the Harris Teeter banner, and president Fred Morganthall and his team will continue to shape culture and policy as it pertains to the stores. But, of course, there will be changes and competitors already know that Kroger’s corporate ownership now means increased buying power and expertise in many backroom areas. In fact, no other supermarket chain has displayed the combination of corporate clout and regional flexibility that Kroger has, and that type of “local connection” is one of the prime reasons the Cincinnati chain is the most successful when measured against its peers nationally.

And one more thing that Kroger will likely add to its newest acquisition: lower prices. Potentially lowering retails will be a powerful competitive weapon for Harris Teeter, whose only negative perception is that it’s too high-priced. In all the other key metrics in determining what makes a supermarket successful – training, customer service, in-stock conditions, fresh departments, private label, etc. – Harris Teeter grades out near the top of the charts. So, while lowering prices will certainly help HT against powerful and growing entities like Wal-Mart, Target and Wegmans, it will be an even bigger factor in the Baltimore-Washington market against market leaders Giant/Landover and Safeway.

It’s been 15 years since Harris Teeter first entered the B-W market with a smallish two-level supermarket in the Ballston area of Arlington, VA. The company hoped its presence in the DC market would essentially serve to replace the old Giant/Landover reputation (Giant was sold to Ahold USA that same year) as the “go to” food retailer that provided a high level of customer service and strong perishables departments. A decade and a half later, Harris Teeter (which has now expanded its base into Baltimore) operates nearly 40 stores in the B-W market and continues to take share away from the market leaders which, despite many prized store locations, have chosen not to defend their turf as aggressively as they might have.

Even as a regional chain, Harris Teeter hasn’t shied away from paying more than $30 per square foot for some locations (especially inside the Beltway and in the cities of Washington and Baltimore) and has among the most aggressive real estate programs of any operator in the B-W market, regardless of size. Expect that to continue and perhaps be enhanced by Kroger, which spent more than $2 billion on cap-ex last year.

While Kroger’s stores in other parts of the company are primarily organized, Harris Teeter’s are not. Don’t expect any changes there; Harris Teeter’s stores will remain non-union. And while the closest Kroger banner you’ll see to the DC area is 100 miles south in Richmond (where the chain is currently gaining share, partly at the expense of Ahold USA’s Martin’s stores), it wouldn’t be surprising to see Kroger expand its 125,000 square foot Marketplace format into the B-W market in a few years (there are currently two Marketplace units open in Virginia in Chesterfield County and in Virginia Beach, which compete with its own Kroger banner and will now compete with Harris Teeter as well).

With the Federal Trade Commission’s decision not to force Kroger to divest any overlapping stores, the big chain’s market share will immediately increase exponentially in regions such as Tidewater and Charlottesville, VA as well as in the Raleigh-Durham area of North Carolina and in Nashville, TN.

As I’ve said from the beginning, this will prove to be a great deal for both Harris Teeter and Kroger. For HT (and the Dickson family and its Teeter shareholders), it found a highly strategic buyer that was willing to pay a premium price to acquire one of the country’s hidden gems. For Kroger, the opportunity to learn the nuances of an upscale, perishables-driven regional operator and gain entry into new markets offers the best growth opportunity the company has had since its 1998 purchase of Fred Meyer on the West Coast.

Harris Teeter moving into the “top three” in the Baltimore-Washington market? Harris Teeter expanding into the DelawareValley? Marketplace combo stores opening in the Northeast? Wait a few years – it’s all possible.