Kroger Keeps On Rockin’ With Strong 1st Qtr., Vitacost Deal

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The Kroger Company continues to be the hottest supermarket operator in the country. Last month, the Cincinnati-based chain posted another strong earnings report, the first to include its acquisition of Harris Teeter.

For the first fiscal quarter, ended May 24, Kroger reported net earnings of $501 million, up 1.5 percent from a year ago. Total revenues grew by 9.9 percent to $33 billion, with identical store sales (excluding fuel) rising by 4.6 percent.

“We are seeing strong position indicators in shopping behavior,” CEO Randy McMullen said during a conference call announcing the results. “Our customers have exhibited less cautious spending  behavior, for example. Consistent with the rise in consumer confidence index in May, our own customer research tells us that more customers perceive the economy to be in recovery,” he added. “While it is obviously welcome news, the recovery remains fragile, especially for customers on a budget.”

Early returns indicate that the acquisition of Matthews, NC based Harris Teeter has been a positive one for Kroger. COO Mike Ellis commented, “We are spending time with Harris Teeter and learning a lot about how they connect with customers. Their store standards and fresh foods are world-class, and our cultures are a great fit, which makes our integration work rather easy. We’re excited by what we’re learning about Harris Teeter’s online ordering and store pickup model. It’s a program with a lot of promise.”

During the past month, Kroger also acquired Vitacost.com Inc., an online seller of vitamins and other health-related products in a move that will give the largest pure-play supermarket operator in the country a stronger presence in Internet retailing. Analysts expect the $280 billion deal to give Kroger a platform for fulfilling home delivery of orders, an area of growing focus for grocery chains as they continue to face growing competition from online retailers like Amazon.com and FreshDirect.

McMullen said that Kroger plans to add some of its own natural and retail organic foods, sold under the Simple Truth brand, to Vitacost’s produce offerings. The Boca-Raton, FL based online retailer, founded in 1994 as catalog retailer before moving to online sales, saw its 2013 revenue grow 16 percent to $382.7 million on sales of more than 45,000 products to about 2.3 million customers. However, that figure represented a $13.7 million net loss and was the company’s fourth straight year of operating in the red.

Kroger will pay $8 a share in cash for Vitacost under terms of the deal, which it said both company’s boards have approved. It said it will finance the Vitacost transaction with debt and its expects the deal to close in the third quarter.

It’s been quite a year for Kroger, which completed its $2.44 billion acquisition of Harris Teeter in late January and hasn’t missed a beat since veteran Kroger executive McMullen succeed Dave Dillon as CEO on January 1.

The company clearly plans to continue the positive trend, saying in March that it plans to enter at least one new market in the near future. At an analyst conference held in New York last March, CFO J. Michael Schlotman said, “We are going down the path of picking one new market to enter organically. We’ve been engaged in that process since October and we’ve essentially (decided) where we’re going to go, though it will be a while before we go public.” He cited competitive reasons and other considerations, saying, “…the cost of land always seems to go up if they know we are looking.” He added that Kroger will continue to expand in fill-in markets and is open to the possibility of acquiring stores that may become divested, though he did not refer to any specific companies by name.

In making the Harris Teeter deal, Kroger saw an opportunity to gain entry or expansion into fast-growing markets in the Mid-Atlantic and Southeast, where it had few or no stores and little market share.

Prior to the merger, Harris Teeter had aggressively carved out an increasing market share in the Baltimore-Washington market. In the 2009 Food World Market Study, the retailer operated 21 Baltimore-Washington units that tallied sales of $491.7 million, good for a 2.15 market share. In the 2014 study, the retailer’s share had climbed to 3.16 percent with 17 stores added to its fleet in the region during that five year span. HT sales for the period approached the $1 billion mark at $964.2 million at its 38 area units.

Harris Teeter plans to continue its aggressive expansion in the Mid-Atlantic, with new stores planned in: Alexandria, FallChurch, Haymarket and the Sandbridge area of Virginia; Laurel and Bethesda, MD; and the District of Columbia (National’s Stadium).

Kroger operates no stores in the Baltimore-Washington market.

In addition to Baltimore-Washington, two markets in Virginia offer room for greater growth for both Kroger and Harris Teeter. Before the merger earlier this year, both chains operated stores in the Hampton Roads and Charlottesville markets in Virginia as well as in Charlotte, NC. That fact  prompted many analysts to speculate that federal regulators would call for some store closures in those markets. However, the determination was made that no divestitures would be required, clearing the way for both banners to continue current operations as well as plan future growth.

In 2012, Kroger announced plans to build 10 new stores in the Hampton Roads market within the next five years. The region’s first Marketplace store opened about a year ago in Virginia Beach, and future Hampton Roads Marketplace units are slated for Portsmouth and Suffolk. In the 2014 Food World Market Study, Kroger’s share of the Tidewater market was 3.73 percent on sales of $184.8 million at nine area stores. Five years earlier, its share was 2.33 percent on sales of $104.7 million at eight area stores.

In that same period of 2009-2014, Harris Teeter added five stores in Tidewater, giving it 13 stores in the area that had a share of 5.79 percent (vs. 3.41 percent) on sales of $287.1 million (vs. $153.3 million).

The Richmond market is one where Kroger has also been growing at an even quicker pace as the retailer opened its 17th store in April, and its second Richmond area Marketplace unit. The first Marketplace opened in December 2012 in Chesterfield; the newest unit is in western Henrico. Additionally, the company has plans for two more superstores under development, in Hanover and Chesterfield. The Hanover store will be an expansion of a traditional Kroger unit and construction on the Chesterfield location is expected to begin in September. Additionally, the company has plans for a new Kroger in Colonial Heights, expected to open in July 2015, and is expanding another Chesterfield store. In the 2014 Food World Market Study, the 29 Kroger stores in the Richmond-Norfolk market had a market share of 7.78 percent (up from 27 stores with 6.5 percent in 2009) and sales of $734.1 million (up from $548.4 million).

In that five-year span, Kroger has grown in the market in part at the expense of Martin’s, the Ahold USA division that acquired Ukrop’s Super Markets in 2010. In the 2009 study, Ukrop’s led Kroger – they were the fourth and fifth ranked retailers respectively. By 2014, their positions had been reversed.

While both Kroger and Harris Teeter continue to operate as separate units, Harris Teeter’s recent announcement that it would be lowering prices on thousands of items at stores in both Charlotte  (April) and Baltimore-Washington (June) provides a clear indication that Kroger is willing to put some muscle behind its most prized new purchase.