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Major Changes at Kroger -- Are They Good?

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Kroger (NYSE: KR  ) , the nation's largest grocery chain, is undergoing major changes, including a $2.4 billion acquisition of Harris Teeter (UNKNOWN: HTSI.DL  ) . This deal adds 212 stores in eight states, which provides Kroger exposure in new regions. It also gives the company the opportunity to learn more about fresh-food categories, which are highly profitable, says Kroger CFO Michael Schlotman

There is also speculation that Kroger will acquire the Great Atlantic & Pacific Tea Company, though Kroger said it would be difficult to make another large acquisition within the next six months. Great Atlantic & Pacific Tea operates Pathmark, Food Emporium, Waldbaum's, and A&P chains.

Despite the fact that Great Atlantic & Pacific Tea recently emerged from bankruptcy, The Wall Street Journal projects it is worth around $1 billion. If Kroger is able to complete the A&P acquisition, it would be able to penetrate new markets in Connecticut, New York, New Jersey, and Pennsylvania.

Grocery industry consolidation is becoming quite common. Companies are searching for ways to stay competitive under intense pressure from dollar stores, upscale grocers, and of course, Wal-Mart  (NYSE: WMT  ) . With many retailers now doing nearly the exact same thing, it is becoming more and more difficult to distinguish oneself from the competition and remain profitable.

Evidence that increased competition is impacting the bottom line: Kroger has adjusted its coupon policy and has begun removing its double-coupon policy in many stores. To appease coupon users, Kroger has assured its customers that the removal of double coupons will be replaced with lower prices and better weekly specials. This sounds a lot like Wal-Mart's "Everyday Low Prices" philosophy.

Imitation is the sincerest form of flattery
Wal-Mart's business model of "Everyday Low Prices" eliminates the need for specials. The company has been known to offer grocery items at a loss in an effort to sell other merchandise. These low prices coupled with Wal-Mart's generous price-matching policy and other customer perks have secured the company's position as the king of the ever-changing retail environment.

While Kroger is ending its double-coupon policy, Wal-Mart is taking steps to make its money-conscious customers happy. The company has incorporated the Scan & Go feature in its mobile app, which will allow customers to organize and easily access available coupons. Wal-Mart anticipates the program will reach more than 200 stores. Retailers like Kroger will undoubtedly follow suit.

What do these changes mean for investors?
Change is hard for everyone, but Kroger's stock appears to be responding well. After the Harris Teeter acquisition on July 9, Kroger shares enjoyed a steady climb, which included establishing a new 52-week high of $39.97 at the end of July.

For Harris Teeter shareholders, the ride has not been as smooth. The stock has remained fairly flat, which is not surprising considering there is some debate as to whether the acquisition benefits shareholders. In fact, with multiple lawsuits already being filed by Harris Teeter shareholders in an attempt to halt the acquisition, this is hardly a done deal.

One recent such filing claims the board failed to take adequate measures to ensure shareholders were properly protected and that shareholders will not receive fair value for their shares. The all-cash transaction is valued at $49.38 per share, which, according to the lawsuit, is "woefully inadequate in light of Harris Teeter's strong financial position and the complementary assets which a combination with (Harris Teeter) would bring to Kroger."

If investors are looking for a pure grocery play, Kroger is a solid investment option given its aggressive growth strategy largely driven by acquisitions and its ability to adapt to the changing grocery industry landscape. But for a more diversified retail investment option, look to the leader of the pack, Wal-Mart. 

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 11, 2013, at 5:31 PM, DAG_Investments wrote:

    There are a litany of frivolous law suits filed in response to every acquisition. The securities industry's equivalent of ambulance-chasing law firms simply have dollar signs in their eyes that are blinding them from the fact that the only reason HTSI ever traded beyond its standard $32-38 range was the well-know belief that Kroger would at some point buy them out. In other words, the rest of the premium that the lawyers are trying to convince HTSI holders they deserve was already baked in over the past year since the speculation started. As such, HTSI holders are indeed getting all that is due.

    By the way, comparing Kroger to Walmart is akin to comparing Ford to Alcoa because Ford's cars have some aluminum in them. Investors don't buy Walmart stock to invest in the grocery industry any more than we buy Kroger stock to invest in "diversified retail".

  • Report this Comment On September 12, 2013, at 3:15 AM, RotRow wrote:

    Thank you to the reader for posting the well written comment above. I read early on as HTSI negotiated with bidders that the board members also considered as part of the purchase Kroger's future plans for the Harris Teeter Stores that would continue their company's expansion - remodel plans and long term opportunities for the company and its employees, and that Kroger would keep their beloved company name intact. I hope the shareholders realize that there is a rather ugly alternative out there, an acquisition by a private equity firm which would rip the company to shreds and sell it off piece by piece in order to get the value the shareholders demand.

  • Report this Comment On September 12, 2013, at 7:30 AM, DAG_Investments wrote:

    Thanks RotRow. Indeed, the grass is always greener ... I agree with your assessment that, if HTSI investors choose to block the deal, the PE route will be the only option since there aren't any other grocery company's left that are strong enough to do such a deal. Then, they will find out why the grass is always greener ... because that's where the dogs are ... well, let's just say "fertilizing".

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