Kroger Beefs Up its Online Channel With Acquisition

The rise of e-commerce has put pressure on the retail sector across a wide range of industries. Some have been hit harder than others, such as consumer- electronics vendors. Other industries have not felt the repercussions of this development as much.

So far, supermarket chains have largely managed to hold their own against online competitors, perhaps because people like to be able to see their food before they buy it. However, things may be changing now, as a growing number of companies are offering groceries online. Kroger's (NYSE: KR  ) acquisition of (NASDAQ: VITC  ) shows it is serious about boosting its online presence.


Room to grow
At the moment, online grocery shopping isn't particularly common. According to a report from the US Census Bureau, food and drink items accounted for only 2% of overall US online sales in 2010. Part of the problem is that it's more expensive to shop for groceries online, as many vendors charge for delivery. Another problem is that it's hard to guarantee the freshness of goods. So far, the approach of tacking e-commerce capabilities onto existing supermarket models does not seem to be working.

However, consumer shopping habits are changing. Several factors may contribute to a greater penetration of online food shopping, according to research firm Nielsen. First of all, the first generation of people that grew up with the Internet are now forming families, for whom online shopping is a well-established habit.

Secondly, vendors are becoming more aware of the opportunities offered by the online channel and are simplifying the process. Furthermore, niche players will have an advantage in this new playing field, as traditional economies of scale do not automatically translate to increased online sales. Kroger, America's biggest supermarket chain, seems to have realized that the time may be ripe for online grocery shopping.

Buying in
Kroger has shown it is able to quickly respond to shifting consumer preferences, largely by increasing its offering of organic items under the Simple Truth label. It has now agreed to purchase for some $280 million. The company sells vitamins, minerals, herbs, organic food, and other nutritional products online and earned some $382.7 million in revenue last year.

Buying Vitacost has several advantages for Kroger. Aside from boosting its online presence, the acquisition will give Kroger access to Vitacost's shipping network, its customer base of around 2.3 million, and its two distribution centers. Moreover, it will help position the company as a vendor of healthy foods, which is clearly a winning image in today's grocery market.

Kroger plans to add its Simple Truth-brand products to Vitacost's lineup of roughly 45,000 items and will start experimenting with delivering other types of food as well. The delivery of dry goods would be a logical first step, as fresh food delivery remains problematic. Natural foods are Kroger's fastest-growing segment, with double-digit revenue growth in the latest quarter. With the product category quickly gaining popularity and widespread consumption, many chains are now rushing to get in on the trend before it's too late. Kroger has definitely been making progress in establishing itself as a player in the space.

The bottom line
While online shopping has not yet achieved widespread appeal in the groceries segment, things seem to be changing. Kroger has been making significant steps in order to improve its competitiveness, expanding its range of organic offerings in order to maintain market share. However, it has also recognized the growing importance of the online channel. The company has now acquired online nutritional goods vendor, which should allow it to increase its online presence and solidify its position in healthy nutrition. As such, Kroger should be able to maintain its run of solid revenue growth, making it a compelling choice in the industry.

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Daniel James

I'm primarily a value and fixed-income investor with a background in cultural anthropology. As a writer for the Fool, I focus mainly on the consumer goods sector, also dabbling in technology occaisionally. When not pouring over the world's stock markets, I like to read, travel and make music.

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Related Tickers

8/31/2015 4:00 PM
KR $34.50 Down -0.44 -1.26%
The Kroger Co. CAPS Rating: ****
VITC $0.00 Down +0.00 +0.00% CAPS Rating: No stars