Kroger (NYSE: KR), the nation's largest grocery chain, is undergoing major changes, including a $2.4 billion acquisition of Harris Teeter (NYSE: HTSI). 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 (WMT +1.08%). 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.
