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Why Kroger Bought Vitacost

By Andrew Marder – Jul 14, 2014 at 3:07PM

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Kroger announced that it was going to offer $280 million for, broadening its horizons and cementing its online plan.

Jumping on the organic train like a kid on a moonbounce, Kroger (KR 0.63%) is offering $280 million for online vitamin retailer, (NASDAQ: VITC). Vitacost is a relatively small retailer, with revenue of just $382.7 million in its last fiscal year. Kroger, by comparison, gathered up $98.4 billion in revenue in its fiscal year. So what does Kroger see in this little online retailer, and what plans does it have for the long term?

What's in it for Kroger?
There's probably a long way to say this, but here's the short version: Whole Foods Market. Whole Foods has made a business and a fortune out of selling organic, sustainable, and healthy products. As the company's bottom line has grown, so has the American appetite for healthy products. According to Euromonitor International, Americans spent $23 billion on vitamins and supplements in 2012.

As the market continues to grow, more and more companies are getting in on the health act. Kroger's acquisition of Vitacost is part of its plan to offer more products through more channels -- Vitacost is online-only -- in order to build its revenue stream. In the announcement of the purchase, Kroger said that it "[intends] to grow's strong position in the online nutrition market" while at the same time using its online platform to offer new options to online shoppers at its other brands.

Kroger has pushed its online strategy recently, and its acquisition of Harris Teeter and its "Express Lane" online platform will be strengthened by Vitacost's products. That should help Kroger kick its sales up a level from their already strong position. Kroger managed a 4.6% increase in comparable store sales -- excluding gas sales -- last quarter.

Kroger and the competition
While the Vitacost is a direct shot at the Whole Foods customer base, it's also going to help solidify Kroger as the strongest traditional retailer. Kroger is already out ahead of companies like Safeway, which only increased comparable sales by 1.8% last quarter, and which put up a meager 0.66% operating margin -- Kroger's operating margin was 2.8%.

Vitacost should help Kroger keep itself out ahead of its closest competitors while giving it a new avenue to pursue the markets of players like Whole Foods. This is an excellent move for Kroger -- even if it is relatively small -- and investors should be happy with the added expertise in online shopping. Kroger is setting itself up to be a company that owns the high end of grocery retail, and Vitacost is a step toward that end.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Whole Foods Market. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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