This probably isn't the last acquisition for Kroger (NYSE:KR) and certainly not the biggest, but the purchase of midwest rival Roundy's (UNKNOWN:RNDY.DL) indicates the supermarket chain is keen on grabbing market share while it can.
Kroger's been expected to make a deal for some time. As the grocery-store chain has grown over the years, some holes have become obvious in its geographic coverage. The Midwest was one; Florida was another. The acquisition of Roundy's 151 stores operating under various brands, including Pick n Save, Copps, and Mariano's, and which serve customers primarily around the Milwaukee and Chicago areas, plugs a particularly big gap for the supermarket.
It tries harder
Kroger is the country's second largest grocery store behind Wal-Mart (NYSE:WMT) and operates more than 2,600 stores in 34 states under the Kroger, City Market, Ralphs, and Harris Teeter banners, among other names. Kroger bought the latter in January 2014 for $2.4 billion, three times more than what it's paying for Roundy's, including debt. And while Roundy's generates nearly two-thirds of its $4 billion in annual revenues from the Wisconsin Pick n Save, Copps, and Metro Market stores where it has a leading 18% share of the market, it's the Chicago-based Mariano's chain that Kroger really wants.
Mariano's has largely been the better-performing chain in the Roundy's portfolio, and Kroger is looking to expand on its urban format.
That would follow what other supermarket chains are doing, reducing their footprint so that they can fit into city landscapes and get closer to customers. Wal-Mart is rapidly building out its smaller Neighborhood Markets concept, 42,000-square-foot stores that are about a fifth the size of one of its typical supercenters, while Target is opening more of its own smaller urban-format stores. Both have vastly expanded their grocery and fresh food selections even as Whole Foods Market is developing a smaller concept store as well, called 365 by Whole Foods, that will primarily feature its store brand products.
Already a competitive marketplace, the grocery-store space is becoming even more so and will drive greater consolidation. Earlier this summer, for example, European supermarket giants Ahold and Delhaize Group, which operate brands such as Giant, Stop & Shop, and Food Lion, agreed to a $29.5 billion merger that will create the fourth biggest chain in the United States.
That makes it imperative for rivals such as Kroger to also buy up competitors to maintain their position and further encroach on Wal-Mart's turf. Together, Kroger and Roundy's will operate 2,774 supermarkets and have more than 422,000 employees across 35 states and D.C.
The bigger they are, the harder they fall
Wal-Mart has stumbled badly in recent weeks. Its disappointing earnings were the result of faltering sales in the U.S., as competition from traditional rivals such as Kroger and Supervalu have intensified while the deep-discount dollar-store chains carve out an expanding presence. Dollar General has especially seen an opportunity to move forward and is opening more supermarket-style stores.
That's happening even as Wal-Mart projects slower new store growth for itself, though it has enhanced its online offerings at the same time. As a result, the retail king reduced its guidance for 2016, weighed down by heavier labor costs resulting from the wage increase it initiated earlier this year for half a million employees. It expects those expenses to cost it $1.5 billion next year and estimates that earnings could fall by as much as 12% in fiscal 2017.
This gives Kroger an excellent opportunity to gain on its rival. By expanding into markets it's not already in, the grocery-store chain can capitalize on Wal-Mart's weaknesses. That's why the Roundy's acquisition, while important, is only just a small part of a larger strategy, and we'll probably see more such purchases by Kroger in the future.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. 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.