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Instant Analysis: Kroger Completes Acquisition of Roundy's

By Rich Duprey – Dec 18, 2015 at 6:54PM

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The grocery store chain adds another supermarket to its portfolio to help it dominate the industry.

What happened?
Supermarket giant Kroger (KR -1.22%) completed its acquisition of midwest rival Roundy's on Friday, purchasing all of the grocery store chain's outstanding shares for $3.60 each in cash. Kroger is adding all of Roundy's 151 grocery stores and 22,000 employees to its portfolio of 2,774 supermarkets and multidepartment stores in 35 states. It has more than 422,000 associates of its own who work under a variety of banners including Kroger, Fred Meyer, Fry's, Harris Teeter, and Ralphs.

Does it matter?
As Kroger has grown through acquisition, it has increasingly challenged Wal-Mart's(WMT -1.33%) dominant position in the industry. Wal-Mart's disappointing third-quarter earnings report highlighted the more competitive environment the grocery stores operate in, as well as the increased costs it inflicted on itself by unilaterally raising its workers' minimum wage.

Kroger, in contrast, has continuously invested in its operations, expanding selection, quality, and value, which have exacerbated the shortfalls seen in the retail leader. Its own third-quarter earnings performance beat analyst expectations as profits rose 23% to $0.43 per share from $0.35 per share a year ago and ahead of forecasts of $0.39 per share. Revenues were 5.4% higher, marking the 48th straight quarter it has posted positive same-store sales growth. In 2014, it recorded $108 billion in sales.

The acquisition of Roundy's, which also operates several chains, including Pick n Save, Copps, and Mariano's, fills a void for Kroger, as it had little to no exposure in the Midwest market. In particular, Roundy's Chicago-area Mariano's chain is seen as the real prize in the acquisition.

That addition should also help Kroger continue its assault on the higher end of the market. Prior to the acquisition, the supermarket was already encroaching on Whole Foods Market's (WFM) turf, building out a bigger assortment of organic produce at lower cost. Wal-Mart wasn't the only grocer complaining about competition as Whole Foods also said its comps were pressured by "increasing competition." Its fiscal fourth-quarter comparable sales were down 0.2% on a constant-currency basis.

Although Wal-Mart is bigger, Kroger is the largest traditional supermarket chain and the Roundy's acquisition burnishes its ability to challenge the industry leaders, regardless of whether they're at the discount end or in high-end organics.

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. 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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