The grocery behemoth Kroger Company said on Tuesday that it would pay $2.4 billion for Harris Teeter, a relatively small grocery chain. Kroger will pay $49.38 per share in cash for all outstanding Harris Teeter shares and will take on $100 million in debt as part of the arrangement.
Despite not having the same brand recognition as Target or CVS, Kroger packs a punch in terms of sheer size. With 2,500 outlets across 31 states, the grocer is the country's largest grocery chain — and the second-largest retailer overall, behind only Walmart. Kroger made $96.8 billion in revenue during the fiscal year that ended on February 2.
Kroger has acquired a number of lesser businesses over the last three decades, including Dillon Companies, which also owns Kwik Shop, and Fred Meyer, which owns Ralph's, QFC, and Smith's. So why did it focus its attention on Harris Teeter, a supermarket company with 212 locations across the southern and mid-Atlantic states?
There are several causes for this.
First, in recent years, the grocery business has become more competitive as new types of merchants have joined the market. Grocery sections have developed in megastores like Target and Walmart, while food aisles in dollar stores have expanded. Whole Foods, on the other hand, continues to expand its presence in more wealthy areas. Grocery stores have been rapidly combining in order to remain competitive.
Second, while Harris Teeter is a small store, it is located in a desirable area. According to Reuters, the company "has outlets in affluent tourist areas, university cities, and markets where populations are expanding faster than the national average." North Carolina's "Triangle Region," which comprises Duke University, North Carolina State University, and the University of North Carolina at Chapel Hill, is included.
"Kroger has been losing grocery dollar market share in the Triangle for some years to Wal-Mart and Food Lion," according to the Triangle Business Journal, and has forced to close three of its underperforming shops in the last two years. Harris Teeter, on the other hand, is expanding in the neighborhood. "With 35 locations and $752 million in sales in 2012, it ranked third in Triangle market share," according to the newspaper.
Finally, Harris Teeter isn't exactly a schlub. It made $4.5 billion in revenue in fiscal 2012, and its stock price has grown 31% since it announced it was for sale on January 18th. "Harris Teeter is a terrific company with a fantastic brand, pleasant and competent colleagues, and appealing store formats in lively markets run by a first-class management team," said David B. Dillon, chairman and the executive officer of kroger ess. Kroger also stated that it expects to learn from the retailer's online purchasing setup.
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