Big news from the grocery sector: Kroger will buy Harris Teeter for $2.5 billion following the trend of consolidation in the grocery industry. Earlier this year, Empire Ltd, the owner of Canadian grocery chain Sobeys, bought Safeway’s Canadian business for $5.7 billion in a “game changing” deal.
As the supermarket industry becomes more competitive, companies are under pressure to step up their game. The acquisitions by Empire and Kroger will help both companies maintain their position as the number two grocer in Canada and the US respectively.
Kroger’s acquisition of Harris Teeter would be its largest deal since its 1999 purchase of the Fred Meyer chain for $13 billion. This change in strategy underscores the maxim “grow or die.” Even though Kroger has more market share than traditional grocery stores Safeway and Publix, the company cannot afford to remain stagnant. In order to stay successful, the supermarket chain must proactively develop a plan to remain ahead of the curve.
Kroger faces increased competition, from traditional grocery stores, from low-price stores such as Walmart and Costco, and from high-end specialty stores such as Wholefoods. In the face of so much competition, acquisition can be the best defense, and the fastest and most profitable way to grow.
Why Harris Teeter?
It’s clear this acquisition will help keep Kroger ahead, but what is their underlying strategy? As I’ve mentioned before, a successful acquisition must have a one clear purpose that reflects the company’s overall growth strategy. In this case, Kroger’s reason for buying Harris Teeter is to expand their access to high-end customers.
According to Kroger Chief Executive David Dillon, “We do a nice job on the high-end customer but there are some things Harris Teeter does better. We expect we can learn a thing or two from them.”
Harris Teeter is only about one-fifth the size of Kroger. It generates $4.6 billion in revenue compared to Kroger’s $97 billion, but it has access to high-end markets that Kroger currently does not.
The Harris Teeter brand name carries with it loyal customers who are willing to pay more for a clean and pleasant grocery shopping experience. Harris Teeter has made shopping even more convenient with its “click and collect” program that allows customers to order groceries online and collect them at the store. While Kroger could grow this type of customer base organically, it is much faster and more reliable to simply “purchase” these customers from Harris Teeter.
With the acquisition, will Kroger have access not only to the high-end market through Harris Teeter stores, but also to the best practices that won those customers in the first place. Kroger will likely look to implement those practices to attract more upscale customers to other Kroger stores.
Kroger will also have access to new geographical markets. Harris Teeter stores are located in affluent areas, urban areas, and growing cities in the Southeast and mid-Atlantic.
What does this mean for M&A in the grocery industry?
Competition in this space will remain tough as chains compete for market space. Be on the look-out for more consolidation. As CEOs of other grocery chains see consolidation happening in their market space, they begin to seriously consider acquisition.
Although it may be tempting to jump on the bandwagon and follow the trend, executives should be sure that any acquisition is precisely tailored to their company’s overall strategy. Just because Kroger and Harris Teeter are consolidating, this does not mean it is the right strategy for everyone. Acquiring a technology company to streamline back-office operations or a distributor to cut costs may be more appropriate. The challenge is always to anticipate change and proactively plan for future demand. Remember, acquisition is powerful, but only successful when used strategically.