Kroger adds Harris Teeter to supermarket network

NEW YORK (AP) - July 10, 2013

The $2.44 billion cash deal reflects Kroger's growth plans at a time when supermarkets are fighting competition from big-box retailers such as Target Corp. and Wal-Mart Stores Inc., as well as drugstores and dollar stores that are expanding their food sections.

Harris Teeter has 212 stores in eight states. That includes three locations in Delaware: Bethany Beach, Millsboro, and Selbyville. Other locations include Florida, Maryland and Washington, D.C., where Kroger currently does not have a presence.

Kroger says it doesn't plan to close any stores as a result of the acquisition. But in the regions where there is some overlap, it may be asked by the Federal Trade Commission to sell stores to other operators to maintain a competitive landscape, said Mike Schlotman, Kroger's chief financial officer. After Kroger's last major purchase of Fred Meyer in 1999, he said the agency asked it to sell eight stores.

Harris Teeter stores will keep their names and personalities, as with the nearly two dozen other regional chains owned by Kroger, including Ralphs in Southern California, Fred Meyer in the Pacific Northwest and Fry's in Phoenix, the company said.

"I don't see a lot of change that we would make to Harris Teeter," Schlotman said. "It already has a large fresh and prepared section - that's one of the things they're good at."

That focus on fresh and prepared foods is what makes the deal so attractive to Kroger. While they're not on the level of Whole Foods supermarkets, Harris Teeter stores tend to be in more affluent neighborhoods and are more profitable because they have bigger fresh food sections.

Kroger, meanwhile, has been expanding the ranks of its "Fresh Fare" stores, which have bigger sections for produce, meat, seafood and prepared foods. These categories tend to have higher profit margins than the rest of the store, Schlotman said.

Notably, Harris Teeter also offers a "click and collect" service in about half its stores that lets people shop online then pick up their groceries curbside or at the front of the store.

"It's very popular in Europe, and now we get the chance to understand the process with someone that has it in place," Schlotman said.

Harris Teeter, along with Ralphs, will be one of Kroger's largest chains by store count.

Under the terms of the agreement, Kroger will pay $49.38 for each of Harris Teeter's shares. The price represents a 2 percent increase over the company's Monday closing stock price. The deal has been approved by both companies' boards, but remains subject to Harris Teeter shareholder approval.

Kroger, based in Cincinnati, operates 2,419 stores in 31 states. Its namesake stores account for more than half its stores.

Of Harris Teeter's 212 stores, 138 are in North Carolina, with 55 of those in the Charlotte area. Another 55 stores are in the Washington D.C., area. Its fiscal 2012 revenue totaled about $4.5 billion.

Schlotman said the deal marks Kroger's entry into several attractive, high-growth markets such as Charlotte, N.C., and Washington D.C. But he declined to say whether the company planned to eventually expand to all 50 states.

"We don't have a map of the U.S. with pins saying, 'We're going to here and we'll never go there,' " he said.

After the deal closes, Harris Teeter will become a Kroger subsidiary and will continue to be led by members of its current senior management. The division will remain based in Matthews, N.C.

Kroger Co. says it expects the deal to result in cost savings of $40 million to $50 million over the next three to four years. It will finance the deal with debt and plans to assume Harris Teeter's outstanding debt of about $100 million.

In morning trading, Harris Teeter shares rose 47 cents to $48.99, while Kroger shares rose $1.10, or 3 percent, to $37.29.

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