Kroger, Meyer plan $13 billion merger Largest U.S. grocer to have 2,200 stores from Ga. to Alaska

Pressure from Wal-Mart

Acquisition is part of two-year wave of grocer consolidations


October 20, 1998|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

The nation's largest supermarket chain, Kroger Co., is about to get bigger, with stores stretching from Georgia to Alaska, in a planned $13 billion merger with Portland, Ore.-based Fred Meyer Inc., the companies said yesterday.

The combined company projects annual sales of $43 billion, cementing Kroger's dominant spot by placing it well ahead of national rivals Safeway Inc. and Albertson's Inc., both of which have been on buying binges. Kroger, which now runs supermarkets in 24 primarily eastern and southeastern states, will gain a strong West Coast presence, growing to 2,200 supermarkets and 300,000 employees in 30 states.

The merger, which would retain Kroger's corporate name and Cincinnati headquarters, is one of the biggest ever in the retail food industry and part of a 2-year-old wave of consolidations. Just last week, Safeway announced it is buying Chicago grocer Dominick's Supermarkets Inc. to form a company with projected annual sales of $26.5 billion. Albertson's, in an $8.3 billion deal, is buying Acme and Lucky stores owner American Stores Co. to create a $33.8 billion company.

"There is a new level of aggressiveness in consolidations in the industry," said Carole Throssell, a spokeswoman for the national Food Marketing Institute. "We have seen a tremendous amount, a result of larger companies recognizing that a dollar spent on an acquisition is a better return than a dollar spent on a new store."

Much of it stems from the rapid growth of Wal-Mart, the nation's top retailer with $118 billion in sales, and other discounters that have cut into traditional supermarket business, analysts said. Grocery giants such as Royal Ahold NV, which is purchasing Landover-based Giant Food Inc., and Kroger can stay competitive by growing larger, said Burt Flickinger, managing director of Reach Marketing, a Westport, Conn.-based retailing and marketing consulting firm.

"The consolidation is really to stay ahead of Wal-Mart, Kmart, Target and Costco," Flickinger said.

For grocery chains, which typically operate on slim profit margins, mergers allow for advantages such as increased purchasing power and efficiencies achieved through volume.

The new Kroger will benefit from substantial economies of scale and increased purchasing power, generating annual savings of about $225 million in three years -- $75 million the first year, the company said.

"Even this year alone, you do see a trend of consolidation in the grocery industry, where bigger is better," said Greg TenEyck, spokesman for Safeway's Eastern Division.

"It benefits everyone, not just the companies but the consumers and more cost efficiencies, which should translate to more competitive pricing."

Fred Meyer, now a $15 billion company, has been a prime example of merger mania. In just over a year, it rapidly grew from a 120-store chain of food, apparel and furniture "super-centers," by gobbling up three grocery chains and adding 681 stores.

For Kroger, which runs 1,398 supermarkets under banners such as Dillons, Gerbes and Fry's, the merger will expand the company's geographic base as well as its range of formats.

While Kroger runs more traditional food and convenience stores, Fred Meyer operates gourmet grocery stores called Quality Food Centers; Ralphs, a Southern California chain of both traditional and warehouse-style supermarkets; and Fred Meyer Stores, which combine grocery and department store items into "super-centers."

All Fred Meyer stores will keep their names, said Mary Burczyk, a Fred Meyer spokeswoman. She said the new company would likely build new stores, but couldn't comment on whether expansion plans would include new territory. None of the Kroger or Fred Meyer stores are in Maryland.

"Kroger will be able to make use of some of the strong, but different, formats Meyer operates," said Charles Cerankosky, an analyst with McDonald and Co. "In terms of working with Fred Meyer assets, Kroger can leverage its distribution expertise and take advantage of its private label supply."

For the consumer, the savings should boil down to lower prices.

"There's a tremendous consumer benefit," Flickinger said. "It helps retail supermarket chains to buy and operate more efficiently, and it's been our experience it's passed along in a lower-priced basket of goods in the weekly shopping trip."

Under the terms of the merger agreement, which has been approved by the boards of directors of both companies, Fred Meyer shareholders will get one newly issued share of Kroger common stock for each Fred Meyer common share.

Fred Meyer shareholders will own about 38 percent of the combined company. Based on Kroger's closing price of $48.75 per share Friday, the transaction is valued at $13 billion, which includes $8 billion in stock and $4.8 billion in debt.

Pub Date: 10/20/98

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