CINCINNATI -- Kroger Co. here can expect pretty smooth sailing following its merger in May with Portland, Ore.-based Fred Meyer Inc., observers told SN.
The merger, which was disclosed last October and completed in May, combines Kroger's strength in the Midwest and Southeast with Fred Meyer's expanded presence in the West.
Coming just a couple of months after Albertson's disclosed its plans to merge with American Stores Co., Salt Lake City, the Kroger-Fred Meyer merger enabled Kroger to retain its position as the nation's volume leader, with combined sales of $43.1 billion.
It also enabled the company to secure the No. 1 or No. 2 market share position in 33 of the nation's largest markets, with 10 cents of every food dollar being spent at a Kroger-owned store.
According to Joseph A. Pichler, chairman and chief executive officer, "Kroger's fundamental strategy is to leverage our size while allowing divisional operators the freedom to respond to local communities and markets. This merger will enable us to implement that strategy on an unprecedented scale."
For Fred Meyer, the deal culminated two years of merger activity of its own that saw it acquire Smith's Food & Drug Centers, Salt Lake City, in late 1997; and Ralphs Grocery Co., Compton, Calif., and Quality Food Centers, Bellevue, Wash., early in 1998.
Industry analysts said a lot of pre-merger planning and conservative estimates on results should put Kroger in good shape for the foreseeable future.
According to Debra Levin, an analyst with Morgan Stanley Dean Witter, "The merger is on track, and Kroger is going to make sure the synergies between its stores and Fred Meyer -- be it in procurement, private label or integration in Arizona -- are carried off in a very reasonable and rational way.
"They've had plenty of time to plan things, so there's much less transition risk, and they're not trying to reinvent the wheel by trying to redo all the different systems or install different MIS platforms."
Gary Giblen, New York-based managing director for Banc of America Montgomery Securities, San Francisco, predicted ultimate success, "although there could be some fits and starts in some areas -- for example, it looks like there are some union situations in Phoenix, at both the distribution center and trucking levels, that didn't work out as Kroger was hoping. But in the broad scheme of things, there are more things going right than going wrong."
Jonathan Ziegler, San Francisco-based analyst with Salomon Smith Barney, New York, expressed similar thoughts. "There are still some minor things Kroger must deal with and write down, such as getting rid of a distribution center and its share of a dairy in southern California, but those are minor in the overall scheme of things.
"Actually, with everything that's happened, Kroger came out a major winner because of the stores it picked up in northern California following the Albertson's-Lucky divestiture. Kroger had to divest only eight stores in Arizona and Wyoming [to complete the merger with Fred Meyer], but then it picked up a real good cadre of stores in California to supplement the nameplates it has."
At the time of the merger Kroger said it expected to achieve savings of $75 million in the first 12 months, $150 million in the second 12 months and $225 million in the third 12 months -- extremely conservative numbers, analysts pointed out.
"Kroger probably should be projecting $225 million a year instead of $225 million over three years," Ed Comeau, an analyst with Donaldson Lufkin & Jenrette, New York, told SN. "Kroger has enough flexibility so that, should there be an issue here or there or a minor bump, it's well covered."
Ted Bernstein, a high-yield analyst with Grantchester Securities, New York, said the transition is going smoothly because of Fred Meyer's prior experience merging Ralphs, Food 4 Less, Hughes, QFC, Smitty's and Smith's over the previous couple of years.
"Each of those chains has, within the last three years, been through at least one corporate change, and in the process, everybody's brought systems through at least once, so you don't have the same sort of hide-bound, tradition-bound rules and ways of doing things because people have thought things through more recently.
"As a result I think these cultures are probably more ready to adapt and don't need a lot of fine-tuning at this point."
As a result of the merger, analysts said, they expect Kroger to experiment with alternate formats, given the warehouse stores and multidepartment stores that Fred Meyer operates; to expand Fred Meyer's jewelry business to Kroger stores; to expand the use of outsourcing to eliminate the kinds of labor problems Fred Meyer has encountered in the past; to improve procurement practices and logistics, and to expand premium-line private label, based on the Fred Meyer model.
The problem of both companies operating stores in Arizona -- Kroger's Fry's Food Stores and Fred Meyer's Smith's and Smitty's units -- was resolved when Fred Meyer converted the Smitty's stores to the Fred Meyer banner in February and Kroger converted the Smith's stores to Fry's after the merger.
As for the future, Comeau said Kroger has indicated it is looking for small-market acquisitions. "It's not a company that's geared up to buy turnaround companies. Kroger is teed up to buy a good company that it can integrate with a high level of confidence without a lot of risk."
The merger with Fred Meyer came as somewhat of a surprise within the industry, following a year of speculation that Kroger and Safeway, Pleasanton, Calif., would get together -- speculation Kroger firmly denied just weeks before the Fred Meyer deal was announced.
