Odds Against Big Kroger Acquisitions: Analysts

HIGHLY SELECTIVE

David B. Dillon, chairman and chief executive officer of Kroger, reemphasized the chain’s position on acquisitions during its fourth-quarter conference call earlier this month.

Asked whether Kroger was considering getting more aggressive on acquisitions, Dillon replied, “If I had the script from the last time we answered that question, I would just replay the tape for you because it’s the same answer — we’re always interested, always looking, highly selective.

“And we don’t need them to make our numbers.”

J. Michael Schlotman, senior vice president and chief financial officer, added, “We’re not opposed to [acquisitions], but we’re not going to change the metrics we look at and stretch to do something because of the current environment. If it meets our metrics, we would certainly look at. If it doesn’t, we won’t.”

One industry analyst, who asked not to be quoted by name, said Kroger would probably be willing to make a sizeable acquisition if the right opportunity and circumstances presented themselves.

“The company has said it is always looking but hasn’t seen anything attractive,” the analyst pointed out. “Kroger is very picky — it’s made it clear it doesn’t want to take on anyone else’s problems or have to turn around anyone else’s assets in a new market.

“But if it were looking in a new market, it would want a company with a good market share. So if Jewel were available at the right price, Kroger would probably be interested.

“Jewel is a great business but not right now, and that would affect the potential selling price. But that won’t stop Kroger from being seriously interested.”

Wolf also said that, “at a different valuation, it might make sense for Kroger to go after Jewel. For right now, even if Jewel were available, its current pricing levels do not make sense for Kroger’s pricing strategy.”

According to the unnamed analyst, “If you were a betting person, you probably wouldn’t want to bet on Kroger making a major acquisition. Too many things have to fall into line for the company to decide acquisition is the way to grow. But with the right combination of events, it’s possible that it could happen.”

What Kroger is interested in are in-market acquisitions, such as its 2007 purchases from Supervalu of 18 units of Scott’s Food & Pharmacy, Fort Wayne, Ind., and 20 Farmer Jack units from A&P in Detroit.

Chuck Cerankosky, an analyst with Northcoast Research, Cleveland, said Kroger has restricted itself to such in-market deals in recent years — “buying select pieces of busted chains in markets in which it already operates.

“It’s hard to say that constitutes a growth strategy because it’s really more opportunistic and allows Kroger to buy as little as a single store,” Cerankosky said. “In terms of acquiring a larger entity that would add meaningfully to sales, that’s a low probability for Kroger. Maybe that would change if the economy gets a little better, which might help Kroger see how potential synergies might benefit the entire corporation.”

What could change Kroger’s strategy, Wolf suggested, might be lower selling prices, which would enable Kroger to balance the price it pays with the cost of making the necessary adjustments in shelf pricing.

“If the price were right, Kroger would more likely be interested in acquiring a business that was 3% or 4% higher on shelf prices, where it could bring the selling price down and justify the cost of price investments more easily,” he explained.

According to Neil Currie, an industry specialist, Kroger believes there are a lot of in-market opportunities for smaller, add-on acquisitions.

Further, as a multi-format operator, Kroger has the option to make acquisitions outside of mainstream supermarkets, Currie added. “For example, it could look at small-store formats. And I thought it might have taken a look at BJ’s Wholesale Clubs before those stores went private.”