“Aggressive growth plans” are not words that have been uttered by very many traditional supermarket operators in the last few years, but that is the way David Dillon, chairman and chief executive officer of Kroger Co., described his company’s outlook following the agreement last week to acquire Harris Teeter Supermarkets.
“Our strong financial performance and continued market share gains give us confidence that we are taking the right steps to meet the challenges of today’s competitive marketplace,” Dillon told SN in an email correspondence after the $2.5 billion acquisition was announced. “Expanding into new markets is a significant opportunity for Kroger, and our merger agreement with Harris Teeter is consistent with our aggressive new growth plans.
“We are truly excited about all that lies ahead for Kroger this year and beyond. We will continue to focus on our ‘Four Keys’ — our people, products, prices and the shopping experience — to overcome challenges and drive growth.”
Dillon’s tenure as CEO has been marked by steady sales growth and a handful of smaller acquisitions, but the company has shied away from large-scale deals and had made no secret about its cautious approach to mergers and acquisitions.
Although Kroger was repeatedly rumored during the past several years to have been a suitor for various other acquisition candidates — from Dominick’s to Albertsons to Roundy’s — it was Harris Teeter that finally caught Kroger’s highly selective attention.
“Our agreement with Harris Teeter fits all of the criteria we look for in targeted mergers,” Dillon said. “Our disciplined and successful merger history is based on joining with companies with an established, respected brand in their markets. And Harris Teeter’s brand is exceptional.”
He added that Kroger’s expansion plans also include entering new markets on its own.
Jose Tamez, managing partner in the Denver office of Austin-Michael, said Dillon and Harris Teeter President Fred Morganthall have known each other for a long time.
“When you look at Harris Teeter and Kroger you see an association that goes back some time, both transactional and relational,” Tamez said. “I believe David Dillon has always been a great admirer of Harris Teeter and of Fred Morganthall in particular.
“Kroger, and David Dillon’s handling of previous acquisitions, makes them the perfect partner to leverage Harris Teeter’s past successes, maintain brand strength and keep them on a continued growth pattern.”
Neil Stern, managing partner at McMillanDoolittle, Chicago, agreed that the two companies have compatible management, and that might have helped seal the deal.
“When you look at David Dillon and his leadership style, and the leadership style of Fred Morganthall and Harris Teeter, it is a very good fit,” he told SN. “And, I think part of how deals get done is that the company seeking to sell itself asks, ‘Is the culture right? How are you going to run the company? What are you looking for?’
“I think maybe David Dillon was able to answer some of those questions for Harris Teeter better than other suitors were.”
He also pointed out that Dillon himself came to Kroger though the 1983 acquisition of his family’s supermarket chain, Wichita, Kan.-based Dillon Cos. Twenty years later David Dillon was named CEO of the parent company.
“The fact that he is running the company right now speaks volumes about David, and also speaks volumes about the way Kroger has historically looked at acquisitions,” said Stern.
This year Kroger’s sales volume — combined with the $4.5 billion from Harris Teeter — could pass the $100 billion mark, which would be approximately double the sales Kroger recorded in Dillon’s first year as CEO in 2003.
The acquisition further solidifies Kroger’s hold on the No. 1 spot among traditional supermarket operators in the U.S., where it had long been an example for the industry with its competitive pricing and its “Customer 1st” strategy.
“The Kroger team delivered another outstanding year in 2012 through their inspired, customer-first performance,” Dillon said. “As a result, we have now achieved an industry-leading 38 consecutive quarters of positive identical sales growth. We also achieved record earnings per share for the year, so it is clear that our Customer 1st strategy is working for both shareholders and customers.”
He added that he was also “especially proud” of the community service Kroger and its partners have provided — a company-record $250 million in 2012 —through hunger relief work and other programs.
Dillon also said Kroger sees opportunities to expand its digital capabilities.
“It is no secret that digital is the fastest-growing channel to connect with customers, so we are expanding our leadership in personalization in areas such as our mobile app,” he said. “Customers today can sort through our digital coupons by personal relevance, refill pharmacy prescriptions and view their fuel savings all through our phone app. Our focus on the customer will continue to be the cornerstone of everything we do, and it guides our technology innovations.”
In fact one of the areas where Kroger said it hopes to learn from Harris Teeter is in its “click and collect” strategy for online ordering.
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