GROWTH EXPECTED AFTER KROGER/MEYER MERGER

DAVID GHITELMAN

Kroger Co., Cincinnati, said it remains on target to realize $380 million in synergies from its merger with Fred Meyer, Inc., Portland, Ore., a deal that closed last May.

"We are going to achieve the responsiveness of decentralization combined with economies of scale," Joseph A. Pichler, Kroger chairman and chief executive officer, said at Donaldson, Lufkin & Jenrette's Annual Food & Drug Retailing Conference.

He also said Kroger expects to see a 16% to 18% annual growth in earnings per share over the next three years. "No additional acquisitions are required to achieve these goals," Pichler said.

Instead, he said Kroger intends to grow gradually by expanding its presence in its current markets, all the while keeping a very close eye on expenses.

"Most of our growth will be in existing markets," said Pichler. "That allows us to leverage costs."

As for cutting costs, he said the company, which fills 100 million prescriptions a year, was able to save $600,000 annually by changing the vials in which it packages medicine.

He also said the company was saving $2 million by selling Fred Meyer kitchen gadgets in all its stores, instead of going to outside suppliers to stock Kroger-bannered supermarkets.

The money Kroger saves, Pichler said, will help it retire debt. His goal, he added, is to reduce debt to twice the annual cash flow. "We will use free cash flow to reduce debt," he said. "This is a skill we possess."

Pichler said he did not expect the competitive environment to be different this year: "It'll be the same as it was in the last five years -- no better, no worse."

But he pointed out that Kroger's stores have been able to "withstand the entry of supercenters" in their markets.

"Within two to three years, sometimes four years, sales return to presupercenter levels," he said.

He attributed this survival rate to the company's basic format. "Our neighborhood locations save time and travel," Pichler said. "They make it easy to shop." He also cited Kroger's wide variety of items as well as its "world-class perishables."

W. Rodney McMullen, Kroger executive vice president and chief financial officer, told the conference "all capital investments must earn more than 11% to 13%," a figure that varies according to the project's risk. Once begun, all capital projects are subject to a quarterly re-analysis to ensure they meet these estimates.

He also said the company evaluates every merger opportunity the way it analyzes capital projects. "We ask ourselves, 'Can we add value to shareholder investment?"'

Also tied to shareholder results is a new incentive bonus system created last year for managers. The bonus does not come into effect until the company reaches 16% to 18% growth in earnings per share.