NEW KROGER LIKELY TO SEEK ALTERNATIVE STRATEGIES

ELLIOT ZWIEBACH

CINCINNATI -- Kroger Co. here is likely to move in a number of directions -- including experimenting with alternate formats in different markets, adding fine jewelry sections and doing more outsourcing -- as it begins to implement its post-merger strategies, securities analysts told SN.

As reported, Kroger completed its merger with Fred Meyer, Inc., Portland, Ore., late last month.

Kroger's first order of business is "to execute the assimilation process without any missteps," Chuck Cerankosky, a securities analyst with McDonald & Co., Cleveland, said. "Fred Meyer is a very big acquisition, which itself still has a fair number of moving parts in transition, which Kroger certainly understands.

"So Kroger doesn't want to institute any rapid changes that could create mayhem. It wants things to come together nicely, so it must proceed carefully, under the right time constraints, and not make integration a distraction to the people running the business."

According to Mark Husson, an analyst with Merrill Lynch, New York, a significant part of the integration process will involve combining the Phoenix operations of Smith's Food & Drug Centers with Fry's Food Stores, under the Fry's banner, "which should be fairly simple." Once the basic blocking and tackling of integration has been completed, analysts said, Kroger's opportunities include the following:

Experimenting with different formats. "Down the road Kroger could move the Fred Meyer-style multidepartment stores into traditional Kroger marketing areas," Jonathan Ziegler, a San Franciso-based analyst with Salomon Smith Barney, New York, said.

Expanding Fred Meyer's jewelry business. With Fred Meyer operating 381 fine jewelry stores, Kroger could trade on its expertise to add jewelry to some Kroger stores, Ziegler said, possibly at units of Smith's, which are larger than most other stores it operates.

Expanding the use of outsourcing. Kroger is already outsourcing merchandise for more than half its distribution centers, Giblen pointed out, "and that holds some promise for Fred Meyer, which has had a lot of past labor problems."

Broadening the test of self-scanning checkouts. "Kroger is jumping up and down with joy about the testing it's done of self-scan checkouts for the express lane," Cerankosky said. "Kroger feels it's a major customer convenience and a big labor saver, and Fred Meyer has already begun to install a few self-scan checkouts at some Smith's stores since the merger agreement was disclosed last November."

Exchanging best practices. "Kroger has always managed to work with vendors to lower its inventory investment for each dollar of sales, based on logistics, handling and deliveries and perhaps more cross docking, and it's become extremely efficient," Ziegler said.

Improving buying practices. "More centralized buying for a massive business is one of Kroger's long-term goals," Husson said.

According to Cerankosky, Kroger will be able to "do a better job capturing regional deals with its stores spread all over the country. For example, there could be a hot deal in Atlanta that's worth sourcing, even if it means merchandise has to be shipped all the way to Portland."

Improving logistics. Cerankosky said Kroger will add its expertise in logistics management to the Fred Meyer organization, "which should allow Fred Meyer to skip a couple of generations of distribution center rationalization, going right to the Kroger model of divisional and upstream warehouses."

Expanding private label. Ziegler said he expects Kroger to introduce its homogeneous, single-label private-brand program companywide to replace the three-tier program Fred Meyer has been using.