'Major Observations' on the Kroger/HT Deal

In the social media-fueled world in which we live, it was all to be expected that the Kroger-Harris Teeter deal – as one of the single-biggest stories to unfold in the retail food world in recent years – would spark a frenzy of various reactions from trade observers, financial analysts, business pundits and consumers across untold multimedia outlets, the volume of which is nearing infinity.

To be sure, the endless stream of chatter swirling around the Kroger/Harris Teeter deal from all sides of the aisles shows no signs of abatement for the foreseeable future, and has splintered into micro-discussions far more extensive than can be covered in a third-day commentary here.

But after having had a chance to digest the onslaught of wildly divergent interpretations making their way across the wires about the momentous deal – which if all goes as planned, will represent the fourth-largest acquisition of a North American food retailer in a decade – a handful of items bubble to the top of the list of things I consider to be most significant and well worth watching in the days ahead, as follows:

• In the scheme of potential suitors, Harris Teeter -- which we honored as our Retailer of the Year last October – made a very wise choice. Over the course of my years covering the retail food industry, I’ve gained tremendous respect for The Kroger Co., foremost to which is its capable, well-rounded corporate and regional leadership teams, at the helm of which are two of the most grounded, talented and bright retail execs in the business, David Dillon, chairman and CEO and Rodney McMullen, president and COO. Kroger’s superb performance in recent years is a direct reflection of the duo’s empowered trust and lead-by-example style, which has enabled the Cincinnati-based supermarket stalwart to hit 38 consecutive quarters of same-store sales growth and on par to surpass $100 billion in sales. Accordingly, I believe Harris Teeter’s associates, stores and customers will be in very good of hands.

• Given its solid history integrating its past merger partners, I fully expect to see Kroger’s acquisition record with Harris Teeter exceed the success it’s had with any prior similar deals in recent years. My belief is tied to the nation's top-ranked grocer's stated vision for its next chapter of growth to center on further empowering its sizable associate base to view their careers through a long-term lens as they would at a private company, to deliver the best possible shopping experience possible.

• Contrary to nearly every Wall Street pundits’ views that I’ve read, heard or seen in the past few days, I believe the deal is far less about playing catch-up with Walmart’s superstore penetration, and far more about elevating Kroger’s own brand. In the context of this conversation, in fact, Walmart is secondary when considering the momentum the Cincinnati-based retailer has gained by relentlessly nurturing its alliance with dunnhumby, which continues to further fuel its powerful promotional and loyalty programs that are in turn steadily solidifying its price perception among consumers.

• Let there be no mistake, however: A deal of this size and scope will require considerable complex, intricate work on the parts of the retailers’ respective troops when it comes time to assimilate store operations, economies of scale, purchasing power, information systems, loyalty programs and customer insights, among others, to minimize shopper disruptions and sustain local relevance.

As Anthony Bruce, CEO of Applied Predictive Technologies, shared with me in an e-mail exchange earlier this week, “Kroger and Harris Teeter are both known for continually introducing innovations to drive growth. The challenge going forward is that some of the programs that may have been successful in one banner may not have the same impact on the other. For example, what worked in Kroger stores may work well (or not at all) at Harris Teeter, given differences in geographies, customers and brand positioning.” Post-merger, Bruce said, it will be critical “to systematically test new ideas prior to broad rollout to de-risk innovation and allow for optimal targeting and tailoring.”

• As momentarily surprised as I was after first learning of the big news, it was hardly shocking, given our recent prognostication of the same in the context of HT’s most viable acquisition candidates, and Kroger’s planned expansion strategy to increase square footage and store penetration in existing and new markets to drive sales and further refine its market-specific store formats.

• There is clear symbiosis with the Kroger-Harris Teeter alliance, including both being well-run companies with generally strong reputations in their respective markets; sound customer service game plans; capable management teams, many of whom are expected to remain in place after the deal closes; and a great base of stores in contiguous operating territories where combined infrastructures can be leveraged.

• While many associates and customers of both companies have been buzzing about what comes next for their local stores, Kroger said it has no plans to close any locations, at least until after the deal closes, after site-by-site analyses. However, while it’s logical to speculate that at least some stores will potentially close in overlapping markets (i.e., Raleigh, N.C., Charlottesville and Hampton Roads, Va., and Nashville, Tenn.), no job losses or layoffs are anticipated, as associates of both HT and Kroger will continue to have employment opportunities with both companies.

Suffice to say, there will be much more to report on about the Kroger/HT merger in the weeks ahead (including a recent development here), but in the interim, the news is but one more affirmation of a year that's trending to be as riveting in the U.S. supermarekt business as any in recent memory.

We welcome your viewpoints and encourage you to keep them coming.

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