Kroger Pays Premium For Harris Teeter Acquisition
At roughly $11.5 million per store and a very healthy multiple of 7.9 percent times earnings, Kroger certainly paid a premium for one of the best run regional chains in the country. For Harris Teeter, which announced last January that it was “exploring” its options, there was little doubt that the timing was ideal to sell – with its operating performance at its peak and a high-level competitor (Publix) with a similar operating style about to establish a beachhead in its Charlotte backyard.
As it turns out, this is a deal that will be good for both parties. For Kroger, the largest pure play supermarket chain in the country (and the best run in its peer group), it marks the first major acquisition made by the Cincinnati based retailer since its $13 billion deal to acquire Fred Meyer in 1999. While there is some store overlap with Harris Teeter in the Raleigh, NC market, in Nashville and in the Charlottesville and Tidewater areas of Virginia, don’t expect too many FTC store conflict issues.
In addressing the financial analysts following the announcement of the proposed deal, Kroger CFO Mike Schlotman added: “This is one of those opportunities when you take a map and put dots on the map where my stores are and take that map and put dots where their stores are – it’s an amazingly great fit. Just like when we merged with Fred Meyer – that was a unique fit. And when you go back to 1983 when we merged with Dillon Stores, it was the exact same thing. I think this is very consistent with what we said we’d look for over time – a great management team, a customer-centric operating model, well-run stores and a contiguous geography where we can leverage a lot of infrastructure.”
At Harris Teeter, at least for the near term, president Fred Morganthall and executive VP Rood Antolock, the main cogs in a skilled and creative management team, will be staying on and that’s a very good thing. And Kroger’s decision to keep its newest prize as a separate operating entity and keeping the Harris Teeter banner in place is also good business. And while there ultimately will be an integration of synergies (Kroger said it can save $40-50 million over the next three to four years by utilizing the big chain’s scale), Kroger has proven it can maintain banner independence and identity as its done with Fry’s, King Soopers, Dillons, Fred Meyer and Ralph’s.
It will be several months before this deal closes and there is one interesting (but unlikely) scenario that could still rear its head. As part of the agreement, although Harris Teeter cannot solicit alternative bids, other companies may still come in with offers, Schlotman admitted during a follow-up conference call after the deal was announced early on July 9 (although there would be significant break-up fees that could affect both parties). This could potentially allow other interested parties such as Ahold and private equity companies Cerberus and Bain Capital to potentially enter or re-enter the derby.
Schlotman noted: “We are excited about entering new markets, which include vibrant and growing major urban centers such as Charlotte and Washington, DC, several other metropolitan areas in the Carolinas, and affluent vacation destinations and university communities. Harris Teeter operates in several markets with populations growing faster than the national average. We see a lot of opportunity to learn from one another, and many ways that our combination will benefit each organization. We plan to bring to Harris Teeter the things that Kroger does very well, including our purchasing power, information systems, and loyalty programs with the world-class customer insights firm dunnhumbyUSA. This merger extends Kroger’s footprint into new, growing markets. We also believe the entire Kroger organization will benefit from Harris Teeter’s expertise in operating urban, upscale stores, and gain insights behind their strong customer ratings on people, products and shopping experience. Interestingly, they operate an online ‘click and collect’ system, and we expect to gain insight from Harris Teeter as we continue to study and test this online strategy.”
The tentative agreement also poses some interesting scenarios going forward.
Part of Harris Teeter’s successful growth story over the past decade has been its entry in the Baltimore-Washington market where it now operates 35 stores (and has about a half-dozen new projects under development). Kroger, which used to compete in the DC market (it exited in the early 1960s) I believe would welcome a challenge against market leader Giant/Landover (Ahold USA). Since 2010 when another Ahold USA unit (Giant/Carlisle-Martin’s) acquired 25 Ukrop’s stores in Richmond, Kroger has handled that competitive threat very effectively.
And then there’s the union vs. non-union issue. Kroger’s stores nationally are overwhelmingly unionized (including all stores in the areas where Harris Teeter operates). Harris Teeter is a non-union company. When asked about that structural difference, Schlotman explained: “They (Harris Teeter) have done a great job of exciting their associates every day when they come to work with the package of benefits and pay that they enjoy. And we will certainly take their (Harris Teeter’s management team) guidance on how to maintain that excitement of their associates coming to work the way they always have.”
It’s a great fit for Kroger, which might have been at a financial disadvantage when potentially competing against Ahold. But in the end, they wanted it more and were willing to pay the price to acquire a stellar merchant with the store network and a customer image to help Kroger expand and build market share in new in new territory.
Super Minimum Wage, Bottle Taxes Part Of Ongoing Trend Of Poor Legislation
It’s has not yet been passed into law, but the Washington, DC council’s preliminary decision to require large non-union operators (and future operators) to pay a “living wage” is another example of how recent legislation in major cities has unfairly made retailers the prime target.
Whether it’s added tax money to bridge a budget shortfall or penalizing a segmented group because of its size or union affiliation, the takeaway is the same: these laws are unfair and prejudicial (and perhaps unconstitutional, if they were tested).
In the case of DC’s so-called living wage legislation (officially known as the Large Retailer Accountability Act), the DC Council voted 8 to 5 late last month to force a super minimum wage of $12.50 an hour – well above the District’s standard $8.50 minimum – on retailers reporting at least $1 billion in annual corporate revenue and operating in spaces of 75,000 square feet or larger. Those retailers affected would be required to comply within four years. A final vote is scheduled for this month.
The proposed legislation, which is being supported by organized labor, would not only affect stores already operating in our nation’s capital (Macy’s, Home Depot and the recently opened Costco), but would also apply to any new retailers that would fit the criteria (think Wal-Mart, which plans to build six stores in the District over the next several years, with three currently in development).
Ah, Wal-Mart. Nobody has been more critical of the Behemoth’s hypocritical corporate behavior over the past 15 years than me. But this has nothing to do with Wal-Mart’s report card as a corporate citizen. The fact is that the world’s largest retailer plans to make a significant investment in the city and open some of its stores in underserved area, bringing jobs and adding to DC’s tax base.
Add to that the fact that Giant and Safeway would be exempt from this potential law, and it gets back to the point of the sheer unfairness of creating legislation specifically targeting certain groups while exempting others.
What’s interesting about this case is that DC Mayor Vincent Gray was arguably the key individual in convincing Wal-Mart to entering the District in a major way. And Gray lobbied the boys from Bentonville aggressively to build a new store at the Skyland Town Center project near Gray’s home in Anacostia (Southeast DC). According to published reports, Gray has not yet decided if he will veto the Council’s vote.
At least Gray’s got some skin in the game and sharper business acumen than Baltimore’s Mayor Stephanie Rawlings-Blake, who successfully spearheaded a five cents per bottle tax in BaltimoreCity last July.
This targeted legislation is costing food retailers in Baltimore City millions of dollars of business as consumers opt to purchase their beverages in adjacent counties.
Whether it’s the proposed super minimum wage in DC, the Baltimore bottle tax, or legislation that narrowly failed to be passed into law in other cities (Philadelphia Mayor Michael Nutter’s attempt to pass a bottle tax two years ago or New York City Mayor Michael Bloomberg’s effort to limit soft drinks containers to 16 ounces), expect the hypocritical trend to continue because the companies that provide a vital tax foundation for cities to even function are also the easiest targets to pursue.
Sadly, it’s become the new American way of conducting business: biting the hand that feeds you.
‘Round the Trade
Kroger, which has had a great run on almost every measurable level for the past five years, continued its strong sales and earnings performance in its recently completed first quarter. The Cincinnati based chain increased overall sales 3.4 percent to $30 billion and earned $481 million for the period ended May 25. Additionally, identical store growth (excluding fuel) was a very healthy 3.3 percent. This marks the 38th consecutive quarter of positive ID sales for the chain, which spent $646 million in cap-ex in the period compared to $557 million in the first quarter of fiscal 2012. “Kroger achieved strong sales and record earnings per share for the quarter, and our customers’ positive view of us continues to improve,” said David Dillon, Kroger’s chairman and CEO. “This is because of our continued focus on the Customer 1st strategy. Our first quarter results give us the confidence to raise our guidance for the year.” Kroger also announced that it is restructuring its divisions in the south. The retailer has added new divisions in Nashville, TN and Louisville, KY. The new organizational structure replaces the old Mid-South division, which was also based in Louisville and, according to the company, the revamped structure will allow it to better focus on growth opportunities in Alabama, Kentucky, southern Illinois and Indiana. Rick Going has been named president of Kroger’s new Nashville division and Calvin Kaufman will head the new Louisville division…no wonder Smithfield Foods’ CEO Larry Pope was so happy about the recent announcement that the big pork processor had reached a deal to sell to China’s Shuanghui International. I’d be happy, too, if I knew I could receive more than $46 million in compensation, which could be Pope’s payout, according to an SEC filing last month. According to the filing, Pope could be eligible to receive $28 million in cash and an additional $18.6 million in equity…a related note about my earlier comments in this column about Cerberus Capital Management and how it is attempting to create positive change at one of its banners – Acme Markets – which for years was the leading grocery chain in the Philadelphia market but under Supervalu’s incredibly poor management has now slipped to the fourth position in the Delaware Valley. After three months of ownership Cerberus and its new local leadership in Malvern, PA, Acme have begun to make visceral changes to its operation. Beginning on June 21, the once-mighty chain unveiled a new advertising look and marketing plan featuring thousands of lower everyday prices and the elimination of the Acme SuperCard (the entire Albertsons national fleet of about 1,000 stores has discontinued loyalty card programs). Acme customers can still use their loyalty cards, which will provide benefits for some ancillary marketing and tie-in promotions, but not for the purpose of discounting items. After speaking with senior Acme officials just prior to the release of the new ad plan, it was clear that the division of New Albertsons, Inc. is really determined to plug the many holes that former owner Supervalu created in seven years of control. In fact, Acme division president Jim Perkins appears in Acme’s new circular pledging improved service, cleaner stores and better pricing. In a related letter to Acme’s vendor, Dennis Clark, VP-merchandising and marketing, also outlined several areas that the chain will focus on. Those include improved quality in the company’s “fresh” departments (Acme has been prioritizing upgrading its perishables conditions since the new management took over) and a “Fresh or it’s Free” guarantee. “Everyone has worked hard to make this day significant. We know we haven’t arrived but we are pleased with the progress we have made in a few short months. We need your support as we continue down the path of rebuilding Acme. I am convinced we are on the right course to drive sales together. I encourage you to visit an Acme near you and see the changes we have made,” Clark stated in his letter. During my discussion with those senior Acme officials, I emphasized that without significant capital investment, these other well intentioned and hopefully well executed plans can’t be a difference maker. Their response to me was that significant capital investment is coming, both in real estate and other infrastructure improvements. If that’s the case, then Acme has a fighting chance to reclaim some of the glory it enjoyed for much of the past 50 years…sadly, I have several obits to report this month. Bobby “Blue” Bland, one of the greatest R&B singers of all time, passed away late last month at the age of 83. While Bland may not have gained general popularity, his smooth as silk voice was regarded by his peers as one of the best vocal instruments ever. Two of his best songs became hits for other artists, “Further on Up the Road” (Eric Clapton) and “Turn on Your Love Light” (The Grateful Dead). Bland, whose career began in the early 1950s, was still touring up until a few months ago…joining the “Country Music Hall of Heaven” was single Slim Whitman. The 1950s country singer who encouraged a teenaged Elvin Presley when he made his professional debut in a concert headlined by Whitman. After fading from the limelight by the late 1970s, Whitman enjoyed a comeback of sorts when he sold millions of records via late-night infomercials. The success of those TV spots resulted in Whitman being abetted by “Tonight Show” host Johnny Carson, who good humoredly mocked Whitman’s schtick and held Slim Whitman lookalike contests. He was 90…we also learned of the sudden and untimely passing of James Gandolfini, who in my opinion was one of the great American actors of the past 25 years. Gandolfini passed away in Rome, Italy where he was to attend a film festival and the young age of 51. While the New Jersey born actor (and Rutgers alumnus) will forever be known as brooding mob boss Tony Soprano, you can better judge his greatness and versatility in a couple of supporting roles before he became an American icon. If you have the opportunity to rent “True Romance” (1993) and “Get Shorty” (1995), you’ll easily recognize the power and charisma he displayed. “He was a genius,” said Sopranos creator David Chase. “Anyone who saw him, even in the smallest of his performances, knows that. He is one of the greatest actors of this or any time. A great deal of that genius resided in those sad eyes.” …and lastly, one of our own, the great Lou Rosenthal has passed on at the age of 91. One of the funniest and most interesting men I’ve ever known, Lou joined us in 1986 after his retirement from Entenmann’s, bringing his many sales talents to our advertising team. He finally officially retired from Best-Met in 2011. With humor and wisdom, Lou managed to entertain us every day, regaling us with stories from his days growing up in the Catskills to previous jobs as a gas station owner in Florida to his experiences as a door-to-door salesman. A wonderful, genuine mensch, Lou will be missed.