With Harris Teeter Deal, Kroger Gains Ground

The largest supermarket chain in the country is dwarfed in grocery sales by Walmart.

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Kroger announced this week that it would buy grocery store chain Harris Teeter for roughly $2.5 billion. That move boosts the grocery giant in a few ways: it gives it 212 more stores in the South and it could help the company reach out to more affluent consumers, for example. It could also bolster Kroger's position in a marketplace that data show to be increasingly taken over by big-box behemoths.

Since 2000, supercenters and warehouse clubs have more than doubled their market share among grocery retailers, according to recent data from the USDA. While these stores sold just 7.1 percent of groceries as of 2000, they sold 16 percent as of 2011. Much of that growth has come at the expense of traditional grocers, whose market share has fallen from 76.8 percent of sales to 69.9 percent.

(USDA/Economic Research Service)

Though supercenters still account for a minority of grocery sales, they make up two of the top three grocery sellers in the country: Walmart, aside from being the top retailer in the world, is also a juggernaut when it comes to grocery sales in the U.S., with $274 billion in grocery sales last year, according to industry publication Progressive Grocer. Target, at No. 3, sold nearly $72 billion in its stores and supercenters.

[READ: Kroger to Buy Harris Teeter For $2.44B]

Kroger is sandwiched between those two chains, with nearly $87 billion in annual sales. That makes it by far the top traditional grocer in the nation, but also means it is dwarfed by Walmart.

Because of the growth of supercenter grocery sales, supermarket chains have been working to expand their offerings to stay competitive.

"In response to the sales inroads made by nontraditional retailers, traditional grocers are expanding the number and types of product offerings, designing new store formats and using innovative in-store technologies," wrote the USDA in a March report on grocery industry trends. The department noted that Kroger, along with Safeway and Giant Eagle, has added gasoline pumps to some of its stores and that many stores have been offering organic and natural options in response to customer demand.

 

Kroger has been working on expanding both its stores and reach. Adding Harris Teeter stores may not initially help Kroger to gain much ground on Walmart – Harris Teeter only took in $4.5 billion in sales last year – but Harris Teeter may help Kroger to improve its offerings in the area of healthy foods. CEO Kevin Dillon told the NEW YORK TIMES this week, "[Harris Teeter has] a stronger fresh reputation, and by 'fresh,' I'm really referring to all the perishable departments, than some of the Kroger operations. ... Our intent is to learn from them, 'How do they get that reputation?'"

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That could mean higher-quality food at Kroger stores, particularly those in the Southeast, where Harris Teeter's 212 stores are located, says Jeffrey Cohen, grocery industry analyst at market research firm IBISWorld.

He adds, however, that while other grocery stores may also be trying to fend off the big-box onslaught, that doesn't necessarily mean more mergers in coming years. According to USDA data, mergers and acquisitions contributed strongly to the growth of top grocery stores in the 1990s, but have tapered off since then.

"Not all other grocery stores really have the financial resources to do what Kroger is currently doing," says Cohen. "Other grocery stores that aren't as large and have a difficult time competing with Walmart won't necessarily be able to engage in these acquisitions as time goes on."

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