Harris Teeter to be acquired by Kroger in $2.5 billion deal

Kroger Co.'s planned acquisition of Harris Teeter Supermarkets Inc. will allow it to capitalize on Harris Teeter's growing presence in the Baltimore-Washington market, but consumers will see few, if any, changes in existing stores.

Kroger, the biggest U.S. supermarket operator, said Tuesday it would buy the Charlotte, N.C.,-based regional chain in a $2.5 billion deal that will raise its store count in the Southeast and Mid-Atlantic.

Regional supermarkets like Harris Teeter are struggling to maintain market share against mass merchandisers such as Costco and Walmart, leading to consolidation in the industry. Meanwhile, chains such as Whole Foods and Trader Joe's are nibbling at the top end.

"There are just more stores trying to do the same thing," said Scott Mushkin, a senior retail analyst with Wolfe Research.

Still, Harris Teeter has been expanding with large, upscale stores in Maryland, building eight since entering the market in 2010. The chain has locations in Columbia, Fulton and Ellicott City in Howard County and in Locust Point in Baltimore. A second city location will open this fall, anchoring The Shops at Canton Crossing, one of Baltimore's largest new retail developments. And developers are courting Harris Teeter for proposed projects in Towson and Annapolis.

The chain has also moved into Washington's Maryland suburbs, with stores in Bethesda, Potomac and Germantown.

"The Baltimore/D.C. area is an exciting and fast-growing area," said Lynn Marmer, group vice president for Cincinnati-based Kroger.

The combined chains will operate 2,631 supermarkets and employ more than 368,000 workers in 34 states and the District of Columbia. Harris Teeter will operate as a Kroger subsidiary, maintaining its brand, stores and management, the companies said. There are no plans to close stores or lay off workers.

"The plans are to operate the Harris Teeter stores as Harris Teeter," Marmer said, as Kroger operates other brands elsewhere, such as Ralphs in Southern California, Fry's in Arizona and Smith's in Utah. "We operate under different banners in different parts of the country, and we wouldn't see this as being any different than that."

Kroger does not operate any stores in Maryland. Harris Teeter plans to continue its new store growth plan, said spokeswoman Danna Jones, but she declined to elaborate about what that might mean for the Baltimore area.

Harris Teeter, with sales of about $4.5 billion last year, runs 212 supermarkets from Florida to Delaware. It operates in affluent vacation destinations, university communities and markets where populations are growing faster than the U.S. average.

"Buying up 200 some stores through Harris Teeter gives [Kroger] a large foothold into a lot of markets that they're in with just one or two stores, or in some cases into brand new markets," said Jeremy Diamond, director of the Diamond Marketing Group, a Baltimore food consulting, marketing and advisory brokerage.

It remains to be seen whether Kroger ultimately retains the Harris Teeter name, Diamond said.

"It doesn't always work that way," he said, explaining that switching over all its banners to one brand would make marketing more cost-effective.

The acquisition should help Harris Teeter, which has faced stiff regional competition in the Southeast from Walmart and Publix, said David J. Livingston, a supermarket consultant based in Wisconsin.

"With economies of scale, being absorbed by Kroger is best for their long-term survival," said Livingston, who expects Kroger to keep the Harris Teeter name and consumers to see few, if any, changes.

Now "the smaller regional chains are going to have to be the ones having to compete with the size of Kroger," Diamond said.

The Harris Teeter deal, which includes the assumption of $100 million of debt, is Kroger's second-largest acquisition; its largest was its $13.9 billion purchase of Fred Meyer Inc. in 1999. Kroger said it would finance the deal with debt.

It will be the second-biggest deal in the U.S. grocery industry this year. Supervalu Inc. struck a $3.3 billion deal in January to reduce its debt by selling five of its supermarket chains to an investor group led by Cerberus Capital Management.

The deal is somewhat "out of character" for Kroger, which for 10 years or so has been "cherry-picking stores vacated by downsizing or exiting competitors," said Walter Stackow, an analyst with Manning & Napier.

Kroger's offer of $49.38 per share in cash represents a premium of 1.8 percent to Harris Teeter's Monday close. The stock has run up 31 percent since Jan. 18, when the first reports emerged that the company was up for sale.

Shares of both companies rose on the news, with Harris Teeter shares up 1.5 percent to close at $49.26 on Tuesday. Kroger shares rose 2.7 percent to $37.15.

Reuters contributed to this article.

lorraine.mirabella@baltsun.com

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