Kroger CEO: Harris Teeter will have a big say in operations after acquisition
07/09/2013 7:28 AM
07/16/2013 5:24 PM
The chief executive of The Kroger Co. says Harris Teeter will retain a big say in how it runs its business following Kroger’s $2.4 billion acquisition of the Matthews-based grocer, which the companies announced Tuesday.
Kroger CEO Dave Dillon told the Observer he plans to give Harris Teeter plenty of autonomy and to keep the company’s name and culture intact. Kroger plans to maintain the company’s local headquarters and operate the grocer as a subsidiary.
“We’re not going to come in and change these stores into something people won’t recognize,” Dillon said. “These are going to be Harris Teeter stores and they’re going to stay Harris Teeter stores.”
But the announcement creates uncertainty for the 550 employees at Harris Teeter Supermarkets’ headquarters, and for thousands of workers at the grocer’s dozens of area stores.
Dillon didn’t rule out the possibility that jobs could be eliminated or transferred to Kroger’s Cincinnati headquarters. Some functions, such as technology and advertising planning, could benefit from centralization, he said. But Dillon said it’s too early to make those decisions and that the company will rely on recommendations from local managers.
“We frankly don’t know until we have had the conversations with the divisions and included them,” Dillon said. “Whether or not we would do those things in Harris Teeter or not would be in very large part up to the opinion of the leadership at Harris Teeter.”
Kroger executives said they expect to save $40 million to $50 million annually with the combined company over the coming years.
The sale ends local control of Charlotte’s No. 1 grocer by market share, founded in the 1930s as two separate stores – one Harris, one Teeter. The company says an early Harris store that opened in 1949 was innovative for the time, in offering air conditioning and staying open until 9 on Friday nights.
If Kroger successfully closes the deal, Harris Teeter’s $4.5 billion worth of annual sales will propel Kroger into the rarefied company of $100-billion businesses, joining only 21 such publicly traded firms in the U.S. The combined grocery chain would operate 2,631 supermarkets and employ 368,300 workers in 34 states from coast to coast.
Founded in 1883, Kroger is the second-largest food retailer in North America by sales, behind only Walmart. Harris Teeter is the 19th largest, according to data from Bloomberg.
Kroger plans to pay $49.38 a share in cash for Harris Teeter, a total of $2.44 billion, financed with debt. The company would also assume Harris Teeter’s $100 million worth of outstanding debt. The purchase price is only 2 percent higher than Monday’s closing Harris Teeter stock price, but it represents a 34 percent premium to the Matthews grocer’s stock price when reports of a possible sale first surfaced in January.
The companies have little overlap in their territories, and the Raleigh-Durham area is the only place in North Carolina where both have stores. Kroger executives said they don’t plan to close any locations after the acquisition.
Kroger didn’t give a timeframe for when the deal might close. It is subject to approval by regulators and Harris Teeter shareholders.
Some customers said they’re worried Harris Teeter could change, or were disappointed that a locally headquartered fixture is being sold.
Harris Teeter’s Facebook page was besieged with about 1,500 comments Tuesday, many from shoppers who said they hoped Kroger won’t change the company.
“May the ownership change be invisible,” Denny Conroy posted.
“I’m sorry to see that a local business is no longer local,” said Linda Weisbruch, 64, outside the Harris Teeter on East Boulevard. “It’s just a shame.”
Putting together the deal
As late as Monday night, Harris Teeter was still negotiating the sale with more than one interested party, a person familiar with the matter told the Observer.
The sale capped months of speculation about who might buy Harris Teeter, since the company said in February that it had retained J.P. Morgan Securities and was exploring a sale. The grocer first hired J.P. Morgan in November after receiving queries from potential buyers, the person said.
Kroger said Tuesday that buying Harris Teeter will help boost its presence in the Southeast and mid-Atlantic, where Kroger has relatively few stores. Harris Teeter will become a subsidiary of a much larger company with greater buying leverage.
Harris Teeter had interest from several buyers, including private equity firms. The company’s management did not think it had to sell and evaluated bids against how the company could have done on its own, the source said.
As for the deal’s price, the company reached the conclusion that its stock could hit $50 per share in the future as a stand-alone chain but that in the short term it would likely fall without a deal because its shares had been trading higher on the prospects of an acquisition, the person said.
Both Kroger’s and Harris Teeter’s boards of directors voted unanimously to approve the acquisition Monday night. Keeping the Harris Teeter name and headquarters was not a sticking point because Kroger liked the brand and the way the stores were run, according to the source.
Dillon, the Kroger CEO, said he’s known Harris Teeter CEO Thomas Dickson and president Fred Morganthall for years and sees Morganthall several times a year at the Food Marketing Institute, where both are on the board. When he heard Harris Teeter was on the market, Dillon was immediately interested.
“We said ‘you know, we know them real well. Let’s think about this,’” Dillon said. Kroger officials have visited Harris Teeter stores multiple times in recent months to check them out, executives said Tuesday.
Jason DeRise, an analyst with UBS Investment Research, said he expects other grocers might make a rival bid for Harris Teeter.
“Publix and Ahold (owner of Giant supermarkets) will likely need to consider a bid for strategic purposes because Kroger is known to compete on price,” he wrote in a note to clients Tuesday.
Dillon said that could happen. “I’m not really concerned about it. It’s certainly always a possibility,” he said. “I try to focus on our own game.”
Changing grocery market
Competition from low-cost grocers and other upscale chains such as Florida-based Publix Super Markets influenced Harris Teeter’s decision to sell.
“We face a very difficult competitive environment, especially from price discounters such as Walmart, Aldi and Food Lion,” Morganthall wrote in a message to Harris Teeter employees that was obtained by the Observer. “The need to roll out new technology to service the customers grows with each passing year, which requires a great deal of financial investment. To compete effectively size and scale do matter.”
Harris Teeter executives declined a request to talk about the deal on Tuesday.
“Unfortunately, we are not doing interviews,” spokeswoman Danna Jones said via email.
Harris Teeter had 23.7 percent of the Charlotte market in 2012, overtaking Walmart to regain the No. 1 spot, according to data from Chain Store Guide. Walmart had 20.4 percent, and Food Lion was third, with 17.4 percent. And with almost two-thirds of its stores in North Carolina, Harris Teeter is one of the state’s largest grocers.
But a host of changes and new competitors have swept into Charlotte in recent years, putting more pressure on Harris Teeter. Walmart has added Supercenters and a new, smaller-format grocery store meant specifically to compete with traditional supermarkets. Target has greatly expanded its grocery options, and Whole Foods opened its first Charlotte store, in the SouthPark area.
Publix, known as a fierce competitor, has also begun moving into Charlotte. The company is building two stores, in Ballantyne and South End, and opening a Charlotte division headquarters off West Tyvola Road. Company officials have said the chain will aggressively expand in Charlotte, targeting many of the same customers as Harris Teeter.
Harris Teeter has been renovating and rebuilding its prominent Charlotte stores, such as those in Plaza Midwood and Queens and Providence roads. The company also swapped local stores with Lowes Foods last year, giving Harris Teeter more Charlotte stores and effectively removing Lowes from the local market.
Roger Beahm, executive director of the Wake Forest School of Business Center for Retail Innovation, said Publix’s advance into North Carolina made a sale of Harris Teeter – which is significantly smaller than Publix – increasingly likely.
“They can’t just sit back on the sidelines and let Publix take (market) share,” he said. “That’s going to cost them. With the backing of a parent like Kroger, it gives them a lot of strength and resources.”
Kroger’s bigger size could also mean savings for Harris Teeter in areas such as private label grocery purchases.
“They’re buying private label for 212 stores, and we’re buying for 2,400 stores,” Kroger chief financial officer Mike Schlotman said Tuesday.
But Kroger was rarely mentioned as a company that might buy Harris Teeter, even though executives said earlier this year they were looking for acquisitions. Tuesday, Schlotman congratulated both companies and their advisers on the lack of leaks.
“There weren’t many rumors out there,” he said. “I want to applaud everyone who’s been involved with this for keeping it quiet.”
History of acquisitions
Kroger isn’t brand new to the Charlotte market. The company had stores in the city until 1988. That year, Kroger sold its 15 Charlotte-area stores to Bi-Lo as part of a $34 million deal in which Kroger also sold its Charleston stores.
And this isn’t the first time Kroger and Harris Teeter have done a deal. In 1999, they swapped stores to fortify their respective markets in western Virginia and the Triad. Harris Teeter got 10 Kroger stores in Winston-Salem, Greensboro, High Point and Kernersville, while giving Kroger 11 stores in western Virginia.
Unlike Harris Teeter, which grew mostly organically, Kroger has a history of big acquisitions. Dillon himself is the great-grandson of the founder of the Dillons grocery chain, with which Kroger merged in 1983.
Kroger’s biggest acquisition was the 1998 deal to buy the Fred Meyer chain in a $13-billion deal. The company now runs supermarkets and convenience stores under two dozen different names, including City Market, Dillons, Jay C, Food 4 Less, Fry’s, King Soopers, QFC, Ralphs and Smith’s.
Beahm, of Wake Forest, said Kroger has generally done a good job of preserving the differences at its supermarket brands, or “banners,” as they’re known in the industry.
“Kroger’s done a great job of maintaining the culture within those regional chains,” he said. “I think they’ll continue to do that with Harris Teeter.”
Job cuts can occur, however. In 2000, Kroger laid off almost 100 employees – mostly in accounting and information services – at Fred Meyer’s headquarters in Portland, Ore., as it wrapped up that acquisition, according to news accounts at the time.
A securities filing Tuesday shows that Dickson and other top Harris Teeter executives are eligible for a bonus equal to 35 percent of their base salary – $262,500 in Dickson’s case – when the merger closes. If they leave the company or are fired after the merger, they stand to receive millions of dollars worth of “change in control” payments. For Dickson, those payments would total $15.6 million.
Dillon said Harris Teeter’s top leaders will stay on with the combined company, at least for a while.
“We don’t have some management team ready to swoop in and run this instead,” he said. Individual executives will decide how long they stay, Dillon said.
Meanwhile, customers such as Dana Bailey, 39, were wondering Tuesday how their favorite store might be different after the sale.
“I wonder if Kroger is going to change anything,” Bailey said, standing outside of the company’s Morrocroft store. “When you think of Charlotte, you think of Harris Teeter.” Observer staff writers Steve Lyttle, Rick Rothacker, John Arwood, Ronnie Glassberg, Andrew Dunn, Dan Burley and April Bethea, and researcher Maria David contributed.
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