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[7 comments]

Kroger buys Vitacost.com

July 3, 2014

Kroger, the largest operator of supermarket chains in the U.S., has announced a definitive agreement to purchase Vitacost.com, an e-tailer of healthy living products, for roughly $280 million.

Vitacost.com, according to a press release announcing the deal, has more than 2.3 million active customers supplied by distribution centers in Lexington, NC and Las Vegas. The company, which is number 89 on the Internet Retailer Top 500 list, also operates a customer service in Lexington.

"This merger is in line with our growth strategy to enter new markets and new channels, and — along with Harris Teeter's online order and pick up service — accelerates our efforts to provide customers with even more ways to shop," said Rodney McMullen, Kroger's chief executive officer, in a statement. "Vitacost.com's core focus on healthy living products is complementary to our fast-growing natural foods business, and we intend to grow Vitacost.com's strong position in the online nutrition market. At the same time, we will build on Vitacost.com's eCommerce platform by integrating it with our existing digital offerings to create exciting new levels of personalization and convenience for our customers."

Kroger is looking for the merger to provide impetus to its omni-channel strategy. The company presently offers a cloud-based shopping list online and through mobile apps and two divisions, King Soopers and Harris Teeter, have online ordering. King Soopers has a home delivery service while Teeter offers in-store pickup.

"Vitacost provides Kroger with an excellent vehicle to greatly expand sales of Kroger's successful private label natural/organic Simple Truth brand," Deutsche Bank analyst Karen Short said in a StreetInsider.com. "On the flipside, Kroger will leverage its relationship with dunnhumby to accelerate sales with the combined Kroger and Vitacost customer base."

Ms. Short said the acquisition made sense, in part, because she expects AmazonFresh to expand its presence, which could disrupt the U.S. grocery business. The acquisition of Vitacost will provide Kroger with a competitive advantage as it expands its online operations.

FINANCIALS:     [NYSE:KR] [ ]

Discussion Questions:

What is your assessment of Kroger's acquisition of Vitacost.com? What will the deal mean for Kroger's biggest competitors?

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Instant Poll:

What grade would you give Kroger for its deal to acquire Vitacost.com?

Comments:

Kroger is starting to feel the heat from AmazonFresh. Amazon is so far ahead of Kroger in e-commerce that the country's largest grocer needed to play catch up, thus the Vitacost.com purchase. At $280 million, this is not a costly acquisition for Kroger and will give it a leg up on other brick and mortar grocers.

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Max Goldberg, President, Max Goldberg & Associates

As noted in the article, this is another venture by Kroger into the omni-channel world. In reality the company needs to expand the King Soopers and/or the Harris Teeter online shopping models to the Kroger banner in order to have any real impact.

The combination of online shopping at Kroger, in conjunction with what it learns from the Dunnhumby analytics, would make Kroger even more of a force in the competitive market place. The key is to provide a real omni-channel experience, which is about customers not channels, sooner than later.

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Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University

This is a bold and very strategic move for one of the premier retailers in the country. I believe it will propel Kroger's online infrastructure forward, and leave many others in the rear view mirror.

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Dave Wendland, Vice President, Hamacher Resource Group

Kroger is smart to jump on the buy-it-don't-build-it bandwagon. Time's a wastin'. E-commerce capabilities are one thing but Kroger's Vitacost acquisition also brings a portfolio of health-focused owned and partnered brands, a robust online marketplace filled with unique items (that, thanks to the Harris Teeter get, can also be picked up in Kroger stores) and a highly-desirable user base. Kroger is uniquely poised to make the most of the data insights that come as part of the deal as well, given its years-long relationship with Dunnhumby. Mega win!

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Carol Spieckerman, President, newmarketbuilders

Remember, Kroger sells all product categories with a larger general merchandise mix than Target in its Fred Meyer Stores. I have never understood why there is no online sales presence for Fred Meyer.

This vitamin website purchase is interesting. They are putting their money where their mouth is regarding natural foods and this website, like Kroger, is very-price focused, so it is a fit in that regard. I assume this will also get Kroger's costs for vitamins down and enable the stores to expand their mix. This also lays more of a foundation for Kroger to develop a Sprouts-like format.

'storewanderer'

Smart move. Acquired at a modest price for a $100 billion company. Kroger is boldly taking on new competitors, but doing it with the advantage of having a captured host partner with experience in the online side of the business.

Based on the May Prosper Insights & Analytics Monthly Consumer Survey, when asked where they buy their Organic Products most often, Kroger(5.6%) trails Walmart (10.3%), Whole Foods (9.3%), and Trader Joe's (7.2%) shoppers. Not an insurmountable lead, but room certainly room for improvement. Kroger shoppers are more likely to buy the Generic / House Brand of Vitamins, Minerals & Supplements—8.3% of Kroger shoppers fall into this bucket, vs. 6.7% of Adults, 18+ carrying that brand preference. Should be useful for the Simple Truth brand.

Throw in the fact that King Soopers and Harris Teeter already have learnings from the online space, this is a positive investment, which should pay a positive ROI over the next 5 years.

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Roger Saunders, Managing Director, Prosper Business Development

It's a smart move. It aligns with its growing reputation in the natural/good-for-you space and its baby steps into e-com. Importantly, it gives Kroger access to Vitacost's talent and infrastructure. Pretty nimble move for a traditional grocer.

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Kelly Tackett, Research Director, Planet Retail

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