Why Kroger May Not Be Eyeing Whole Foods

Would Kroger want to buy a load of issues when their own organic brand is healthy and growing?

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Oct 10, 2016
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Whole Foods' (WFM, Financial) stock spiked up after rumors about a Kroger (KR, Financialacquisition started swirling in the market. Whole Foods has been going through a very difficult environment as the company has had to swim through a sea of bad news, such as price gouging and a recent warning letter from Food and Drug Administration after the regulatory body found "serious violations" during an inspection of the company's food preparation facility in Massachusetts.

One of the primary causes for the acquisition chatter is the sharp decline in Whole Foods' stock price, which has slipped by more than 50% from the 2013 peak of above $62 to the current below $30 levels. With market capitalization of under $10 billion, Whole Foods is a very good acquisition target.

Kroger is one of the fastest growing retail companies in the United States, with sales nearly doubling in the last ten years. Kroger’s stellar growth was actually a direct result of the company’s acquisition strategy. Kroger is a specialist buyer and focuses on buying successful regional brands. More often than not, it lets the brand continue under its original name.

So it's not really a surprise that Kroger’s name came up in the acquisition chatter. The problem is, Kroger already has a solid organic food business which is estimated to be worth $11 billion in sales last year, almost 10% of their overall sales.

With the U.S. running through the longest stretch of food deflation, grocers are going through a painful period, and the pain is expected to continue for some more time.

Economists and food analysts say the supermarket price declines could last at least through year-end. The drop comes as weaker demand from China is resetting commodities prices in everything from cheese to iron ore. The current food-price slump soon could beat the nine months of year-to-year declines experienced in 2009 and 2010—the longest stretch since 1960, according to the Bureau of Labor Statistics.” - WSJ

As the pain continues, smaller companies are the ones that are going to face the biggest problems, which, in turn, could lead to consolidation. Though Kroger is no stranger to acquisition, I am not sure if the company would want to buy a cheap Whole Foods and the whole set of problems that come along with it when they already have a strong presence in the grocery market and a fast growing organic foods division.

Since launching three years ago, Kroger's Simple Truth has grown at a double-digit rate and is expected to reach $1.5 billion in annual sales by the end of the year. Kroger CFO Michael Schlotman said at a BMO Markets conference that the company believes Simple Truth is the largest natural food brand in the U.S.” - Fortune

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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