Kroger Buys Vitacost For Web, Organic Growth

Investor's Business Daily

Kroger took advantage of a two-for-one offer Wednesday, paying $280 million to buy to expand its fast-growing natural-foods sales and make a push into online groceries.

The strategy behind Kroger's (KR) deal was both offensive and defensive, according to BB&T Capital Markets analyst Andrew Wolf. Vitacost (VITC) is a good buy not only because the future of consumption is in health, but also because Web involvement is necessary for grocers to stay in the game and not fall behind Amazon (AMZN).

"The good retailers are getting really involved in the Internet," Wolf said. "If Amazon is chasing it (food delivery), these guys have to be there at a minimum defensively to figure out what's going on.

Amazon's same-day grocery delivery service, AmazonFresh, is in three West Coast markets — Seattle, Northern California and Southern California — and looking to expand.

Kroger, a Cincinnati-based grocer with more than 2,600 supermarkets under chains such as Kroger, Ralph's and recently acquired Harris Teeter, has had little online presence. Registered customers can refill prescriptions and order deli and bakery items at select participating locations, both for in-store pickup.

Vitacost will give Kroger access to an online shipping and home-distribution system. The grocer plans to add its Simple Truth organic brand to Vitacost's 45,000 packaged food, vitamin, personal care and pet offerings.

"Today and into the future people are going to purchase food, supplements at different venues," Wolf said.

As with tech gadgets, grocery shoppers may use brick-and-mortar stores as a "showroom" before buying goods for less money online.

Kroger reported double-digit natural foods sales growth in its latest quarter, grabbing a bigger piece of a rapidly expanding pie. That's pressuring upscale natural foods and organic chains such as Whole Foods Market (WFM).

Despite an increased demand for natural and organic products, fresh food delivery remains difficult, Wolf says. Because refrigeration is costly, dry goods are more practical, he says.

While Amazon is expanding AmazonFresh, which has addressed the refrigeration issue by selecting densely populated areas, it is also trying to beef up its non-perishable sales. Wal-Mart (WMT), the largest seller of U.S. groceries, has been fortifying its online operations generally.

Another Vitacost benefit to Kroger will be the addition of increasingly popular "better for you items" in the pharmacy aisle, Wolf said.

Meanwhile, Kroger has just one store in Florida, while Vitacost is based in Boca Raton. And 8% of Vitacost's $383 million in sales last year came from outside the U.S., BMO Capital noted.

Vitacost has lost money as it sacrificed profit to boost users.

Kroger will pay $8 a share for Vitacost, which leapt 27% to 7.97. Kroger fell 10 cents to 49.43, but it is up nearly 25% in 2014.

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