Kroger Makes Another Smart Acquisition

By Jeremy Bowman Markets Fool.com

Kroger Inc(NYSE: KR) did it again.

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The country's largest traditional supermarket chain took out its checkbook once again to make another promising acquisition, purchasing New York-based specialty food purveyor Murray's Cheese.

Kroger has historically grown by acquisition, snatching up regional chains like Fred Meyer, Ralph's, and King Soopers, and more recently Harris Teeter and Roundy's.

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Terms of the deal were not disclosed, but city records reveal that Kroger purchased Murray's flagship Greenwich Village location, which includes classrooms and event and catering operations, for $20.6 million.

Tying the knot

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The partnership between Kroger and Murray's is nothing new. In 2008, the two companies forged an agreement that put Murray's Cheese locations within Kroger supermarkets, and by the end of last year there were over 350 Murray's shops inside Kroger stores across the country, evidence that the deal was clearly beneficial to both parties. Murray's owner Rob Kaufelt said the "partnership has exceeded our wildest expectations."

With the Murray's acquisition, Kroger continues its recent strategy of pushing into more upscale and organic foods. In 2012, the company launched its own line of organic foods, Simple Truth, which is now the linchpin in more than $11 billion of annual sales in organic foods.The company followed that with the 2013 acquisition of upscale, specialty grocer Harris Teeter.

Those moves have helped Kroger take market share away fromWhole Foods Market(NASDAQ: WFM) and other organic grocers, as Whole Foods has seen comparable sales decline in each of its last six quarters, and may have even played a role in its rival's recent decision to pull back from a goal of eventually opening 1,200 stores in North America. Other organic grocers such asSprouts Farmers Market and the now-privately owned Fresh Market have also struggled.

What Kroger gets from Murray's

Kroger didn't spell out its plans for Murray's Cheese, but it seems likely that the company would accelerate the rollout of Murray's locations inside Kroger supermarkets, as it added 100 Murray's shops just last year. Expanding stand-alone Murray's stores could also be a possibility, which would enhance the profile of the brand and give Kroger a stronger grip on the gourmet cheese market. Murray's has just two retail locations, both in Manhattan, which also offer gourmet foods such as charcuterie, olives, and other such hors d'oeuvres. Kroger is also likely to amp up Murray's e-commerce profile, and the supermarket giant's economies of scale should help it obtain lower input costs for Murray's, allowing it to lower prices.

Beyond the immediate impact of the acquisition and Murray's ability to help Kroger attract upscale customers, the deal also gives Kroger a foothold in the Northeast, the only region of the country where it does not have supermarkets, and one that makes up a sixth of the country's population. While Murray's doesn't offer the entryway that a supermarket acquisition would, it could pave the way for such a purchase, and it will also give the company data and a foundation in a market it knows little about.

Finally, the acquisition offers investors another reminder that the company will continue to grow through such deals even at a time when the broader supermarket industry is struggling with food deflation. Comparable sales at Kroger slowed to just 0.1% in the third quarter, but such weakness in the industry could offer more acquisition opportunities. Expanding through buying other companies rather than opening new stores also helps Kroger avoid further saturating markets, a lesson that Whole Foods seems to be learning the hard way.

Expect Kroger to continue making such strategic investments as it targets growth areas like upscale foods and parts of the country where it's underrepresented. It's a strategy that's paid off handsomely for investors in recent years.

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John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Kroger. The Motley Fool owns shares of and recommends Whole Foods Market. The Motley Fool has a disclosure policy.