The Kroger Co. (KR), Harris Teeter Supermarkets Inc (HTSI): Will This Grocer’s Upscale Investment Pay Off?

The Kroger Co. (NYSE:KR), the largest grocery chain in the United States, just got even bigger. The Cincinnati, Ohio-based company recently acquired its smaller rival, Harris Teeter Supermarkets Inc (NYSE:HTSI) for $2.4 billion in cash, adding 212 more stores and bringing its total store count up to 2,631.

Although The Kroger Co. (NYSE:KR) has soundly dominated its second and third place grocery rivals, Safeway Inc. (NYSE:SWY) and SUPERVALU INC. (NYSE:SVU), over the past several years, it has come under pressure from superstore Wal-Mart Stores, Inc. (NYSE:WMT), which has been rolling out standalone grocery stores. Will this big acquisition tip the scales back in The Kroger Co. (NYSE:KR)’s favor? Let’s take a look at the facts and figures behind the deal.

A rapidly growing grocer

Harris Teeter Supermarkets Inc (NYSE:HTSI) stores are primarily spread across the Mid-Atlantic region. It has a strong presence in more affluent communities, such as Fairfax, Virginia and Charlotte, North Carolina. The acquisition will expand The Kroger Co. (NYSE:KR)’s reach out of its stronghold in the Midwest to reach areas that the company described as “high-growth markets, vacation destinations and university communities.”

Harris Teeter Supermarkets Inc (NYSE:HTSI) is a growing business, and has reported rising sales for ten consecutive years. In its most recent quarter, Harris Teeter Supermarkets Inc (NYSE:HTSI) reported 4.3% year-on-year revenue growth and an 8.6% increase in earnings. The company reported annual revenue of $4.5 billion last year. By comparison, The Kroger Co. (NYSE:KR)’s revenue and earnings rose 3.4% and 9.6%, respectively.

Attracted by those solid numbers, The Kroger Co. (NYSE:KR) was willing to pay a premium of 33% to acquire Harris Teeter Supermarkets Inc (NYSE:HTSI) for $49.38 per share, and assume $100 million in debt – bringing the total value of the deal to $2.5 billion – the fourth largest acquisition of a North American food retailer over the past decade.

Reaching for a richer shopper

For grocers like Kroger, preserving margins can be a tough balancing act due to unstable food prices. Let’s take a look at the operating and profit margins of these grocers to see where Kroger and Harris Teeter Supermarkets Inc (NYSE:HTSI) rank.

Source: Yahoo Finance, 7/10/2013

Harris Teeter has stronger operating and profit margins than all three of the leading grocers in America. The reason is simple – just like Whole Foods Market, Inc. (NASDAQ:WFM), Harris Teeter opens its stores in more affluent neighborhoods where the average customer can spend more. To these customers, Harris Teeter offers specialty cheeses, freshly baked bread at its La Brea Bakery, aged beef, wine and other gourmet items.