Kroger buys Harris Teeter for $2.5 billion (+video)

Kroger Co said on Tuesday it would buy regional grocer Harris Teeter Supermarkets Inc in a $2.5 billion deal, the latest in a string of grocery industry consolidations.

Shares of both companies rose, outpacing gains in the broader market.

The deal, approved by the boards of both companies on Monday night, will boost Kroger's presence in the southeast US. Competitors there include privately held Publix and discounter Wal-Mart Stores Inc, the largest US food retailer.

Cincinnati-based Kroger, the largest mainstream US grocer, will also get a bigger presence in the mid-Atlantic region, slightly more upscale stores that do a strong business in fresh food and access to fast-growing markets.

As the supermarket industry has consolidated, chains like Harris Teeter, based in Matthews, North Carolina, have struggled to maintain market share against rivals such as Wal-Mart, Costco Wholesale Corp and Whole Foods Market Inc.

The deal is somewhat "out of character" for Kroger, which for 10 years or so has been "cherry picking stores vacated by downsizing or exiting competitors," said analyst Walter Stackow of Manning & Napier, whose holdings include Ahold, which runs US grocery stores such as Stop & Shop and Giant.

Kroger's acquisition of Harris Teeter is the second biggest deal in the US grocery industry this year, and the second-largest acquisition ever for Kroger after its $13.89 billion purchase of Fred Meyer Inc in 1999.

The grocery industry needs more consolidation as it faces pressure from a swath of retailers ranging from dollar stores and Wal-Mart to upscale grocers Fairway and Whole Foods, said Wolfe Research senior retail analyst Scott Mushkin. "There are just more stores trying to do the same thing," he said.

Tesco's Fresh & Easy chain could be the next business to be sold, Mushkin said.

Kroger's rivals Supervalu Inc and Safeway Inc have sold off significant assets. In January, Supervalu Inc struck a $3.3 billion deal to reduce debt by selling five of its chains to an investor group led by Cerberus Capital Management LP. In June, Safeway agreed to sell its Canadian operations to Sobeys operator Empire Co Ltd.

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