Kroger makes move to bolster e-commerce presence

by Eric Schroeder
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Vitacost.com sells healthy living products that include natural and organic foods.

 

CINCINNATI — The Kroger Co. has agreed to acquire Vitacost.com, Inc., an on-line retailer of healthy living products that include natural and organic foods. Under terms of the transaction, Kroger would purchase all of Vitacost.com’s outstanding shares for $8 per share in cash, or approximately $280 million.

“This merger presents a unique opportunity for Kroger to continue our strategy to enter new markets and new channels, along with Harris Teeter’s on-line order and pick-up service, accelerates our efforts to provide customers with even more ways to shop,” Mike Schlotman, senior vice-president and chief financial officer, said during a July 2 conference call with analysts to discuss the transaction. “Vitacost.com offers more than 45,000 items, including vitamins, minerals, herbs, supplements, sports nutrition, beauty care products, and natural and organic foods to approximately 2.3 million active customers. Their core focus on healthy living products is highly complementary to our fast-growing natural foods business, and we intend to grow Vitacost.com’s position in the on-line nutrition market. We believe we can extend the reach of Kroger’s business by finding new Vitacost.com customers who appreciate complementary health-focused brands like Simple Truth.”

The Kroger Co.’s Simple Truth line of products has proven to be a success story. Launched in September 2012, the company earlier this year said that sales have grown at an “astonishing pace.” Mark Ellis, president and chief operating officer of Kroger, in March said Simple Truth could be a billion-dollar brand by the end of fiscal 2014. He said Kroger added more than 100 items to the line during fiscal year 2013, ended Feb. 1, 2014.

Both the Simple Truth and Simple Truth Organic lines of products have simple ingredient labels, and the non-organic products are free from 101 ingredients Kroger has identified as of concern to its customers.

Expanding the digital footprint

Mr. Schlotman also said Kroger is excited about Vitacost.com’s extensive e-commerce expertise, proprietary technology and turnkey ship-to-home fulfillment capabilities.

“We see opportunities to integrate Vitacost’s platform with our existing digital footprint,” he said. “For example, we could potentially link Vitacost.com’s more than 45,000 s.k.u.s (stock-keeping units) to Kroger.com, and, over time, use the Vitacost on-line retail platform to make even more products available for purchase on-line. By linking it to our extensive digital offerings, we can create exciting new levels of personalization and convenience for our customers.”

Mr. Schlotman said about 10,000 of Vitacost.com’s 45,000 s.k.u.s overlap what Kroger currently sells.

Change in thinking?

A little more than a year ago, then Kroger president and chief operating officer Rodney McMullen told analysts that Kroger was hard at work on getting the scale and profitability needed to make e-commerce a viable service for the company. He said the company had been experimenting with on-line retailing and home delivery at its King Soopers stores in Denver for several years, and the service was continuing to grow “at a modest rate.”

In the question-and-answer portion of the conference call on July 2, Mr. Schlotman was asked whether Kroger is now a little more optimistic about the potential of on-line grocery as a viable business model.

“If you listened to our words, exactly what we said, we aren’t talking about delivering fresh product and those kinds of items, which we have always thought is a difficult formula to get right,” Mr. Schlotman said. “That is why we have had what we are doing in Denver for so long and haven’t expanded it. We keep learning from that, but we haven’t solved the formula for that in the Denver market, which is why we haven’t expanded it outside that market.

“When you look at that home delivery model, and you compare and contrast that with the Express Lane model that Harris Teeter has, and the success of that and the growing sales that are on that platform, and the fact that that’s profitable. And combine that with the opportunity for the customer to now have another way to interact with us for shelf stable products, I think the combination of those three winds up becoming pretty powerful.”
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