Kroger Co. (KR) makes a bet on omnichannel retail with $280 million purchase of Vitacost.com

Faster to buy than build online retail platform

CINCINNATI - The Kroger Co. will accelerate its move into e-commerce and bolster its ability to compete against natural foods retailers with the acquisition of Boca Raton, Fla. –based Vitacost.com Inc., company officials told analysts Wednesday.

The $280 million acquisition was announced Wednesday morning and is subject to regulatory review and approval by Vitacost shareholders. The online seller of vitamins and nutritional supplements saw its share price jump 27 percent to $7.99 when Kroger announced its all-cash purchase offer at $8 per share.

Kroger views the purchase as a way to quickly establish an e-commerce sales platform to go with the home-delivery model it is testing at its King Soopers division in Denver and the online-order/in-store pickup service that Harris Teeter operates on the East Coast. Vitacost sells more than 45,000 items and claims 2.3 million regular customers.

“We see opportunities to integrate Vitacost's platform with our existing digital footprint,” said Kroger Chief Financial Officer Mike Schlotman, in a conference call with Wall Street analysts. “Over time (Kroger could) use the Vitacost online retail platform to make even more products available for purchase online.”

Schlotman said Kroger stores currently offer about 10,000 of the items Vitacost sells online. But Vitacost’s existing customers could be interested in Kroger’s expanding line of organic products, including its fast-growing Simple Truth brand. Kroger could use data from shopper card loyalty programs to determine which customers would be most interested in placing Vitacost orders. Vitacost sells in 16 states that have no Kroger stores.

“It fits incredibly well with our established digital capabilities and our goal of providing an omni-channel experience where customers can shop with us whenever and however they want,” Schlotman said. “Together, we are a powerful combination blending the art of retailing and deep customer insights with a superb online experience. We look forward to closing this transaction and working together.”

As WCPO has reported, Kroger faces increasing competition from Amazon.com , which is testing home grocery delivery in multiple cities.

Natural food retailers like Whole Foods and Trader Joe’s have nibbled away at some of the most profitable product lines for traditional grocers. Kroger has been fighting back with in-store brands that emphasize natural and organic foods and by marketing to the health care concerns of its customers .

Kroger’s competitive position is improved on both fronts with the Vitacost acquisition, but it won’t immediately boost profits. Vitacost lost $13.7 million in 2013 on revenue of $373 million. Kroger’s increased buying power and its logistical and marketing strengths could improve those margins.

“When you look at the overhead involved in shipping a package, the more items you can get in that box, the better ability you have to be profitable,” Schlotman said. “Our goal would be expand the reach and the penetration with each box that goes out which is what will ultimately help drive the profitability.”

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