July 2, 2014, 1:45 PM

Kroger adds Vitacost.com to its shopping cart for $280 million

The supermarket chain is buying Vitacost.com, a web-only retailer of vitamins, supplements and diet products. Kroger, which only delivers online orders in Denver, earlier this year purchased Harris Teeter, which enables consumers to order online for pick-up in 154 stores.

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The Kroger Co. announced today it will acquire Vitacost.com Inc., a web-only retailer of vitamins, supplements and diet products, for $8.00 per share in cash, or approximately $280 million.

Vitacost.com, Vitacost.com, No. 89 in the Internet Retailer Top 500, brings Kroger both a new line of health products and e-commerce expertise that will assist the grocer’s plan to reach further into new sales channels. Vitacost.com’s e-commerce platform will enable Kroger to serve customers through home delivery orders in all 50 states, including 16 states that are currently not served by Kroger supermarkets, the companies said in a joint statement. The acquisition will help Kroger, the No. 2 retailer in the U.S. based on U.S. sales., expand internationally as well: Vitacost.com ships to 160 countries.

“Vitacost.com’s talented team has built an exceptional online retail destination in the growing nutrition and wellness market, with an enviable technology and fulfillment infrastructure,” says Rodney McMullen, Kroger CEO. “This merger is in line with our growth strategy to enter new markets and new channels, and—along with Harris Teeter’s online order and pick-up service—accelerates our efforts to provide customers with even more ways to shop.”

Harris Teeter offers a service labeled Express Lane that enables customers to order online and pick up purchases at 154 local stores. Kroger closed on the acquisition in January. Harris Teeter gave Kroger 212 additional stores in southeastern and mid-Atlantic markets and Washington, DC, and reported fiscal 2013 sales of $4.71 billion.

Kroger will integrate Vitacost.com’s e-commerce technology into its existing online “offerings to create exciting new levels of personalization and convenience for our customers,” McMullen says.

Other benefits expected from the Vitacost.com acquisition include its web site and mobile app, which offer product information, recipes, videos and customer reviews, and ‘Set & Save’ subscriptions for thousands of items, Kroger says. Set & Save enables customers to pick products for recurring orders for delivery at pre-determined intervals.

Kroger offers a limited order online and home delivery service in its King Soopers division in Denver. The addition of Vitacost.com will enable Kroger to provide expanded online order and home delivery on a broader scale, along with an expanded online product line.

Kroger says many customers already plan their shopping online using its cloud-based shopping list and weekly ad through the company’s mobile apps and Kroger.com, and that more than 1 billion digital coupons have been downloaded since 2009.

The Vitacost.com acquisition signals a “significant evolution of their e-commerce strategy and an appetite we haven’t seen among other grocers,” says Kate Wendt, a grocery market analyst at Wells Fargo Securities. “Most grocers have been slow to move to e-commerce, if at all.”

While Kroger has some digital channel experience, it has little e-commerce expertise, Wendt says. “This provides some expertise from an online retailer of healthy lifestyle foods and products, and Vitacost has a great grasp of e-commerce conditions.”

Kroger stands to boost profitability via Vitacost.com’s products, particularly if the lines are extended to stores, or perhaps by setting up kiosks in stores that consumers could use for online ordering, Wendt says. Kroger also could use its purchasing clout to squeeze out more profits from the items Vitacost.com sells, she says. Plus, Kroger could apply enhanced e-commerce skills gleaned from Vitacost.com to other business segments, such as its Fred Meyer department stores, which currently only sell jewelry online.

The merger is likely to have a greater impact on the vitamins and supplements marketplace than on groceries, Wendt says, because “a struggling company now has a strong financial backer,” with a deep pool of marketing expertise. Vitacost.com booked a loss of $13.7 million in 2013 and the company announced in March it had engaged investment bank Jeffries LLC to evaluate its options, including a possible sale.

A major player like Kroger trumpeting the value of e-commerce could cause competitors to take notice, Wendt says. “There could be a rush to catch up,” she says, “but they would need desire from top management to drive it.”

Kroger owns 2,640 supermarkets and department stores in 34 states and the District of Columbia under two dozen local brand names including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, and Ralphs and Smith's.

Kroger reported total sales of $98.40 billion, up by 1.8% from $96.62 billion in the prior year.

Vitacost.com reported total revenue of $382.7 million in fiscal 2013, up by 15.6% from $331 million in 2012. The merchant says it offers more than 45,000 products including minerals, herbs, sports nutrition, beauty care products, and natural and organic foods to approximately 2.3 million active customers. The company operates distribution centers in Lexington, NC, and Las Vegas, and a customer service center in Lexington.

Under the terms of the agreement, Kroger will make an offer for all outstanding shares of Vitacost.com common stock. Any shares of Vitacost.com common stock not acquired in the tender offer will be acquired by Kroger in a subsequent merger. The tender offer and merger are subject to Vitacost.com stockholders selling at least a majority of the outstanding shares of Vitacost.com common stock in the offer, regulatory approvals and other closing conditions. Holders of approximately 26.2% of the outstanding shares of Vitacost.com common stock have agreed to support the transaction, the companies report.

The deal is expected to close in the third calendar quarter of 2014.

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