By: Ben T. Auston of Georgia Weekly Post
Bob Mariano quickly built a chain of upscale Chicago supermarkets by expertly straddling the middle ground between Whole Foods and Jewel.
Now his nimble group of 34 stores is about to be eaten by a giant — the nation's largest supermarket operator, Kroger Co.
▲ Wall Street welcomed Cincinnati-based Kroger's purchase, which saw Kroger's shares up 3 cents, or less than 1 percent, and Roundy's shares jump 64 percent in early trading, to just below the $3.60 a share Kroger has agreed to pay.
But Mariano, 65, says Mariano's customers worried that the popular stores will see quality drop now that Kroger has agreed to an $800 million deal to purchase Mariano's parent company, Roundy's, have nothing to fear.
"I'm still on watch," the Roundy's CEO said following the announcement that the boards of both firms had approved the deal Wednesday morning. "I'm not going anywhere and I'm not going to let that happen."
▲ While expanding, there will be no changes of signs, including this Kroger in Sandy Springs.
Wall Street welcomed Cincinnati-based Kroger's purchase, which saw Kroger's shares up 3 cents, or less than 1 percent, and Roundy's shares jump 64 percent in early trading Wednesday, to just below the $3.60 a share Kroger has agreed to pay.
Kroger executives and Mariano touted the merger as a win for both Mariano's customers and for Kroger's other chains. Mariano's will benefit from the financial might that Kroger's 2,623 supermarkets in 34 states provides, allowing it to expand and improve service, they said. And Kroger will be able to use the lessons learned from Mariano's innovative urban stores, which combine the full-line services of a traditional rival like Jewel with gourmet extras like gelato stands, they said.
Mariano's stores — often located in former Dominick's locations — have won shoppers over with in-store pianists and by featuring a wider supply of organic and fresh products as healthier eating trends drive customers away from the packaged goods that dominate the central aisles of traditional supermarkets.
But analysts on a conference call noted that Mariano's stellar reputation with customers hasn't translated into large profit margins at Roundy's, which also runs a much larger chain of Pick 'n Save stores in its home state of Wisconsin that account for 65 percent of its sales, and has not turned a profit in any of the last three quarters.
Kroger Chief Financial Officer Mike Schlotman said that the $40 million in cost savings that Kroger hopes to achieve once the deal closes later this year won't come at the expense of store closures or job losses at stores. Bob Mariano and his Wisconsin-based Roundy's management team will remain in charge of running the Mariano's stores, he said, adding that Kroger has a history of successfully growing merged brands.
Bob Mariano is "very energized and excited by this project," Schlotman said, adding that the deal gives Kroger a long-sought increased presence in Chicago, where it currently operates only 14 down-market Food 4 Less stores.
Kroger's namesake supermarkets and grocery chains including Harris Teeter and City Market already give it 22 percent of the national supermarket market, according to figures from Euromonitor International. Its closest competitor is Jewel-parent Albertson's, with about 16 percent of the market. Kroger's 782 convenience stores, 326 fine jewelry stores and an online retailer, Vitacost.com, helped it to sales of $108.5 billion in 2014.
The merger will be financed with debt and comes as no surprise to analysts, given the consolidation in the supermarket industry in recent years.
Kroger bought upscale southern chain Harris Teeter for $2.5 billion in 2013. And last year, Kroger was on the shortlist to buy Safeway, which was eventually purchased by the Cerberus Group for $9 billion. In 2013, Cerberus bought Albertsons from Supervalu for about $3 billion.
"What a lot of larger chain brands have learned is that it's easier to acquire than to build," said analyst Darren Tristano, president of Technomic to Georgia Weekly Post.
"It's a good opportunity for Kroger to expand their footprint in the country. (Chicago) is not far away from their headquarters, and I think it's a sweet spot for them."
Tristano noted that Kroger's strength is that the company knows its customer. "It's hard to say that they are good at one thing or the other — they know what their customer wants and are doing their best to give it to them," he said.
Consumers need only look to Kroger's approach to managing Harris Teeter, which it acquired in 2013 as a case study of what may come with its acquisition of Mariano's, according to Jim Hertel, managing partner at grocery consulting firm Willard Bishop.
"This is going to be good news for Chicago shoppers," said Hertel.
Mariano's is like the "Tale of Two Cities," he said, "The best of times and the worst of times," referring to the supermarket's stellar sales per square foot, but less-than-stellar profits. Hertel said he expects Kroger to likely make Mariano's available to more neighborhoods and relieve some of the Roundy's cost pressures.
"Kroger will provide incremental buying power while maintaining the service levels at Mariano's, which is what people love. They'll be able to generate a lower cost and higher profit margins without having to cut in-store labor," he said.
It remains unclear if Kroger will spread the Mariano's brand into other cities, or simply use its techniques to spruce up its existing brands. Schlotman said a mix of the two approaches was likeliest and that Bob Mariano would be involved in exploring both approaches.
Roundy's ability to revamp its struggling Wisconsin stores has been hamstrung by Roundy's relatively small scale and limited access to capital, he suggested.
Sales performance in Mariano's existing stores has also been under pressure, however. Roundy's on Wednesday reported a 3.4 percent decline in same-store sales companywide and a 2.6 percent decline in Illinois. It blamed cannibalization of sales from its new stores, and from competitors who have also been moving into former Dominick's stores.
Bob Mariano, who was working at the new Mariano's store in Lincoln Park on Wednesday, acknowledged that some employees were taken aback by the news that Kroger is taking over.
But he said that once the deal was explained, store workers came around and were "excited."
"Kroger sees this as a merger — they want to take the best of what we do and add the best of what they do. Our view is that we're not going to fiddle with things that are critical to our success. I would not expect quality to change at all; if anything it will go up."