Kroger May Buy Parent of Ralphs, Hughes

Kroger Co., the country’s largest supermarket chain, is in talks to buy the owner of Ralphs Grocery, Food 4 Less and Hughes Family Markets, a stunning deal that would form a coast-to-coast supermarket chain and accelerate the merger frenzy sweeping the nation’s grocery business, sources familiar with the discussions said Friday.

Cincinnati-based Kroger and Fred Meyer Inc., the parent of Ralphs and the other chains, are close to a deal, and an agreement worth $8 billion or more could be announced as early as next week, sources said. Both companies declined to comment, and sources acknowledged that the talks could break down.

If the chains do marry, the combined company would have 2,200 outlets and annual sales exceeding $40 billion. Their merger would again dramatically reshape the supermarket landscape--especially in Southern California, where Ralphs is a leading player.

Grocery chains are joining forces for several reasons. With their sales growing slowly, they believe it is more cost-effective to get bigger by acquiring others, as opposed to taking the risk of building stores in markets outside their traditional regions.

The chains are also merging to stay a step ahead of increasing competition from giant mass merchandisers such as Wal-Mart Stores, which are now aggressively selling groceries at discount prices.

As the number of mergers goes up, the debate over their impact on shoppers also mounts.

Consumer advocates fret that the deals will lead to less competition and thus higher prices. The stores--which already operate in a business with historically razor-thin profit margins--say the mergers make for lower prices because they enable the chains to wring out overlapping overhead and spread their remaining costs over a wider base.

They also contend that their bigger size enables them to wrestle better terms from product suppliers, further keeping a lid on costs. Drugstore chains have been merging for the same reasons, as evidenced by Rite Aid’s purchase of Thrifty PayLess in 1996.

The Kroger deal would follow not only Portland, Ore.-based Fred Meyer’s purchase of Ralphs but also the announcement by Albertson’s two months ago that it plans to buy American Stores Co., which owns the Lucky grocery and Sav-on drugstore chains, for $11.7 billion.

Also, Safeway Inc. last year bought California rival Vons Cos. And Safeway announced this week that it was buying Dominick’s Supermarkets, a major chain in the Chicago area, for $2.1 billion.

Safeway also was widely rumored to be eyeing Kroger, and the sources said Friday that one reason Kroger is entertaining a Fred Meyer deal is to keep Safeway at bay and thus maintain its independence. Fred Meyer, in turn, is interested in gaining a national presence, the sources said.

If it does acquire Fred Meyer, Kroger would have stores stretching from California to the Carolinas, and it would remain the nation’s biggest chain, by sales, even after Albertson’s buys American Stores, which would give it $36 billion in annual sales.

Fred Meyer has 808 stores in 12 states, including 313 Ralphs outlets and 82 Food 4 Less stores in Southern California. Kroger has 1,392 stores in 24 states, mostly in the Mid-Atlantic region and the South.

The sources said Kroger and Fred Meyer believe that their merger would clear antitrust hurdles because they compete only in Phoenix and Tucson.

A key architect of the industry’s merger binge is Ronald W. Burkle, who has become a billionaire by buying and selling supermarket chains, often using borrowed money. Burkle, who as a youngster bagged groceries at Stater Bros. stores, a chain once headed by his father, is now Fred Meyer’s chairman and its biggest stockholder, with a 9% interest in the company.

He declined to comment Friday. But Burkle, whose Los Angeles-based investment firm, Yucaipa Cos., engineered the deal that merged Ralphs into Fred Meyer and the sale of Dominick’s to Safeway, predicted then that more deals were coming.

“The supermarket industry is fragmented, and there’s still a lot of opportunities for consolidation,” he said last November, shortly after the Fred Meyer-Ralphs deal was announced.

Fred Meyer’s stock jumped $3.69 to close at $49 on Friday on the New York Stock Exchange before trading was halted just prior to the closing bell, as rumors of the potential merger circulated. Kroger shares closed at $48.75 a share, down $1.19, also on the Big Board.