The Kroger Co.

By 1994 Kroger's debt load had been reduced significantly, to $3.89 billion. Kroger enjoyed savings of almost $23 million in 1994 alone from its technology investments. The company also benefited from the economic recovery during which interest rates fell, thus reducing the amount needed to spend servicing its debt whenever it could refinance its loans. Enough money could now be freed up for Kroger to shift its focus from debt maintenance to expansion. The timing of this expansion was critical in that Kroger now faced yet another and significant threat, this time from supercenters—such as those operated by Wal-Mart, Kmart Corporation, and Meijer Incorporated—which were combination food, pharmacy, and general merchandise stores. By 1994 more than one-quarter of Kroger's sales base competed directly with a supercenter. Kroger's plan was to continue using its combination food and drug store format—facilities that were about one-third the size of the supercenters—but to increase their number dramatically.

During 1994, Kroger spent $534 million on the expansion, which included 45 new stores, 17 expanded stores, 66 remodelings, and the acquisition of 20 stores. From 1995 to 1997, $600 million was to be spent each year on expansion projects. Overall, this would be the largest capital expansion in Kroger history.

To free up additional money for the program and further reduce the company debt, Kroger in early 1995 sold Time Saver Stores, a division of Dillon which included 116 convenience stores in the New Orleans area, to E-Z Serve Convenience Stores, Inc. of Houston, Texas. Later that year, David B. Dillon, CEO of the Dillon subsidiary, became president and COO of Kroger.

Early returns from the company's mid-1990s expansion were positive. Kroger's 1994 margin of 1.2 percent was its best in several years, and 1995 saw a healthy sales increase of 4.3 percent. By 1997, when Kroger's grocery store count was nearing 1,400, the company enjoyed its best year yet—net income of $444 million on sales of $27 billion, translating into a 1.6 percent margin—while total debt had dropped to $3.2 billion.

Late 1990s and Beyond: Acquiring Fred Meyer, Squaring Off Against Wal-Mart

Its improving fortunes emboldened Kroger to join—in a big way—the ongoing consolidation wave that was sweeping the grocery industry. In October 1998 the company announced that it planned to acquire Fred Meyer, Inc. in a stock swap valued at about $8 billion plus assumed debt of $4.8 billion. The deal closed in May 1999. The Portland, Oregon–based Fred Meyer brought to Kroger 800 grocery stores located in 12 western states—a good geographic fit given Kroger's presence primarily in the Midwest, South, and Southwest. The Oregon firm operated several chains: the flagship Fred Meyer stores, one-stop shopping superstores averaging 145,000 square feet and including more than 225,000 food and nonfood products arranged within dozens of departments; and the Smith's Food & Drug Centers, Ralphs Grocery, and Quality Food Centers supermarket chains—the latter two having been acquired by Fred Meyer earlier in 1998. Fred Meyer, which reported 1997 sales of $15 billion, was also the fourth largest fine jewelry retailer in the country, operating 381 stores under five names in 26 states. The Fred Meyer deal enabled Kroger to maintain its position as the largest supermarket operator in the United States, with annual sales of about $43 billion, although the company soon ceded its position as the largest U.S. food retailer to the hyperbolically growing Wal-Mart.