Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Spoiled Goods
Shares in specialty, organic food grocers are going rotten
Source: Bloomberg

Kroger is eating Whole Foods' gluten-free bread and all-natural butter.

News Thursday that Kroger is among the bidders for The Fresh Market sent shares of the natural grocer up as much as 23 percent. Competitor Sprouts jumped, too, as investors cheered consolidation among organic food stores. 

It's not like this is a complete surprise; Fresh Market has been trying to get someone to save it for months now, and Kroger has been on an aggressive acquisition spree. But it's a welcome step. 

So-called natural food chains proliferated over the past decade as consumers shifted to healthier fare, but lately have lost their hold on what has become an over-saturated market. 

Back when Whole Foods opened in 1980, there were fewer places to shop for specialty items such as local beefsteak tomatoes and organic Fuji apples. Even as late as 2007, when Whole Foods pursued rival Wild Oats, Walmart and Kroger were not considered true competitors.

But while traditional grocery stores went bankrupt and consolidated, specialty grocery chains such as Sprouts, Fairway, Fresh Market and Trader Joe's were collectively building hundreds of stores. Eventually, surviving traditional grocers such as Kroger caught up and began stocking the same stuff -- often at cheaper prices. Heck, you can even find "Kale & Quinoa" salads at gas stations now

Now, those specialty chains are going the same way as traditional grocers. And Kroger is smart to go shopping. 

We've already seen the pain at market leader Whole Foods. There's talk of Fairway going bankrupt. And shares in Fresh Market, Sprouts and other natural grocers have taken a beating. 

Decaying Sales
Year-over-year change in same-store-sales at Fresh Market
Source: Bloomberg

Meanwhile, after sitting out of major deal-making for 15 years, Kroger has been filling its cart. First, there was the $2.5 billion purchase of Southeastern grocery chain Harris Teeter in 2014, followed by the $280 million takeover of, an online purveyor of vitamins and health food. Late last year, America's largest grocer spent $800 million to acquire Roundy's, a small-fry chain that operates Pick 'n Save and Mariano's.

Kroger paid for all of those deals in cash. That has left it with a sizable amount of debt. It had about $11 billion in borrowings at the beginning of November and issued another $1.1 billion to help pay for Roundy's. That's not a big deal for now (Kroger is still rated investment grade by ratings agencies Moody's and Standard & Poor's), but eventually its debt-fueled buying binge could slow.

Spending Spree
Kroger has been adding debt to finance a series of takeovers.
Source: Bloomberg

Kroger shareholders don't seem overly concerned. The stock slipped on the news, but only by about 1 percent. With a market value of about $1 billion, Fresh Market won't break the bank. The valuation also falls in the sweet spot for Kroger. It has paid a median of 0.6 times revenue for its biggest takeover targets. After Thursday's jump, Fresh Market is valued at just that.

One could argue the beleaguered Fresh Market doesn't deserve the same valuation as Harris Teeter, which was well-run and growing. Fresh Market's same-store sales have declined for the past three quarters. One of the other bidders for Fresh Market -- which reportedly include private-equity firms Apollo Global Management, KKR and TPG -- could prevail, leaving Kroger empty-handed.

But Kroger has reason to push ahead: It's playing a scale game with Walmart and Whole Foods -- and Fresh Market will help it further its quest for domination.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Shelly Banjo in New York at
Brooke Sutherland in New York at

To contact the editor responsible for this story:
Mark Gongloff at