By Evie Liu

Kroger is trying again to grow through acquisitions — but this time, the target is far smaller. The grocery giant said Wednesday it would acquire privately held Giant Eagle for $1.65 billion, a deal that would expand Kroger's presence in Pennsylvania, Ohio, West Virginia, Maryland, and Indiana.

Kroger stock is gained less than 1% in Wednesday trading, but shares have fallen nearly 12% year to date.

With roughly 200 supermarkets and approximately $9 billion in annual sales, Giant Eagle is large enough to meaningfully strengthen Kroger's regional position but small enough to avoid many of the competitive concerns. The companies said they expect limited store divestitures to obtain regulatory clearance.

That's a sharp contrast with the antitrust battle that doomed Kroger's $25 billion merger with Albertsons, which would have combined two of the nation's largest supermarket operators. Regulators argued the merger would leave shoppers with fewer choices and less competition in many local markets. A federal judge halted the deal in late 2024, prompting Kroger and Albertsons to terminate the transaction.

Kroger faces growing competition from discount chains, warehouse clubs, and e-commerce giants like Walmart and Costco Wholesale. Scale has been one of the industry's biggest competitive advantages. Bigger purchasing power can help lower costs, strengthen negotiating leverage with suppliers, and support investments in technology and fulfillment.

Kroger still wants to grow in size through acquisitions. But after the Albertsons setback, executives may conclude that pursuing several smaller, strategically targeted deals offers a faster and less risky path than spending years fighting regulators over a large merger.

The company is returning to a strategy it knows well: buying regional operators with loyal customer bases and expanding into adjacent markets. Before pursuing Albertsons, Kroger bought Harris Teeter in 2014, adding a strong foothold in the Mid-Atlantic and Southeast. A year later, it acquired Roundy's to strengthen its position in the Midwest.

Guggenheim analyst John Heinbockel thinks the $1.65 billion price tag for Giant Eagle is very attractive. Based on his estimate of Giant Eagle's earnings, Kroger is paying a low multiple. The analyst believes Kroger can improve Giant Eagle by adding stronger pricing and better e-commerce, he wrote in a Wednesday note.

In some markets, Giant Eagle is nearly neck-and-neck with Walmart, according to Heinbockel. He noted that in Pittsburgh, Giant Eagle has 23% share, versus Walmart's 24%; and in Cleveland, Giant Eagle has 20% share, versus Walmart's 22%.

Kroger can cut costs by combining operations, sourcing, technology, and overhead, said Heinbockel. He believes the savings could reach $50 million to $100 million over three to five years, and the deal could start boosting Kroger's earnings by fiscal 2028.

Amazon's experience illustrates how difficult grocery retail can be, even for one of the world's largest e-commerce companies. The company bought Whole Foods — a grocery chain focusing on organic and premium foods — -in 2017, but still struggles to build a competitive grocery presence for the mainstream shoppers.

Earlier this year, Amazon announced that it will close all its Amazon Fresh and Amazon Go physical stores, convert some locations into Whole Foods stores, and focus more on online grocery delivery.

Amazon acknowledged that the Fresh stores didn't offer a compelling enough reason for shoppers to choose them over established grocers. The stores also weren't generating strong enough returns to justify opening more locations.

"While we've seen encouraging signals in our Amazon-branded physical grocery stores, we haven't yet created a truly distinctive customer experience with the right economic model needed for large-scale expansion," the company said in a statement.

The acquisition of Giant Eagle suggests Kroger's grocery consolidation isn't ending. It might just take a different path after the collapse of the Albertsons deal.

Write to Evie Liu at evie.liu@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.