MERGER MANIA; KROGER-MEYER DEAL USHERS IN NEW AGE OF SUPERMARKETS.

Byline: Dave McNary Daily News Staff Writer

Supermarkets will become bigger and flashier in the wake of a string of mega-mergers within the industry, culminating in Kroger Co.'s agreement to buy Fred Meyer Inc. for $11.8 billion in a deal announced Monday after weeks of speculation.

The deal makes Cincinnati-based Kroger the nation's leading supermarket operator, with markets from Southern California (Ralphs, Hughes and Food 4 Less) to the Eastern Seaboard.

``This country has a strong supermarket culture and it's not going away,'' asserted retail consultant Jack Trout of Stamford, Conn. ``They've boutiquized themselves and set up stores within stores to protect themselves when people change eating habits such as more takeout foods and natural foods. When challenged by specialists, they've changed.''

That kind of change will continue, industry observers believe. To compete effectively against aggressive giant discounters like Wal-Mart, Target and Kmart, Kroger will have to:

Offer premium services like florists, bakeries, delicatessens and ethnic food sections.

Provide enough check stands and clerks so that customers don't become impatient.

Keep prices low enough to compete with Wal-Mart and provide deep discounts on staples like videotapes, tortilla chips, detergents and soda.

Adjust each store to the needs of the local market.

Stakes are high for Cincinnati-based Kroger, which will have 2,200 stores in 31 states. The deal comes 10 weeks after Albertson's agreed to buy American Stores, parent of Lucky and Sav-On, for $11.7 billion.

``Grocery stores are a local phenomenon, so shoppers don't care about stores that are 100 miles away, just the ones in their back yard,'' said consultant Frederick Marx of Farmington Hills, Mich. ``They have to be clean, offer fresh food and convenience is critical. Chances are you tend to go to more than one until they disappoint you and then it's all over.''

Analysts believe Kroger is up to the challenge. Retail consultant Mark Kissel noted Kroger was savvy enough to begin switching to larger formats a decade ago before the trend caught on. ``They're very good at the fundamentals,'' he added.

Trout said dealing successfully with expansion is particularly tricky. ``It's not a question of getting big; it's a question of managing yourself when you are big,'' he added. ``It takes some real logistical skills to manage something that large. You've got to get people in and out of stores quickly.''

Kroger's changes will be gradual but critical, since the new company will have annual sales of $43 billion. Private labels brands will change at Ralphs and Hughes but that's all the changes customers will see immediately when Kroger completes its purchase of Fred Meyer early next year.

``I doubt that people going into a Ralphs will see much change initially,'' said analyst Sally Wallick of Legg Mason. ``Both sides have already emphasized that they want to be very careful not to disrupt the customer, so my guess is that the customer is not really going to notice any difference right away.''

Wallick said Wal-Mart, which has pledged to become the nation's largest food retailer, is the biggest threat to Kroger because of its ability to underprice rivals. ``Although Wal-Mart isn't a big deal out West, it's going to be a different story in 10 years,'' she said. ``If I were a supermarket operator, that's what I'd lose sleep over.''

Trout agreed. ``They're all terrified of Wal-Mart,'' he said. ``They all sense that they have to get big so that they can beat up on the manufacturers and get deals. That's what is driving them, just like the banks.''

Analysts give Kroger, a powerhouse in the Midwest, a good shot at beating back Wal-Mart and other rivals. ``They're an excellent company with great strategies,'' Marx said. ``If they have a site in an upscale area, it offers sushi and restaurant-quality foods. Their floral areas are outstanding and the bakeries hold their own.''

Kroger also relies on straightforward marketing strategies, including an oft-repeated jingle about ``going Krogering.''

``Every kid in the Midwest can tell you what Krogering means,'' Marx noted. ``Wal-Mart can kick up some dust but Kroger has nailed down the A-plus locations at the corner of Busy and Busy.''

Kissel said operators like Kroger still have plenty of opportunity to take advantage of shoppers' changing tastes. ``It is the shrewd competitor who can take what rivals are doing and somehow present it as their own,'' he said.

GROCERY GIANTS

The nation's grocery chains are merging to compete against the nation's top retailer, Wal-Mart, which also happens to be the fourth-largest seller of grocery products.

RANK COMPANY REVENUE x RECENT ACQUISITIONS

1. Kroger Co. $39.4 Fred Meyer

2. Albertson's Inc. $33.8 American Stores, Buttrey Foods

3. Safeway Inc. $25.1 Dominick's, Carr-Gottstein, Vons

4. Wal-Mart Stores Inc. $25.0

5. Royal Ahold NV $18.5 Giant Food, Stop & Shop, Bi-Lo

x If pending acquisitions were completed.

SOURCES: Supermarket News, Bloomberg News and company reports

CAPTION(S):

2 Photos, Box

Photo: (1--Color) A lone shopper heads for the Ralphs market in Santa Clarita.

Kevin Karzin/Associated Press

(2--Color) Kroger Co., headquartered in Cincinnati, is buying Fred Meyer Inc.

Al Behrman/Associated Press

Box: GROCERY GIANTS (See Text)