Dive Brief:

• Kroger has acquired meal kit company Home Chef for $200 million, plus $500 million in additional incentives if the company hits performance goals around online and in-store sales, according to a news release.
• Under the deal, which is expected to close in the second quarter, Home Chef will continue to operate its e-commerce business, and will also offer its meal kits in Kroger stores and through the retailer's online platforms. Home Chef will also "assume responsibility for Kroger's meal solutions portfolio," according to the news release. Kroger currently offers its own Prep + Pared meal kits in 525 stores, and according to The Wall Street Journal, that line will fold into Home Chef's operations.
• Home Chef offers meal kits that focus on accessibility and minimal preparation. The company delivers 3 million meals per month, and last year generated $250 million in sales with two profitable quarters.

Dive Insight:

Less than a week after announcing a partnership with British e-grocer Ocado, Kroger has made yet another bold move that positions it to compete against a barrage of industry threats.

The company already has its own line of meal kits, which have tested well with shoppers and are currently available at several hundred stores. But with Home Chef, Kroger gains valuable culinary expertise, scalability and a known brand. It also gets valuable customer data and technology that should complement its already very sophisticated abilities there.

"As the meal kit movement has evolved, it was inevitable that Kroger would act to expand and elevate their Prep + Pared offer," Diana Sheehan, vice president of retail and shopper insights with Kantar Retail, told Food Dive in an email. "They waited to find a company that not only succeeds in the meal kit space, but does so in a profitable and sustainable way."

However, that online business is challenged by high marketing costs, a crowded field and low customer retention. Kroger could pour resources into this channel, though the better bet seems to be that it will focus on in-store merchandising.

Indeed, Kroger's acquisition further proves that meal kits' future is not just online, but on physical shelves, too. Store sales were just $154.6 million last year, according to Nielsen, compared to an estimated $5 billion for online meal kits. But the convenience, lower costs and ability to bundle kits with other grocery purchases indicates this channel will soar in the years to come.

Last month, Blue Apron announced it would begin selling kits in select Costco stores. Meanwhile, Albertsons bought Plated last year for an estimated $200 million and is currently rolling out the kits in stores nationwide. Walmart also now offers meal kits, while Amazon has tested its own meal kits and is expected to become a major threat in the space.

The tough economics of the online meal kit industry combined with grocers' growing interest means there are likely more tie-ups in the future between the two sides. A Blue Apron acquisition could be possible, given the company's brand strength and reduced value. Brittain Ladd, a former Amazon executive and supply chain expert who has advised Kroger, told Food Dive that Blue Apron or HelloFresh could have been a more "disruptive" acquisition for Kroger, but that Home Chef will still give the retailer a much-needed boost in the category.

Embattled Kroger desperately wants to find revenue channels beyond groceries, where margins continue to shrink. The company has dabbled in restaurants, store brand meal kits and other measures aimed at diversification. Now it's starting to make transformative deals that could very well elevate the company.

"In the last two weeks, Kroger has illustrated that it is playing to win in the e-commerce space," said Sheehan. "This paired with the Ocado partnership really sets the stage for a true showdown in the online grocery wars, while continuing to reinforce the importance of the physical store."