By Randy Tucker
The Cincinnati Enquirer

Kroger Co., already the nation's largest retail grocery chain, might be close to a deal to expand its presence in the Midwest by acquiring Dominick's Finer Foods in Chicago, according to some food industry analysts.

Safeway Inc. - which operates 113 Dominick's stores in the Chicago area - said in November that it expected to sell the chain within six months and that potential buyers included Kroger and Supervalu, a Minneapolis grocery store and wholesale operator best known for its Cub Foods stores.

As the six-month window closes, some analysts think that Kroger is poised to make a bid on Dominick's, which would allow the Cincinnati-based grocery retailer to extend its reach into one of the few major Midwest markets where it doesn't have a big footprint.

Kroger operates three Food 4 Less warehouse-style supermarkets the Chicago area and plans to open two to five additional Food 4 Less stores this year, company officials said Wednesday.

"I've thought Kroger was the leading candidate to buy Dominick's ever since Safeway said they would sell the chain,'' David Kathman, a retail stock analyst for Morningstar Inc. in Chicago, said. "I would expect something to happen in the next few months. Dominick's would be a great fit for them (Kroger).''

As a matter of policy, Kroger does not comment on rumors or speculation.

Safeway officials weren't talking, either.

"We're in the middle of the sales process, and we're not about to comment on such rumors," Brian Dowling, a spokesman for Safeway, said.

Still, several factors could motivate Kroger to make an offer for Dominick's, which began with a single store founded by Dominick di Matteo in 1918.

For starters, Kathman said, Dominick's still holds the No. 2 position among Chicago-area grocers, behind Jewel-Osco, despite seeing its sales slide in recent years.

Kroger is also geographically closer to Dominick's than other suitors, which means that it would be easier to integrate operations.

And perhaps most enticing, Kathman said, is that Kroger could probably buy Dominick's for considerably less than the $1.2 billion Safeway paid for the chain in 1998, largely because of the labor union issues that led Safeway to put Dominick's on the auction block in the first place.

"Other suitors might be scared off by the labor issues," Kathman said. "But Kroger has had a history of good relations with its unionized work force."

Safeway agreed to extend Dominick's workers'contracts and look for a buyer who would recognize their union after contract negotiations stalled and the workers threatened to strike last year.

But not everyone agrees with Kathman on the union issue.

"The one that buys Dominick's has to deal with that union contract," Chuck Cerankosky, a analyst with McDonald Investments in Cleveland, said. "That would be buying a problem relationship.''

The acquisition would offer Kroger a way to grow by buying existing stores instead of building new ones, which would be more costly, said Phillip Kaufman, a food marketing analyst with the USDA Economic Research Service in Washington.

"Given the current state of the economy and the competition from super centers and other non-traditional food retailers, the simplest way to gain growth and the potential for additional growth is through acquisition," Kaufman said.

E-mail rtucker@enquirer.com