Kroger Company (KR) and Ace Hardware, a retailer-owned cooperative, are in preliminary talks to form a partnership, TheStreet has learned.

Under the partnership, Ace would have a presence within Kroger stores as a "store-inside-a-store," according to a source familiar with the discussion. Kroger, which operates 2,800 stores, could not be immediately reached for comment. Ace CEO John Venhuizen declined to comment.

Kroger's stock plunged in June after Amazon.com (AMZN) announced its $13.7 billion acquisition of Whole Foods, though shares of the Cincinnati-based grocer have since nearly made a full recovery. Easing the minds of investors was Kroger's 109% increase in online revenue during the third quarter and strides in omnichannel engagement. The fact that its in-store pickup program, ClickList, is now available at nearly half its stores certainly has supported the view Kroger could take on a combined Amazon Whole Foods. 

Ace operates 5,830 stores across the U.S. Under the cooperative corporate structure, every storefront is independently run — like a franchise — and the local owners own company stock, which grants them voting rights in the cooperative.

The store-within-a-store concept is nothing new to Ace. Since 2012, it has offered local store owners $150,000 to adopt the model, in which stores of 5,000 square feet or less and can be located inside grocery or paint stores.

Ace has a partnership, for instance, with paint chain Benjamin Moore. It has at least 400 express stores, according to the latest data available. If the Ace set-up with Kroger goes through, the grocer would be Ace's biggest partnership according to the source with knowledge of the deal.

In November, Venhuizen spoke to TheStreet about the need for diversification among retailers in the age of Amazon.

"I don't know necessarily that every acquisition [by a bricks-and-mortar retailer] will have to be an e-commerce platform, but if retailers don't offer a differentiated experience and an assortment of goods, they will die" in the face of digital retail, he said.

Analysts and consultants have urged grocers, especially since the Amazon Whole Foods deal was announced, to consolidate — either with other big players or third-party companies that could offer supply chain innovation or greater product assortment.

Kroger should evaluate forming strategic partnerships with beauty retailers like Ulta Beauty Inc. (ULTA) , electronics stores like Best Buy Co. Inc. (BBY)  and toy stores, as well as hardware stores, including Ace, according to supply chain expert and Kroger consultant Brittain Ladd. "Kroger should view general merchandise (all non-food items) as an opportunity to increase revenue," he wrote in a LinkedIn article published in the wake of Amazon's acquisition, adding that the retailer "must evaluate which option will delight the most customers."

Barclays analysts warned Kroger in October that if the grocer is aiming for long-term success in the fierce grocery landscape, it must achieve a meaningful acquisition or partnership.

"The days of 8-11% EPS growth are long gone," they wrote in a note, addressing Kroger directly. "Absent a transformational event — it will be almost impossible to change the narrative on your story for the next several years."

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