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Are the Kroger and Albertsons Merger Criticisms Just Unfounded Myths?
The chief executives of Kroger and Albertsons have penned an op-ed piece in the Cincinnati Enquirer detailing what they say are three myths created about the proposed merger of the two supermarket giants.
Rodney McMullen of Kroger and Vivek Sankaran of Albertsons write that each company was founded by people who took their life savings and created businesses committed “to bringing fresh food to their neighbors.” They claim that commitment remains the same today, but grocery retailing has changed dramatically and requires more resources and new tools to succeed.
Gone are the days when families made one weekly grocery trip and walked store aisles checking off items on their grocery lists. Consumers can now go online or open an app, place an order and have it delivered to their home.
Americans, who spend about half their food budgets in restaurants, also have plenty of other retail destinations where they can get groceries beyond Kroger and Albertsons’ stores including convenience stores, dollar stores, online grocers and other formats.
Messrs. McMullen and Sankaran say the first myth that has grown up around their merger is that “my store will close.” The CEOs say they understand the concern, but it is overblown. Kroger, for one, has “committed to zero store closures as a result of the merger, and the company will invest in stores post-merger.”
Some stores will be divested or sold to gain approval for the merger, but these too will remain open, they write. “We are working closely with the regulators and are committed to finding reliable operators for the divested stores.”
The second myth is that unionized associates will lose their jobs. The Kroger and Albertsons CEOs write, “No frontline workers will be laid off as a result of the merger. The combined company will be one of the largest unionized workforces in the country. We are committed to protecting and expanding opportunities for union jobs.”
The third falsehood about the merger is around prices, write the CEOs. Critics say that the merged company will mean that consumers will pay more for groceries. Kroger’s strategy, according to the op-ed, is for it to lower prices every year to gain market share.
The company is also not looking to put the squeeze on farmers to meet its price objectives. “Farmers are the backbone of our business and help put fresh, affordable food on families’ tables daily. When we grow, farmers grow with us.”
Discussion Questions
DISCUSSION QUESTIONS: Are the CEOs of Kroger and Albertsons correct about the three myths – store closings, job losses and higher prices – that they say have grown up around the merger? What do you think a merger of the two grocery giants would mean for consumers, competitors, vendors and employees?
Poll
Loading …BrainTrust
Gary Sankary
Retail Industry Strategy, Esri
Gene Detroyer
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
Grocery is a low margin business. The only viable way to deliver consistently low prices is through scale. Whether people like it or not, that’s an economic fact. And it’s part of the thinking behind the Kroger and Albertsons merger. Given that, the idea that the two chains would merge only to close masses of stores is absurd. Of course there might be some job losses as duplicate functions and roles are consolidated, but most of these will not be on the front line. So, broadly I agree with the views of the CEOs. My concerns for the merger are more around whether the synergistic savings will be delivered as companies tend to over-promise on this front.
These CEOs may be saying this now, but I wonder what happens after they are secured in their golden parachutes a few years down the road? The fact is, these companies are interested in merging to become a more formidable competitor. But history shows that Goliath enterprises with too much market power can be detrimental to consumers and stunt competition. While I respect these two leaders and I’ll give them the benefit of the doubt that they mean what they say, this combined enterprise will go on for a long time after they are gone and the intentions of whoever is running this business are undetermined.
The editorial sounds like a warmup for the CEOs’ testimony in front of the FTC, a House committee, or whatever governmental agency is tasked with approving the merger. It’s meant to reassure and it’s obviously self-serving — but that doesn’t make the promises empty.
If the combined company is forced to divest several hundred locations, it’s impossible to predict how the new owners of those sites will behave (including closures, layoffs, etc.) but I still believe that the merger makes economic sense. Consolidation in all segments of the retail industry (not just grocery) is not going away.
To add to my earlier comment, the CEOs don’t address the inevitable cutbacks and layoffs of headquarters staff. There is doubtless plenty of overlap and duplication that they have already identified for potential cost savings.
The concerns are very warranted but I think there are a lot of what ifs, from the customers perspective, that remain in the balance. They will have to close some stores, but what if those stores are the closest to those customers? They will really have to think before they act. Losing customers is the worst thing that can happen in this huge merger.
All true. And hopefully a great opportunity for independents or regionals to jump in.
It’s easy to be skeptical, or even cynical, about this whole situation. But everything they are saying makes perfect sense–based on business conditions today. It’s in their best interest to be good corporate citizens and cultivate the goodwill of the customer. The real wild card is what happens to the divested stores and the accompanying jobs. Would it be a good thing if they go to Amazon? I’m having a hard time thinking that Amazon wants to step into this hyper-competitive and low-margin scenario. And I can’t believe that the Kroger/Albertsons combo is looking forward to that kind of competition, although that might be exactly what is in the best interests of the customer. Let’s believe these guys for now. We are still very early in this movie.
Unfortunately, I don’t put a lot of stock in these statements. Both CEOs have a vested interest in having their merger approved. I hope they mean well with these comments, but the reality is once the dust settles, they will do what they need to do to deliver shareholder value and drive margins. Time will tell.
Of course stores will close. If not by the hand of government, then by the hand of sound business decisions. Of course people will lose their jobs. One cannot close 300, 500, 800 stores without lots of people losing jobs. Higher prices? Less competition means higher prices.
Data and history tell us that mergers between top rivals never produce the benefits outlined in the business plan. The lawyers make money. Investment bankers make money. The chief executives get massive bonuses and golden parachutes. The integration is always more expensive than forecast if forecast at all. After all is said and done, the real losers will be the shareholders. Enterprise values of the combined companies will be less than they are separately.
Undoubtedly, the merger plan shows an increase in market share. It never happens; if anything, competition among behemoths is a drive to the bottom in profit.
I cannot for the life of me figure out where the savings are going to come from if not by consolidating warehouses and retail in overlapping areas, firing a bunch of people in Cincinnati, and further squeezing suppliers (and inevitably farmers.) What, they’ll get a break on their T-Mobile bill? Distribution can only be trimmed so much because fresh food is perishable and only comes from certain areas at certain times of year. Truck miles are not going to be cut. Rail miles are not going to be cut. Ocean freight is not going to be cut. There are only so many manufacturers that can supply at scale and if you push them too hard, they merge too and raise your price. Construction and renovation costs don’t scale at all.
As we’ve discussed on the Walmart thread recently, cost savings only accrue up to a certain scope, and after that point supposed benefits of standardization actually become liabilities as marketing opportunities and finding niche vendors fritter away, plus the costs of servicing institutional investors bleed R&D investment. Arguably both Kroger and Albertsons are already beyond the effective scope limit and combining them will end up looking like Albertsons + SuperValu all over again.
Scott, you would get an “A” in my M&A class. This is just the sort of analysis I have my students do. The tough part is getting them to see through the BS of press releases. The conclusion for a passing grade is always to buy the seller.
First of all, some stores will clearly close either before or after the merger. There will have to be some divestiture pre-merger and nobody ought to believe that any of the surviving stores will stay open indefinitely. Stores open and close all the time.
Next, I’m sure the stores will stay unionized, but the critical thing for workers is what newly negotiated contracts look like. It’s a wait-and-see situation.
Finally, on price, there is no explanation of what “lower prices every year” means. Does it mean some prices, but not others? Does it mean prices on “core” shopping list items will decline, or just the price on low velocity items? And, more critically, does anyone really believe taking your prices down on an annual basis – apparently in perpetuity – is a winning strategy? If COVID-19 taught us anything it is exactly how fragile supply chains are, and how consumer behavior can radically impact supply and demand, so making long-term pricing announcements is – at best – skating on dangerously thin ice.
Kroger and Albertsons both operate within the lowest margin retail sector. The grocery industry has witnessed enormous upheaval in competition and consumer choice, leading to this strategic merger of two seasoned brands who need to adapt to the current landscape in order to remain enduring for the next generation. The three myths addressed by both CEOs will largely come to pass as being just that. Given the scope of this pending deal and the high stakes involved, you have to believe these issues have been vetted from every angle. Will there be some unanticipated changes? Of course.
Rarely, in the cases of deals such as these, are all issues. More likely, only positive outcomes are planned buffed. Most M&A fail. Depending on the study, approximately 70% to 90% of acquisitions fail to meet expectations. Most acquisitions destroy value for the acquirer.
There are a variety of different interests in the market including short sellers who don’t want the merger to consummate, so it’s hard to identify signal from the noise. Store closures are inevitable, but so are store openings. This will be completely dependent on the success of the stores and economic value. This is good for consumers and the industry. Associates will be needed regardless of the stores, and despite unionization goals, there’s no reason to believe that employees will be let go. There’s always huge turnover in the retail grocery sector, and the merger doesn’t change the demand for groceries or market size. If they’re not working at Kroger, they’ll work at the Walmart down the street. Pricing, the last myth will change not based on the merger but by market competition. This merger doesn’t change the enormity of competition that remains in the market around grocery. Looking forward to what Kroger-Albertsons achieves once ithey figure out how the merger details.
And they all lived happily ever after…
Obviously the people who have access to all the companies’ data are better able to address specific questions, so opponents are always forced to speak in generalities. And with that in mind, my thought is, it’s hard to imagine there’s any point to a merger if nothing changes: if the goal is higher profits, then wouldn’t they have to come from either lower costs. or higher revenues?? Take , for example. the claim that prices may actually be lowered (to gain market share): why is it that a company wants greater market share ?? Usually it’s because they have greater control in the long run.
And that’s really what this is about…the long term: it’s easy to make vague claims – or even concrete statements – about what will happen “after”. But they usually have an expiration date after the first year.
If anything, people should be asking will this merger improve their grocery shopping experience – either in better prices, more innovation, and/or more fresh food options. But we know mergers like this won’t deliver on those. An Albertsons-Kroger merger will likely improve efficiencies in the supply chain and boosting margins.
The best thing to come out would be more competition, from smaller independents and yes, even Amazon grocery. Shoppers typically don’t like to be shoe-horned down to only one grocery store. Independents should get ready to compete for this opportunity by remodeling and building differentiated, better stores and experiences.