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Is a 413-Store Divestiture Enough for the Kroger-Albertsons Merger?
Kroger and Albertsons have announced that they will sell 413 stores, eight distribution centers, two offices, and five private label brands to C&S Wholesale Grocers in order to get regulatory approval for their planned merger.
The deal would give C&S access to a retail footprint spanning 17 states, but it remains to be seen if this divestment will be enough to earn Kroger and Albertsons government approval — or whether memories of Albertsons’ disastrous sale of locations to Haggen during the grocery giant’s merger with Safeway will raise its own concerns.
While C&S is primarily a wholesale grocery supply and supply chain solutions company, with 7,500 independent grocery store customers, the brand does have retail experience as the owner of the Grand Union (11 locations) and Piggly Wiggly (504 locations) banners. Additionally, Kroger and Albertsons noted that C&S has been an FTC-approved divestiture buyer in prior grocery transactions.
“Following the announcement of our proposed merger with Albertsons Cos., we embarked on a robust and thoughtful process to identify a well-capitalized buyer who will operate as a fierce competitor and ensure divested stores and their associates will continue serving their communities in the ways they do today. C&S achieves all these objectives,” said Kroger Chairman and CEO Rodney McMullen in a press release. “C&S is led by an experienced management team with an extensive background in food retail and distribution and has the financial strength to continue investing in associates and the business for the long run.”
The divestiture aims to ensure that no stores will close as a result of the merger, all frontline associates will remain employed, and all existing collective bargaining agreements will be honored. Additionally, the deal will enable C&S to enter new geographies to serve as a fresh competitor to the combined Kroger-Albertsons business.
However, Kroger and Albertsons are still facing scrutiny from both federal and state governments as well as other parties. In April, Reuters reported that 25 consumers filed lawsuits to block the merger, though lawyers for Kroger stated that competition law “does not turn every grocery store consumer in the country into a roving antitrust enforcer.”
The deal may also need to grapple with the aftermath of what happened when Albertsons sold a number of stores to Haggen in 2014, bringing Haggen from a minor chain with 18 stores and 16 pharmacies in two states to a regional player with 164 stores and 106 pharmacies across five states. In September 2015, Haggen sued Albertsons for $1 billion and claimed that the larger grocer misled it regarding vital data and used the timing of the store transitions to run ad campaigns and promotions that would steal away customers, leading to mass layoffs and store closures, according to The Seattle Times. Albertsons ultimately acquired the ailing Haggen in June 2016.
It is unlikely that the issue with Haggen will repeat for C&S, as it is a much bigger company that already operates under several banners and has a supply chain capable of delivering to thousands of stores. However, past experience may have an impact on regulators’ expectations and ultimate decisions. It remains to be seen if this divestiture will be enough to earn Kroger and Albertsons approval to become a nationwide grocery giant.
Discussion Questions
Is C&S a good choice to create a new competitor for the combined Kroger/Albertsons in the markets where stores will be divested? Will the end results of the Haggen divestiture be considered for this deal, or do you expect regulators to deem it irrelevant?
Poll
Loading …BrainTrust
Neil Saunders
Managing Director, GlobalData
Gene Detroyer
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
Personally, I think this is in the right ballpark to satisfy concerns over local competition – especially as the disposal includes 5 private label brands and a number of offices and distribution centers. The question is really whether the newly disposed entity will be viable – especially as this has been a problem in the past, including when Safeway and Albertsons merged and disposed of stores to Haggen, which subsequently went bankrupt. However, because the disposal is to C&S, which is a very established player in grocery, the newly disposed of stores should operate from a place of stability. All that said, this may not satisfy the broader concerns of the FTC which might see the merger of two giants as causing wider competitive issues in terms of the supply chain. Personally, I don’t buy that logic or argument, but the FTC is becoming more hawkish on policing big deals.
When the merger plans were initially disclosed, I had predicted that up to 750 stores may need to be divested. As market dynamics have continued to evolve, I adjusted that number to about 600. Personally, I believe there will be one more round of pruning to satisfy the FTC.
Ostensibly, this deal is the only way Kroger/Albertson’s can fight off Walmart and Costco. I assure you, it won’t help. The deal will be costly for the combined companies, and the integration will take longer than their spreadsheets predict.
Not knowing where the stores to be divested are located is critical in assessing if the FTC will look favorably. These can not just be poor-performing stores across the geography but impactful stores with specific markets.
Further, I imagine the lobbying against this deal is over the top—everything from local governments and labor to the most significant suppliers.
Agreed Gene. Somehow I don’t think the spinoff portfolio of stores will consist of just their “brightest and best” locations.
I am having a tough time connecting the dots on this whole scenario. The merger will create all kinds of synergies and efficiencies, and at the same time, create a “fierce competitor”. Really?
An important question that has not been asked here isn’t does the divestiture create suitable competition but does the “newco” picking up the stores have the financial engineering to be successful. It never ceases to amaze me how little the continuous hard work that takes place in every store, dc and buying office matters, if the finance department leverages the company with an unsustainable debt burden, or poor balance sheet structure. Good that Albertson/Kroger can spin off stores, can C&S profitably operate a chain of stores that no doubt contains a good percentage of poor performers.
Peter presents a much better way to challenge this scenario than my simple one word query of “really?”. What kind of visibility to we have into newco’s structure and strategy? How does newco become a fierce competitor with all the pieces that Albertson/Kroger didn’t want?
Until a list of stores is released, it’s impossible to know if enough stores are being divested. It’s not the number of stores, it’s the impact on local competition that counts. They may have nailed it…or they may need to divest hundreds of more stores. But until you look at this neighborhood by neighborhood, it’s not an answer any of us can answer.
Financially I don’t think C&S can be considered anything but very viable to add stores. But they have limited experience operating stores.
They’re being divested poor banners like QFC and Marianos and now we are back again to Albertsons banner having different owners in different states like in 2008. Bad arrangement.
The private labels being divested to C&S are meaningless and do very little sales volume.
The bigger thing here is this allows a territory expansion for C&S to add to its wholesale business. This will enable C&S to serve other customers where these stores are too. C&S supplies almost nobody in Southern California, nobody in Chicago, nobody in the mountain states like Utah or Colorado… I think this is the bigger story.
C&S can use these stores as carrots for small regional chains. Sign a supply agreement with us for your 20 little poorly located low volume non union stores and we will lease you our nice just remodeled 55,000 square foot former Safeway over at the busy intersection. Up to you if you want to keep the employees and the union…
FTC needs to stop this deal.
A couple corrections to your comment: One, C & S supplies Butera markets in the Chicago area. That’s about a dozen stores. Mariano’s is actually a pretty successful, upscale chain. It’s my opinion that all 44 Mariano stores should be sold together, not just 14. Taking Mariano’s from 44 stores to 14 while enlarging Jewel from around 160 stores in the Chicago area to almost 190 stores does not enhance competition. Anything but.
Interesting, Butera does not sell Best Yet from C&S, they sell Food Club. Piggy Wiggly Midwest has some of its own private label and Food Club mixed in. They must have realized how weak the Best Yet program is and stuck with the better Food Club program. I think Topco is handling both labels anyway now.
The other thing is of the 14 stores, we don’t know if all are Marianos. Some may be F4L Stores. The C&S F4L franchise or license or whatever it is format in NorCal is much weaker on mix than the Kroger version of F4L.
I agree selling 14 stores and the Marianos banner is a not great move. The entire group of stores and banner need to be sold together for it to make sense and to be viable. I could probably say it would be fine if it was flipped and Kroger was keeping 14 Marianos then selling the other 30 of them with the banner.
Some of the Marianos have pretty bad leases, very high cost. This is probably why Kroger is willing to divest them. In my observation in multiple locations Marianos is actually outperforming Jewel. Kroger center store program has really helped Marianos. Of course they’ll lose that program when divested to C&S.
Without knowing the specific stores, of course, it’s impossible to say anything definitive, so we’re left with answering our default question: “will they do more than the absolute minimum to satisfy regulators?” Based on the description given here – a relatively minor, weak player – I would tend to a “no.” But ultimately it’s up to the various agencies to do what we pay them for and analyze the numbers themselves…the disdain some people feel for them notwithstanding, they certainly know more about it than I do.