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Kroger and Albertsons are merging
Kroger and Albertsons have agreed on a deal that will combine the first and second largest supermarket operators in the U.S.
The deal valued at $24.6 billion will see Kroger pay $34.10 a share for Albertsons’ stock, which closed at $28.63, CNBC reports.
The merger, whose talks were first reported by Bloomberg, represents the biggest deal in the grocery industry since 2006 when Albertsons was acquired by Supervalu, CVS and investment firms for about $9.8 billion. Albertsons earlier this year said it was reviewing “strategic alternatives” under the belief that the company was undervalued.
Kroger and Albertsons, as currently configured, operate 2,723 and 2,273 stores respectively, according to Supermarket News.
Kroger operates stores under its namesake banner as well as Baker’s, City Market, Dillons, Food 4 Less, Foods Co., Fred Meyer, Fry’s, Gerbes, Harris Teeter, Jay C, King Soopers, Mariano’s, Metro Market, Owen’s, Pay Less, Pick N’ Save, Ralph’s and Smith’s.
Albertsons’ roster includes its namesake stores as well as Acme, Balducci’s Food Lovers Market, Carrs, Haggen, Jewel-Osco, Kings Food Markets, Pavilions, Randalls, Safeway, Shaw’s, Star Market, Tom Thumb, United Supermarkets and Vons.
Kroger accounts for nine percent of the U.S. grocery market and Albertsons has a 4.5 percent share, according to data from Insider Intelligence. In comparison, Walmart holds a 25 percent share of the market, according to Euromonitor figures as reported by Reuters.
The Kroger and Albertsons merger is expected to give the combined company greater buying power and the means to remove duplicative costs.
The deal will invite regulatory scrutiny and likely store divestitures as the two companies have a significant overlap in key markets including Chicago, Dallas and Los Angeles. The Federal Trade Commission has been investigating anticompetitive behavior in the grocery industry, and independent grocers represented by the National Grocers Association have been lobbying the Biden administration and Congress to level the playing field through enforcement of the Robinson-Patman Act.
Sara John, a senior policy scientist at the Center for Science in the Public Interest, told The Wall Street Journal that a Kroger and Albertsons merger would reduce competition in the markets where the companies operate. She voiced concerns that reduced competition would lead to higher prices for consumers already struggling with food inflation.
- Kroger agrees to buy rival grocery company Albertsons for $24.6 billion – CNBC
- Kroger Wants to Merge With Albertsons to Create US Grocery Giant – Bloomberg
- U.S. grocer Kroger in talks to merge with rival Albertsons – sources – Reuters
- Kroger and Albertsons in Deal Talks to Create Supermarket Powerhouse – The Wall Street Journal
- Kroger, Albertsons reportedly in merger talks – Supermarket News
- FTC commissioner says it’s time to enforce the Robinson-Patman Act – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: How will the Kroger/Albertsons merger affect the competitiveness of the two companies? What will it mean for their rivals and suppliers?
Poll
Loading …BrainTrust
Bob Amster
Principal, Retail Technology Group
James Tenser
Retail Tech Marketing Strategist | B2B Expert Storytelling™ Guru | President, VSN Media LLC
Sometimes bigger isn’t better – it’s just bigger. By combining the #2 and #4 marketshare players, this enterprise will have second place locked up — but what else? I understand that there will be “synergies” to be had (read cost cutting, store cutting, etc.), which is a normal part of the process. And while this may be a sign of further consolidation in the industry, that will depend on how the FTC rules on this merger.
The chances of this passing FTC muster are slim. If it does, competition and choice both drop significantly in those markets where both operate. Nothing good will come from putting these two companies together – not for consumers, not for employees.
Over the past two years grocery had an excellent run thanks to the pandemic and shifts in consumer behavior. We are now entering a much less favorable period when inflation is eroding margins and competition is tightening as value players expand. One response to this is to scale up to drive better economics and extract savings from central operations. This is the route being pursued by Kroger. Long term success is possible, but the short term complexities of merging two giant businesses – each themselves a product of various mergers and acquisitions – should not be underestimated. Then there are the regulatory concerns: on a national level there really is no issue as both companies would remain much smaller than Walmart; on a local level there will be areas where the combined entity has very high market shares and divestments may be required.
When I saw this yesterday afternoon, I thought three letters – FTC. I will be very curious to see how this merger will move forward. I want to see what the next move will be. How will Amazon and Walmart react? Very interesting indeed.
As inflation rears its ugly head and seemingly can’t be stopped, retailers will need to figure out strategies to address getting squeezed by manufacturers who want to charge more and shoppers who want to pay less. Likely the FTC will have something to say about this, but if it is approved it may very well lead to more “sameness” across the country (good for synergies, bad for shoppers).
Both companies will have to squeeze hard to get any juice of that merger after the FTC tells them what they have to shave off the combined companies. Suppliers will be squeezed for price and many consumers will have fewer choices.
Blending these grocery behemoths and all of the combined banners won’t happen overnight as the regulatory hurdles will be high and the portfolio pruning deep. Still, the combined company will have incredible buying and selling power (hello retail media clout). In a margin-challenged category, the advertising potential alone makes the deal “worth it” from a profitability standpoint.
More than 10 years ago, Mckinsey wrote, “It’s known as ‘the winner’s curse’.” When companies merge, most of the shareholder value created is likely to go not to the buyer but to the seller. More than 80 percent of the time. Further, within two years, shareholders of the merged company will actually lose value.
And then there are the famous synergies. Rarely do they occur. In fact, again in more than 80 percent of these transactions, dis-synergies occur.
The only thing that can save the shareholders is the FTC. But who is interested in saving the shareholders? The winners: the investment bankers and the top management that get new contracts and payments for making the deal happen.
Presuming this deal is approved (and I may be a bit more bullish than my other BrainTrust experts), there are pros and cons.
Pros:
Cons:
If I take a lesson from department store mergers — say Federated and May Co. — then it is very difficult to be enthusiastic about the outcome here. I’m sure it’s a number cruncher’s delight, and that there are indeed plenty of synergies and efficiencies to be gained. But I wonder how many of the smaller, local namesake stores will disappear? Can this grocery merger, if approved, learn from the mistakes of past years’ department store mergers?
I thought the exact same thing Jeff. As Mark Ryski said above, bigger is sometimes just bigger. There is potential, but in my observation over the years, it usually does not play out as people thought, hoped, and forecasted. Hopefully they will have seen the difficulties and problems faced by Federated-May on the dry goods side and they will try to avoid the “grocery version” of that. Walmart is still bigger than the combo, but it may be difficult for a while; such large different cultures and methods of operation. Kroger is going to have to “Krogerize” the Albertsons banners. Kroger is much better and I am sure they have big plans. Still, I am afraid the combining is going to be difficult with such a juggernaut. Let’s see if it even passes regulatory review.
If the merger partners can convince the FTC that the real market share battle is against Walmart, they have a shot of approval if the issues of market overlap are addressed. As to the merits of the merger, is this much different from the consolidation that swept the department store industry awhile back? (Think Macy’s/Federated buying May Company.) I’m sure Kroger and Albertsons go into this deal with their eyes wide open on the antitrust issues.
As a shopper, I’ve found that Kroger has improved the content and operations of the former Roundy’s brands (Pick N’ Save, Metro Market and Mariano’s), especially on the private brand front. (I have less experience shopping Albertsons brands but have not been impressed by Jewel-Osco or Safeway stores.) It’s possible in this instance that bigger actually turns out better.
I think Michael La Kier brings up a great point – “sameness.” Do we really want to have our supermarket experience be the same across the country? I also think that suppliers will bear the brunt of being squeezed and they will in turn squeeze the consumer. What is good about this picture?
I agree with Mark – bigger doesn’t always mean better. As we have seen in other cases it means one plus one equals something less than two. When Safeway bought Dominick’s the product selection was significantly changed and as a loyal Dominick’s customer I can say it was not for the better. We have Mariano’s and Jewel-Osco locations near us and shop both depending on what we are seeking. Based on my research as a shopper they are definitely competitive with each other. Time will tell what, if any, benefits, this merger will bring to shoppers in the Chicago area and other markets.
Wow. The potential for abuse here is pronounced. You have to think that the FTC will have something to say about this, especially given sharp rises in prices pre-merger.
This stunning deal is about creating a fully nationwide retail media network that can compete with Walmart, Amazon and Google for ad dollars. It is a signal of what I now believe will be a massive wave of M&A activity in the grocery in the coming 2-5 years.
Of course it remains to be seen whether it will pass regulatory review, but I do not believe it’s only about traditional forms of “synergy” we are used to hearing about when mergers are announced.
“Retail media network” were the first words I thought of when hearing about this merger, 100% with you James on that one — surely the financial analysis shows this is where that majority of the profitable gains are to be had in the combined entity. And yes, this would make them more competitive to Walmart, Amazon, Google, (and Target) etc, — but I expect the regulatory hurdle to be quite significant.
Kroger realizes the difficulty of securing FTC approval as it expects the deal to close in early 2024. The geographic overlap of stores is significant; financial analysts estimate 57 percent of Albertsons stores are within 5 miles of Kroger stores. Any spin-off company formed to resolve the overlap will impact the final deal price and call into question the economic viability of the spin-off. The bottom line, I don’t expect this deal will gain regulatory approval.
The Kroger and Albertsons merger will change the competitive grocery landscape significantly. There has been a wave of big grocery mergers and acquisitions for over 10 years, and this is undoubtedly the biggest one. The primary consideration is whether the $24.6 billion deal, which combines 700,000 employees across about 5,000 stores, passes the FTC approval process.
While at the surface, the merger will result in some synergies across both organizations and fill marketplace gaps where either the Kroger or Albertsons brands are lacking, the biggest question is the impact on the American consumer. A consumer base is experiencing yet another inflationary period, a potential recession, rising costs of living, rising food costs, an uncertain economy, and an uncertain job market with looming mass layoffs.
Another potentially meaningful competitive advantage of the merger is the significant AdTech and MarTech shared capabilities between the two powerhouses. With digital media networks emerging as a new and significant revenue stream, expect the merged company to compete with Google, Amazon, and others for ad revenues.
My feeling on whether this is good or bad depends on which company emerges as the survivor. I’m a Kroger shareholder, I’m not one of Albertsons: I think that tells quite succinctly what I think of the respective companies.
As for the logistics, we’ll have to see what is asked for from regulators; I know that here in the Bay Area there is very little overlap, but I doubt that’s true everywhere.
The first thought I had when hearing this merger announcement was “retail media network.” Both Kroger and Albertsons have invested in this area and the combined entity as other BrainTrust members have pointed out will make for an even more profitable ad network, that could be seen as more competitive to Amazon, Walmart, Google, etc. I would not be surprised if this factored heavily into the financial equation on “synergies” we are hearing so much about.
However, I do expect the regulatory approvals to be a significant deterrent to this deal going through. Already we have news reports from senators and other gov’t officials saying the deal is bad for consumers. Let’s wait and see what the FTC does. 2024 may be too optimistic for this deal to go through.
The National Grocers Association issued the following statement concerning the merger announcement: “A merger of the nation’s top two grocery chains should raise serious questions about a single supermarket giant gaining unprecedented dominance over the nation’s food supply chain,” said Greg Ferrara, NGA president and CEO. “A merger would not only put smaller competitors at an unfair disadvantage, but also increase anticompetitive buyer power over grocery suppliers, which ultimately would harm consumers. It is our expectation that this deal will receive rigorous scrutiny from federal antitrust enforcers.”
The combined entity would control 11.8% of the total market for food and grocery in the US. It would still be a distant second to Walmart on 17.1%. Under it there would be some enormous players, such as Costco on 5.7%, who are more than able to compete. While I accept there are some local competition issues that need to be resolved should the merger go ahead, the idea that it would create a player of unprecedented dominance is absurd. This is especially so given that the US grocery market is fragmented by international standards. In the US, the top 5 players account for 38.9% of the food and grocery market. In the UK, the top five account for 56.8% of the market. Despite the more consolidated nature of the market, no one in their right mind would say the UK market lacks for competition; on the contrary, it is absolutely cutthroat — probably more so than the US. Quite honestly, I think the NGA’s statement is more about protecting the interests of its members (which is fine as that’s its job!) than looking after consumers.
I guess they had their lawyers and advisors review, that a deal was possible. But like others, divesting just 375 stores seems too low … with over 50% Albertsons stores within 5 miles of a Kroger.
National scale to better compete with AMZN and WMT, sure. But at the same time, I’m concerned both companies will take their eyes off current strategic initiatives, and notably Kroger’s push into digital with Ocado.
Big question I always ask in mergers — how will this help or improve things for the customer? If this merger lifts margins, lowers costs, improves efficiencies, how much of that finds its way to customers in order to change shopping habits, change the competitive landscape? At initial glance, hard to tell.
Other issue is they’ll be asked to shed more sites than proposed, with overlap in Chicago, Dallas, Colorado, Southern California and the Seattle area. Empty location suitors may be Amazon Fresh, Trader Joes, regional players, independents. Do they really want to give those up to hungry competitors?