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Would/Should Kroger and Albertsons Sell Hundreds of Stores to Amazon?
Kroger and Albertsons plan to sell between 250 and 300 stores to get approval from the Federal Trade Commission on the proposed merger between the two supermarket giants. Who will buy them if it goes that far?
Business Insider earlier this week reported on a note published by analysts at Bernstein that envisions a scenario where Amazon.com could purchase many, if not all, of the stores that Kroger and Albertsons are looking to offload. The two companies have stores overlapping in several large markets including Chicago, the Pacific Northwest, Phoenix and Southern California.
The article points to comments made by Amazon CEO Andy Jassy about the vital role that grocery plays in his company’s future growth plans.
Stores, he said in February on the company’s fourth-quarter 2022 earnings call, will be a critical part of the plan because physical locations are required to succeed in perishable categories.
Mr. Jassy told analysts that Amazon’s online grocery business is strong.
“If you think about the aisles in a grocery store, from packaged food to paper products to canned goods to pet supplies to health and personal care items to consumables, we have a very large business there that continues to grow at a rapid clip and that we think will continue to grow,” he said.
Mr. Jassy also said that Whole Foods, with nearly 500 stores, has made significant strides in growing its profitability.
It’s Amazon Fresh, Amazon’s mass-market grocery concept, where Mr. Jassy sees the greatest upside potential even as his company has temporarily hit pause on opening new locations.
Amazon is tweaking the Fresh concept, Mr. Jassy said, “to find a format that we think resonates with customers [and] it’s differentiated in some meaningful fashion and where we like the economics.”
He later added, “When we do find that equation, we will expand it more expansively.”
Amazon’s big plans for grocery, matched with Kroger and Albertsons’ desire to sell, have led to “a very rare opportunity in U.S. retail,” according to Bernstein.
“In theory, Amazon could plug acquired stores into its network, which would (potentially at least) prove less painful and costly than building a distribution and logistics network from scratch,” the analysts wrote.
Amazon may not pursue a deal over concerns it could lead to more regulatory scrutiny of its operations.
Discussion Questions
DISCUSSION QUESTIONS: Will selling 250 – 300 stores be sufficient for the Federal Trade Commission to approve the merger between Kroger and Albertsons? Do you see Amazon or some other party making a deal to acquire most, if not all, of the stores that are put up for sale?
Poll
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Lisa Goller
B2B Content Strategist
Georges Mirza
VP Product Management & Advisory, ComTask
It’s hard to say how the FTC will call it, but selling excess stores is one way that these sorts of deals have gotten done in the past. The FTC may also rule that they need to sell even more stores. In any event, Amazon could very well be interested in expanding its grocery footprint, and this would be a great way to do it. The attractiveness will depend upon the quality of these 250-300 locations, but Amazon and any grocery competitor looking to expand will take a good look at these locations.
I’m pretty confident that Amazon will not be making a bid to acquire new stores. They announced earlier this year a massive pullback in their physical stores strategy and, at the moment, are trying to sell off a number of half-finished locations in several markets around the country. They took a pretty big financial hit on those locations. I just don’t see them doing a 180 a few months later and reinvesting in what they’ve been working hard to divest from.
I don’t know about this. Everything you said about the missteps that Amazon made when jumping into the grocery arena is correct, however I think if there were an opportunity to buy facilities in locations that are desirable to jump back into grocery full force, they would take that opportunity to do it. It’s R&D.
I don’t disagree; however, timing, and I know timing is everything; just a few months after a dramatic reversal off course, seems too much. I might be reacting to the three locations around me where great building sites have been abandoned, in two cases with cranes sitting idle in the parking lots.Not an inexpensive change in plans. I think it would be hard to justify to shareholders why buying these locations is a good idea while leaving others nearby abandoned. I don’t know the specifics; I just suspect that Mr. Bernstien is projecting Amazon’s strategy based on remarks from Mr. Jassy at Amazon, who has some damage control to do with shareholders and analysts about their announced withdrawal from Amazon branded physical retail.
This sounds like a quick logical entrée for Amazon, but I don’t think it’s that simple. Buying secondary locations for the privilege of competing with a formidable opponent sounds risky. Unless Amazon can turn those locations into more attractive destinations than they have previously been. And by that I mean extending the product offering beyond groceries. Some new Target-like hybrid retail model. My local grocery store is clearly over-spaced for groceries. A recent remodel saw a lot of fixture capacity come off the floor. They may or may not be adding categories, but clearly they don’t want to carry unproductive inventory. Can Amazon turn secondary locations into a new grocery store model for the 2030s and beyond?
The stars may align for Kroger and Albertsons to rightsize their store count and for Amazon to catapult forward in physical retail.
Some of the sites in question may make viable Whole Foods locations, but the Amazon Fresh concept is stuck in neutral. The answer to George’s question depends on which sites are subject to the selloff.
In Chicago, for example, there are far more Jewel-Osco stores (Albertsons) than Mariano’s locations (Kroger) but often in older or less desirable locations. Yet it’s the Mariano’s sites that would be a better match to the Whole Foods customer, and I don’t see that kind of spinoff happening. It’s also hard to see another chain buying a relatively small number of discarded locations across the U.S.
By definition, these excess stores overlap with another Kroger or Albertsons store, therefore whoever buys them and continues to run the locations as supermarkets will automatically be competing in those locations with the remaining Albertsons or Kroger store. I don’t think that Amazon knows how to run a large-scale supermarket chain (Whole Foods runs independently) well enough to take this on.
Before Amazon does anything further in grocery it needs to refine its proposition and have a very clear strategy for entering the mainstream grocery market. At the moment it has this in part, but not in full — hence their constant experimentation and the advances and pullbacks in the category. Without a clear proposition, acquiring hundreds of stores in one go would be folly; though selectively buying a few for Whole Foods or Fresh conversion would be sensible given that some of the locations are good. As for the FTC, it has to be careful about divestments. Its past rulings have ended in disaster with companies taking on diverted stores going bust and leaving the consumer with less choice — see Albertsons-Safeway, Dollar Tree-Family Dollar, etc. This is because the FTC does not properly understand how markets work!
My prediction is that the merger will go through. Amazon will not buy any of these stores because they are way too big and the available stores are too geographically dispersed to make it efficient.
I do not know what the final FTC decision will be. But if I were Kroger/Albertsons, the last thing I would want to do is set up another competitor to split market share with.
If I were the buyer and wanted to make an impact in a marketplace, I would not be buying the least-performing locations in the market.
If I were Amazon, I would not need a bucketful of “fixer-uppers.”
Perhaps the FTC should be looking at Amazon as a company that is growing too powerful to be left alone as one.
By definition these potential spin off stores are in competitive areas since they are too close to other “brand” stores. While it probably won’t happen, would be nice to see some regional’s pick these up. Consolidation narrows the field, new players expand it.
Chicago would be a big shiny jewel for Hy-Vee or Meijer. If UNFI was smart they’d want to look hard at putting Cub Foods there as it is doing well at holding Walmart at bay up in the Twin Cities.
If I were Kroger and Albertsons, the last entity that I’d want to enhance in this merger would be Amazon. Here are a couple of certainties: Amazon is looking for more bricks-and-mortar stores and intends to improve upon the Amazon Fresh offering. I realize the actual divestiture of the hundreds of stores depends on many variables. That being said, I see the opportunity for the larger regional grocery chains to pick off Kroger/Albertsons locations that fit their needs.
There are far too many cautionary retailer tales that led to Amazon’s rise to prominence during the company’s beginning. As Amazon was gaining market share in selling books and CDs in the mid-’90s, the destruction of Toys “R” Us started in 2000 when instead of expanding its digital presence, Toys “R” Us signed a 10-year partnership to stock a wide variety of its most popular toys on Amazon in exchange for being Amazon’s exclusive seller of toys and baby products. We all know where that led. This will not be the case for Kroger and Albertsons, as a partnership with Amazon isn’t necessary.
The Kroger and Albertsons merger will go through as planned, and they will not have to sell hundreds of stores to Amazon. By combining forces Kroger and Albertsons are in an excellent grocery market position and will have plenty of buying and sourcing leverage. Amazon has also indicated that they are slowing down their brick-and-mortar grocery and retail ambitions, as the Whole Foods model has proven challenging.
Absolutely not! They need to sell 250-300 stores just in Oregon and Washington to avoid creating a monopoly. The real number is probably closer to 700-1000 stores they need to divest.
And Kroger stated at the outset that they needed this merger to compete with Amazon, and now they want to sell them stores? That undermines their case for a merger. Plus it places Amazon into an even better position to compete with Kroger with all these new delivery points.
Hi, David — I agree with your point re not selling to their stated competitor — especially if the number of spunoff locations is that high. Can you share your source or thinking re the figure for 250-300 locations in WA and OR?
First, with over half of Albertsons’ stores within five miles of a Kroger, the number of divestitures will need to be at or above the 650 store threshold currently in the agreement.
Second, to get the deal done, Albertsons/Kroger need to convince regulators that Amazon (and Walmart and other non-union alternatives) are the key competitors driving this merger. Amazon won’t be acquiring any stores. Third, given the consumer, union and political opposition, I don’t think this deal gets done.
It’s hard to know what store count will be sufficient to sell. It may make sense in particular markets to sell a store and other markets have enough grocery options for consumers. Selling to a large national grocery retailer or Amazon is not the best option. If Albertsons and Kroger do not have a short, hard deadline, it may make sense to allow time for smaller regional grocers to bid for particular sites.
In San Diego, we learned how tight deadlines to sell can be disastrous with the Haggen purchase of the Safeway/Albertsons store. I was just in the Hillcrest area yesterday where a neighborhood saw the transition from Albertsons to Haggen to Lazy Acres at a site within five years. The answer is not only big chains. Natural or Hispanic or Asian-formatted or even value-oriented stores may be a better fit for particular neighborhoods than mainstream grocery stores.
The merger will likely go through, but it’s going to require offloaded 500 or more stores across all markets to get a green light. There’s too much overlap at 250 stores.
As in previous mergers and bankruptcy moves when stores are offloaded, competitors often get the first look at the best sites. Amazon will eventually create a more compelling store value proposition for its own brand, or with Whole Foods and can pick up some locations for a bargain.
The divestiture is a technical issue, having to do with specific stores, namely overlapping ones, rather than overall store count; so unless one is familiar with the details – I’m not – it’s meaningless to speculate on “sufficiency”.
The Amazon angle seems overblown, namely because it wasn’t actually them that came up with it; and I don’t know that the stores, in aggregate, will interest anyone else either…competitor’s castoff(s) usually isn’t the best recommendation for a purchase.
Kroger plans to sell stores based in Pacific Northwest, Southern California, Phoenix, and Chicago. Their collective value is estimated to be more than $1bn.
It seems the buyer might be Ahold Delhaize, which owns Stop & Shop, Giant, Food Lion and Hannaford.
Given a choice, and the markets involved, I think Kroger-Alberston’s will be much better off selling the necessary number of stores to Amazon, who I believe will not be the same type of competitor as the Ahold-Delhaize banners.
I don’t think it is enough to sell 300 stores. The merger would make the resulting entity too big and too strong for any other significant retailer with a chance to compete. Even in the current state, we have seen several regional retailers sell out or close out. Amazon is the only viable option, yet I do not know if it is an option as they are trying to figure out the brick-and-mortar strategy.
Back in 2017 Amazon paid $13.7 billion for the Whole Foods chain, but that has come with bumps and bruises. Amazon also has been forced to close Amazon Go and Amazon Fresh locations and has laid off thousands of workers.
Well said @Neil Saunders, “Before Amazon does anything further in grocery it needs to refine its proposition and have a very clear strategy for entering the mainstream grocery market”. Without a clear proposition, acquiring hundreds of stores in one go would be folly.
Amazon announced in February it was pausing the rollout of its Amazon Fresh stores while it re-evaluated the concept’s economics. I feel Amazon should focus on its current stores and make the stores efficient & profitable rather than buy what competition is offloading.