Rise of the MegaGrocers: Industry Responds to the Kroger-Albertsons Merger
Rise of the MegaGrocers: Industry Responds to the Kroger-Albertsons Merger
November 3, 2022
This article was originally published in Presence Marketing’s November 2022 newsletter.
By Steven Hoffman
Since Cincinnati, OH-based The Kroger Co. (NYSE: KR) and Albertsons Companies Inc. (NYSE: ACI), headquartered in Boise, ID, on October 14 announced a merger valued at $24.6 billion — one of the biggest deals in the history of the U.S. grocery industry — regulators, investors, labor organizations, independent grocers and other stakeholders in the natural, organic, conventional and specialty grocery industry have responded with mixed reactions.
The merger, in which Kroger will acquire all outstanding shares of Albertsons common and preferred stock for approximately $34.10 per share plus the assumption of $4.7 billion of debt, will combine Kroger, the nation’s largest supermarket retailer, with Albertsons, the second largest supermarket retailer in the U.S., to form what the companies say will be a national company. The combined operation will comprise 4,996 stores, 66 distribution centers, 52 manufacturing plants, 2,015 fuel centers and more than 710,000 employees across 48 states and the District of Columbia. The merged entity would create the second largest food retailer in the U.S with an estimated 11.8% market share, behind Walmart at 17.1%. The combined company also would be the fifth-largest retail pharmacy operator, with 3,972 pharmacies, according to Supermarket News.
Source: Wikimedia Commons
Grocery store brands owned by The Kroger Co. include Kroger, Ralphs, Dillons, Smith’s Food and Drug, King Soopers, Fry’s, QFC, City Market, Owen’s, Jay C, Pay Less Super Markets, Ruler, Baker’s, Gerbes, Harris Teeter, Pick N’ Save, Metro Market, Mariano’s, Fred Meyer, Food 4 Less and Foods Co. Albertsons Companies’ portfolio of supermarkets includes Albertsons, Safeway, Vons, Jewel-Osco, Shaw’s, Acme, Tom Thumb, Randalls, United Supermarkets, Pavilions, Star Market, Haggen, Carrs, Kings Food Markets and Balducci’s Food Lovers Market.
The deal, which the companies say is necessary to offer better prices to consumers in an age of inflation, and to compete with the likes of other “mega-grocers” such as Amazon, Costco and Walmart, has to first gain approved by the Federal Trade Commission (FTC). Increased regulatory scrutiny is expected, as the merger is unprecedented for the retail food industry, given the size of the two companies and the large number of markets in which both grocers compete.
“If this were 20 years ago when I was still working in the government, I would expect the FTC would try to block this deal,” Daniel Rubinfeld, law professor at New York University and former deputy assistant attorney general for antitrust with the Department of Justice, told Grocery Dive. But today, supermarkets are not the only stores selling groceries; for example, Walmart is the leading grocer in the U.S., with a nearly 21% share of sales, Rubinfeld noted.
Yet, that was not how FTC viewed things in 2007, when Whole Foods Market, based in Austin, TX, announced its acquisition of natural foods supermarket chain Wild Oats Markets, based in Boulder, CO. Then, the FTC ruled that the merger would violate federal antitrust laws by eliminating competition among natural and organic grocers, which former Whole Foods Market CEO John Mackey and others argued at the time was a very narrow definition of the competitive landscape, since natural and organic products were being sold in many kinds of retail formats by then. The FTC eventually approved the deal in 2009, after Whole Foods agreed to sell off 32 Wild Oats stores in 17 markets.
“Ultimately, the resolution was that organic foods is not its own market and any place you can buy food counts,” Jim Burns, an antitrust lawyer with Williams Mullen in Richmond, VA, told Grocery Dive. Burns said that perspective also will be applied to the deal between Kroger and Albertsons. “I think the better and the ultimate result here is going to include Walmart and those other stores in the same market as these guys,” he said.
However, Christine Bartholomew, a law professor and specialist on corporate monopolies at the University at Buffalo School of Law, countered, “Regulators should not approve the merger simply because two competitors want to compete more effectively with the prevailing dominant big box or online retailer,” she told Grocery Dive. “Nor is inflation enough to justify losing one of the top three market players. If regulators treat these justifications as reason enough to approve the merger, the long-term ramifications are significant.”
Knowing there is significant overlap of stores in numerous major markets, Kroger and Albertsons said they are willing to divest between 100 and 375 locations, reported Reuters. As such, they have created a separate company called SpinCo, controlled by Albertsons shareholders, to sell off the stores, a preemptive move, said analysts, to garner quicker FTC approval for the merger. The companies hope to close the transaction in early 2024, pending regulatory approval and other customary closing conditions.
Expressing concerns about the merger, U.S. Senators Amy Klobuchar (D-MN) and Mike Lee (R-UT), Chairwoman and Ranking Member of the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights, announced they will hold a hearing in November 2022 to examine the proposed merger between Kroger and Albertsons. “As the Chair and Ranking Member of the Subcommittee on Competition Policy, Antitrust, and Consumer Rights, we have serious concerns about the proposed transaction between Kroger and Albertsons. The grocery industry is essential, and we must ensure that it remains competitive so that American families can afford to put food on the table. We will hold a hearing focused on this proposed merger and the consequences consumers may face if this deal moves forward,” the Senators said in a statement.
Independent Grocers and Labor Unions Respond
Already facing stiff competition from retail grocery giants, independent retailers, too, have expressed concerns over the pending merger of the nation’s two top food retailers, while other independents are looking to benefit from potential store closures and other ways they can turn the merger to their market advantage.
“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, President and CEO of the National Grocers Association. Based in Washington, DC, NGA represents 21,000 privately held and family owned independent grocery stores across the country. “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,” he said.
Barons Market, a Southern California-based independent grocer with nine stores, sees the mega-merger as an opportunity to further differentiate, said Rachel Shemirani, SVP of Barons Market, in an emailed statement to a number of media outlets. “A Kroger-Albertsons merger puts independent grocers like Barons Market in a unique position to nurture and cultivate connections with potential shoppers, current customers and the community. Simply put, we do things differently and better than the large grocery stores,” she said.
Shemirani also sees the Kroger-Albertsons deal as an opportunity for independent grocers to attract talent. “When big grocery store chains merge together, these organizations tend to focus on the bottom line rather than their customers and employees,” she said. “As with any merger, layoffs or potential store closures could be on the horizon. So, what do you do when your favorite grocery store closes or your grocery store bestie is laid off? You search for that sense of community elsewhere.”
Leading natural products retailer Natural Grocers (NYSE: NGVC), which operates 164 stores in 21 states, also sees an opportunity for new shoppers to visit its stores, given the likelihood of store closures in some areas as a result of the Kroger-Albertsons merger. “As many have pointed out, without these companies competing against each other, prices could go up and their stores may close to eliminate redundancy,” the Lakewood, CO-based retailer told Winsight Grocery Business. “Many people will be looking for alternative places to shop for better prices, closer proximity or a better shopping experience. We look at the planned merger between Kroger and Albertsons as an opportunity to reach folks that may not be readily familiar with us. If the merger goes through, this could be a catalyst for some customers to give us a chance. And then it’s up to us to win them over with our high-quality product selection,” the grocer said.
Errol Schweizer, retail consultant and former global grocery director for Whole Foods Market, wrote in Forbes that grocery workers, who faced workplace illness, low pay, erratic schedules and long hours during the Covid-19 pandemic, also face high rates of food insecurity as pay rates have failed to keep up with rising costs of housing, child care and transportation. While Schweizer noted that labor unions have negotiated new contracts with supermarket chains for higher wages and benefits, “a merger may make it tougher for unions; a 2004 grocery strike for better wages in California was squashed once Kroger and Albertsons joined forces against their own employees. Now the combined duo would become the latest private sector unionized employer. And a merger will mean large scale layoffs in redundant white collar jobs, such as office-based marketing, procurement, analytics, digital sales and category management roles,” he wrote.
Indeed, major labor unions throughout the country have spoken out about the proposed merger. According to Reuters, unionized retail workers throughout the U.S. are lobbying regulators about the proposed merger. Four local chapters of the United Food and Commercial Workers (UFCW) International told Reuters they are assessing their options for lobbying and coordinated action against the deal, including potential strikes. The chapters together represent about 100,000 Kroger and Albertsons workers in Colorado, Wyoming, California, Ohio, Maryland, Virginia and Tennessee. "There is no way that this is going to be good for workers," said Maggie Breshears, who works in the pickup department at a Kroger-owned Fred Meyer in Seattle, told Reuters. "I wish they would put their money toward trying to lower prices and increase wages, rather than gobbling up the competition,” she said.
In a statement, Teamsters Union General President Sean O’Brien, said, “The proposed merger between Kroger and Albertsons will have serious implications for the more than 18,000 Teamsters employed at both companies and is another example of why real antitrust reform is needed. Historically, mergers of this magnitude have a negative impact on workers and the public. Less competition almost always means higher prices and fewer choices. We will be monitoring developments as the regulatory process plays out. There are a lot of unanswered questions that need to be addressed. Our concerns are shared among workers, customers, elected officials, shareholders, consumer advocates, and the general public,” he said.
Investor Reaction Mixed
From Wall Street’s perspective, the deal is primarily about Kroger and Albertsons being better positioned to compete with the likes of Walmart and Costco and ultimately Amazon in both brick and mortar and e-commerce business. While not pure grocery sector plays, Walmart, the market leader, is taking steps to expand its grocery business, and Costco, one of the biggest sellers of organic food, as well as conventional food, enjoys the benefit of a loyal membership base.
However, the deal all depends on FTC approval during a time when the agency is more closely scrutinizing corporate mergers. As such, Wall Street response has been a mixed bag, as exemplified by these comments in Supermarket News:
“We are surprised by this development. On paper, there appears to be clear strategic merit. However, we would expect a potential regulatory pushback given overlap in key West Coast states such as California, Washington, etc. As a result, this could add risk to any contemplated merger between these two entities,” Rupesh Parish, a financial analyst with Oppenheimer, told Supermarket News. “Consistent with our initial take, we continue to view regulatory approval as a potential roadblock for a Kroger-Albertsons merger. … Based on our work and incorporating a rational grocery backdrop, the earnings/cash flow accretion could be quite compelling down the road, assuming minimal divestitures. We expect our analysis to be quite fluid amidst an uncertain number of regulatory-related store divestitures, competitive developments, macro headwinds, and our changing assumptions (synergies, intangible amortization, etc.). Given our concerns on the regulatory front at this juncture, we remain focused on Kroger’s prospects as a stand-alone entity.”
Speaking to Supermarket News about the proposed merger, financial analyst Arun Sundaram of CFRA Research said, “The combined company will be one of the largest food retailers in the country and a more formidable competitor to its largest competitor, Walmart. With a combined customer base of 85 million households, Kroger will now have one of the most comprehensive first-party data repositories in the food retail space, which should allow the company to develop a very strong loyalty program and deliver more relevant and personalized promotions to its customers. With the savings realized from cost synergies, Kroger should be able to reduce food prices, raise associate wages and enhance the overall shopping experience for its customers over time. We anticipate Kroger obtaining the necessary regulatory approvals, as Albertsons will divest an estimated 100 to 375 stores prior to the merger, likely in markets where both companies have significant store overlap. Additionally, Kroger will keep its No. 2 market share position behind Walmart. Overall, we view this merger as a win-win for both Kroger and Albertsons shareholders.”
Looking forward, the Kroger-Albertsons deal is as much about boosting scale in data, retail media, personalized marketing, e-commerce and private label, and securing more negotiating power with suppliers, as it is about growing physical stores and warehouses. “Kroger has a huge data set of national consumer behavior data, to which they apply analytics, personalization, and expertise to drive retail media, personalized marketing, and better internal decision making,” Ken Fenyo, president of research and advisory with Corsight Research and former VP of loyalty and digital marketing with Kroger, shared with Jeff Wells, Lead Editor of Grocery Dive. “Data is the real gold in the deal,” Fenyo added.
“If it’s able to merge with Albertsons, Kroger will be able to pull itself within striking distance of the industry behemoths. It also leaves the rest of the country’s grocery chains in the dust, effectively creating a new ‘Big 3’ in the industry,” Wells wrote. There’ll be Walmart, Amazon, Kroger-Albertsons, and then everyone else.”