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.”
Is Organized Crime Responsible for Shrinking Retail Margins and Higher Prices?
Photo: Pexels
This article originally appeared in Presence Marketing’s October 2021 Industry Newsletter
By Steve Hoffman
The answer is yes, according to Kroger CEO Rodney McMullen. McMullen told investors in a quarterly results call on September 10 that its gross margins decreased by 0.6% – and that approximately 25% of that decline was due in part to loss of inventory, or what retailers refer to as shrink. “That's heavily driven by organized crime or at least it appears to be,” McMullen said of the shrink factor, according to the Cincinnati Business Courier. “And I know Congress and other groups are starting to spend more time on understanding what's driving that and what's behind it and what's the distribution channels for the stolen products, as well, and trying to manage that,” McMullen said.
As a result of rising levels of theft, higher supply chain costs and increasing food prices overall, McMullen shared that the grocery chain will raise food prices 2% to 3% this year.
Mark Matthews, VP of Research, Development and Industry Analysis for the National Retail Federation (NRF) told the Cincinnati Business Courier that the organized crime Kroger referred to is not necessarily something involving the “mafia,” but instead comprises organized gangs of people stealing from stores, delivery trucks, warehouses and elsewhere for cash, and it’s a growing trend, he said.
According to NRF’s most recent security survey, 69% of retailers responded that they has seen an increase in organized retail crime. Earlier this year, Home Depot reported that it is using technology to try to curb what it said has become a crime problem as the cost of lumber skyrocketed during the pandemic. Kroger said it is working with trade associations to try to fight the amount of product theft the company is currently seeing.
Tackling food fraud, estimated to cost the food industry as much as $40 billion a year in lost sales, product recalls and legal bills, especially during the pandemic, has been challenging because of complex supply chains and the fact that products can change hands numerous times before they reach supermarket shelves, reported Bloomberg. Cases tagged as fraud, adulteration or authenticity-based jumped 38% in the fourth quarter of 2020, compared to the previous year, reported U.K.-based Food Forensics.
The pandemic has complicated efforts to crack down on such criminal activity, as police resources have been diverted and online marketplaces and delivery platforms are creating more opportunities for illegal goods to be sold, Kimberly Carey Coffin, Global Technical Director at Lloyd’s Register, shared with Bloomberg.
“We are as busy as we have ever been, particularly with white flaky fish, tomatoes, rice and other core commodities that are usually vulnerable to fraud,” Rick Sanderson, Business Development Director of Food Forensics, told Bloomberg.
In examples of the growing problem, the Associated Press (AP) reported in mid-September that four people were arrested on suspicion of stealing nearly $2 million worth of retail products from 43 different stores across California. Investigators found the merchandise the theft ring had stolen stacked “floor to ceiling” inside a mobile home and multiple storage units. In April 2021, police arrested two men and recovered nearly $1 million in goods stolen from grocery stores, AP reported.
Target, Kroger Enjoying Growing Sales of Organic and Natural Foods
Photo: Pexels
Originally Appeared in Presence Marketing News, September 2019
By Steven Hoffman
Target Corporation (NYSE: TGT), based in Minneapolis, MN, on August 19 announced the launch of a new flagship private label brand, Good & Gather. The in-house brand will focus on four categories: organic; kids; seasonal; and premium products. More than 2,000 products including dairy, produce, ready-made pastas, meats, granola bars and sparkling water, are expected to roll out under the Good & Gather brand over the next 18 months. Good & Gather will become Target’s largest brand, replacing existing house brands Archer Farms and Simply Balanced and reducing the number of products under Target’s Market Pantry Brand, reports Sustainable Food News. In related news, Cincinnati, OH-based grocery giant Kroger (NYSE: KR) claims its Simple Truth brand now offers more Fair Trade Certified products than any other U.S. private label brand. The company reported on August 20 in its 2019 Sustainability Report that it sold $17.6 billion worth of natural and organic products in 2018. Kroger’s natural and organic private label brand, Simple Truth and Simple Truth Organic, achieved sales of $2.3 billion in 2018, making it the second largest brand sold in its stores, the company reported. Kroger said it purchased 17.2 million pounds of Fair Trade certified ingredients for its private label products, and also said it sold more than $1 billion worth of organic produce in 2018. Kroger operates 2,800 supermarkets and multi-department stores in 35 states. Each store carries on average 4,000 natural and organic items, reports Sustainable Food News.
Kroger, Nation’s Largest Supermarket, to Carry CBD in Nearly 1,000 Stores
Originally Appeared in Let’s Talk Hemp Newsletter, June 2019
By Steven Hoffman
As the hemp and CBD market continues to evolve at hyper-speed, the nation’s largest supermarket chain, Kroger, announced it is joining Walgreens, CVS, Vitamin Shoppe, GNC, Nieman Marcus and other major retailers that have all started carrying CBD products in their stores.
Kroger, which made a “meaningful investment” in Boulder, CO-based natural foods chain Lucky’s Market, which itself is a leading seller of CBD products, announced on June 11 that it will now sell hemp-derived CBD topical products, including creams, balms and oils, in 945 Kroger-owned stores across 17 states, reported CNBC News, which referred to CBD as “one of the hottest consumer trends.”
“Like many retailers, we are starting to offer our customers a highly-curated selection of topical products like lotions, balms, oils and creams that are infused with hemp-derived CBD,” said Kristal Howard, head of corporate communications and media relations at Kroger, in a statement. “CBD is a naturally occurring and non-intoxicating compound that has promising benefits and is permitted within federal and state regulations. Our limited selection of hemp-derived CBD topical products is from suppliers that have been reviewed for quality and safety,” she added.
Consumer interest in and demand for products made with cannabinoid compounds or CBD derived from hemp extract is at a fever pitch. Hemp Industry Daily projects hemp-derived CBD retail sales will surge to as much as $7.5 billion by 2023, up from about $1 billion in sales in 2019.
Yet, while CBD derived from hemp is now legal thanks to the 2018 Farm Bill passed by Congress late last year, the FDA maintains that companies still can’t add CBD to food or sell it as a dietary supplement. However, with so many CBD supplements and CBD-infused food and beverage products already on the market, the FDA on May 31 held a public hearing to learn more about the issue and hear from hemp industry representatives, manufacturers, advocates and others as it considers its position regarding sales of these products.
For major retailers, selling CBD-infused, topical beauty and skin-care products brings less legal risk, which may explain why retailers such as Kroger, Nieman Marcus and others are starting to offer those types of products first. Given the explosive growth of the market, big box retailers Walmart and Target are also reported to be exploring the potential for hemp and CBD-related products in their stores.
Kroger, headquartered in Cincinnati, OH, is the world’s largest grocery retailer, with fiscal 2018 sales of $121.2 billion, and operating stores under names including Kroger, King Soopers, Ralph’s, Dillon’s, City Market, Fry’s, QFC, Mariano’s, Fred Meyer, Harris Teeter and others. Kroger also is a leading seller of healthy lifestyles products – it’s sales of natural and organic products alone exceeded $16 billion in 2017. Kroger’s private label organic brand, Simple Truth, with sales exceeding $2 billion, is one of the largest natural and organic brands in the U.S.
Kroger says it will sell the CBD products in Arizona, Arkansas, Colorado, Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, Nevada, Oregon, South Carolina, Tennessee, West Virginia, Washington, Wisconsin and Wyoming.
Kroger, Nation’s Largest Supermarket, to Carry CBD in Nearly 1,000 Stores
By Steven Hoffman, Compass Natural
As the hemp and CBD market continues to evolve at hyper-speed, the nation’s largest supermarket chain, Kroger, announced it is joining Walgreens, CVS, Vitamin Shoppe, GNC, Nieman Marcus and other major retailers that have all started carrying CBD products in their stores.
Kroger, which made a “meaningful investment” in Boulder, CO-based natural foods chain Lucky’s Market, which itself is a leading seller of CBD products, announced on June 11 that it will now sell hemp-derived CBD topical products, including creams, balms and oils, in 945 Kroger-owned stores across 17 states, reported CNBC News, which referred to CBD as “one of the hottest consumer trends.”
“Like many retailers, we are starting to offer our customers a highly-curated selection of topical products like lotions, balms, oils and creams that are infused with hemp-derived CBD,” said Kristal Howard, head of corporate communications and media relations at Kroger, in a statement. “CBD is a naturally occurring and non-intoxicating compound that has promising benefits and is permitted within federal and state regulations. Our limited selection of hemp-derived CBD topical products is from suppliers that have been reviewed for quality and safety,” she added.
Consumer interest in and demand for products made with cannabinoid compounds or CBD derived from hemp extract is at a fever pitch. Hemp Industry Daily projects hemp-derived CBD retail sales will surge to as much as $7.5 billion by 2023, up from about $1 billion in sales in 2019.
Yet, while CBD derived from hemp is now legal thanks to the 2018 Farm Bill passed by Congress late last year, the FDA maintains that companies still can’t add CBD to food or sell it as a dietary supplement. However, with so many CBD supplements and CBD-infused food and beverage products already on the market, the FDA on May 31 held a public hearing to learn more about the issue and hear from hemp industry representatives, manufacturers, advocates and others as it considers its position regarding sales of these products.
For major retailers, selling CBD-infused, topical beauty and skin-care products brings less legal risk, which may explain why retailers such as Kroger, Nieman Marcus and others are starting to offer those types of products first. Given the explosive growth of the market, big box retailers Walmart and Target are also reported to be exploring the potential for hemp and CBD-related products in their stores.
Kroger, headquartered in Cincinnati, OH, is the world’s largest grocery retailer, with fiscal 2018 sales of $121.2 billion, and operating stores under names including Kroger, King Soopers, Ralph’s, Dillon’s, City Market, Fry’s, QFC, Mariano’s, Fred Meyer, Harris Teeter and others. Kroger also is a leading seller of healthy lifestyles products – it’s sales of natural and organic products alone exceeded $16 billion in 2017. Kroger’s private label organic brand, Simple Truth, with sales exceeding $2 billion, is one of the largest natural and organic brands in the U.S.
Kroger says it will sell the CBD products in Arizona, Arkansas, Colorado, Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, Nevada, Oregon, South Carolina, Tennessee, West Virginia, Washington, Wisconsin and Wyoming.