With its planned $24.6 billion acquisition of Albertsons announced late last week, Kroger is making it clear that it has no intention of letting Walmart and Amazon continue to enjoy the greater benefits of scale in the grocery industry.
Kroger is no small company, of course. It is the largest supermarket chain in the country, with many stores and a host of alternative businesses surrounding this basic grocery offering. But it’s still struggling to keep up with the prices and pace of innovation set by Walmart and Amazon because it hasn’t had that next-level scale from those two companies, which dominate retail bricks and clicks, respectively. And that pressure will only grow in the years to come as digital purchases and the ecosystems that support them continue to intensify.
If he is able to merge with Albertsons (more on that if below), Kroger will be able to get within striking distance of the industry behemoths. It also leaves the rest of the country’s grocery chains in the dust, creating a new “Big 3” in the industry.
There will be Walmart, Amazon, Kroger/Albertsons, and then everyone else.
Powering digital and alternative businesses
The agreement says a lot about the state of the industry today. As inflation and supply chain headaches continue to impact retailers, the acquisition of Kroger gives the company more operational resources, including expanded private label capabilities and more bargaining power with suppliers. Kroger estimates that the agreement will achieve $1 billion in annual efficiency savings in the first four years after closing.
It also presents the opportunity to build a true nationwide supermarket network with a streamlined store footprint. Kroger, which does not currently operate stores in Northeast and Northern California, will now have access to those markets through Albertsons stores. Stores that operate in close proximity — in some cases right across from each other — may be jettisoned, either voluntarily or as part of the upcoming regulatory review process.
Beyond these traditional advantages that come with a large merger, the Kroger acquisition incorporates advantages of scale in emerging areas such as data, e-commerce and retail media that add even more value to the combination than what we would have seen just a few years ago, and position it more for years to come.
Four years after announcing its lunar e-commerce deal with Ocado, Kroger is now poised to generate more volume through the rapidly growing network of automated warehouses it is building alongside the British grocer and the company of technology. High volumes are key to making these expensive facilities profitable, and Kroger was probably overly optimistic about the number of orders it could place through these facilities on its own, Stewart Samuel, program manager at IGD, told me. Kroger’s flexible deal with Ocado also means companies can build additional facilities if needed.
Albertsons has mostly outsourced its delivery operations in recent years to third-party markets, but it has extensive experience testing automated micro-fulfillment centers (MFCs) that could help complement Kroger’s network. The combination of small, medium and large facilities will likely be crucial in helping Kroger compete with Walmart, which has its cavernous stores and a newly acquired MFC company to lean on for fulfillment, and Amazon, which is adding same-day delivery. thanks to its fast service. – growing store network.
“Kroger has always said that they want to have this range of options in e-commerce execution. I think both [approaches] are not mutually exclusive,” Samuel said.
Greater scale also bolsters Kroger’s ability to compete with Walmart, Amazon and Instacart for the vendor advertising dollars that help support these heavy e-commerce investments. The more shoppers a retailer serves, the greater the pull it has on the retail media. Kroger has built a top-tier retail media business over the years that could help the combined company capitalize on the combined 85 million households it serves.
Alternative revenue streams such as retail media, health services and consumer information are becoming essential for retailers as spending on e-commerce, sustainability and other investments further dilute their margins at over time, Samuel said. This gives even more momentum to scaling up.
The biggest price of the merger, therefore, could be the mass of additional consumer data that Kroger can leverage to power its core business and alternate streams, said Ken Fenyo, president of research and consulting at Coresight Research and former vice president. – President of Loyalty and Digital at Kroger.
“Kroger has a huge national consumer behavior dataset to which they apply analytics, personalization and expertise to drive retail media, one-to-one marketing and better internal decision-making” , he wrote in comments via email. “Data is the real gold of the transaction.”
In a call with the investment community on Friday, Kroger Chief Financial Officer Gary Millerchip noted that the deal would reinforce the “flywheel effect” the grocer has exploited in recent years, in which its core business of groceries help fuel its alternative business, which in turn fuels more investments in the heart. He estimated that a combined Kroger-Albertsons would immediately generate $1.5 billion in annual profits from alternative businesses, up from $1 billion reported by Kroger last year.
By merging with Albertsons, Kroger could generate significant additional volume in its Ocado warehouses.
Courtesy of Kroger
Will an agreement really be concluded?
For all its potential to create a new industry behemoth, many questions swirl around this deal. Chief among them being: will the deal actually close?
The Federal Trade Commission has blocked mega-mergers in the past, including the proposed membership of American Foods and Sysco in 2015, and Staples bid to acquire rival Office Depot that same year. Experts agree that the FTC is now taking a more critical look at big deals that could stifle competition and drive up prices.
Samuel said he’s skeptical the FTC will let America’s two largest supermarket companies merge, given their overlaps and the fact that the two companies are doing pretty well on their own. Wall Street is also treading cautiously around the deal, noting its groundbreaking nature but also underscoring the considerable risk involved. Kroger shares fell just over 7% on Friday and Albertsons shares fell 8.5%, indicating investors are unconvinced they will be successful in obtaining regulatory approval.
“While we understand the benefits of the Albertsons acquisition…these benefits will only materialize if the merger passes FTC review,” Jefferies analyst Rob Dickerson wrote in a note to investors on Friday.
Kroger will certainly have to sell the FTC on the deal’s ability to lower prices, improve services and not stifle competition – a daunting task, no doubt. Fenyo said he was optimistic that the deal would be approved, noting that Kroger has already said it plans to invest $500 million in price investments upfront.
“Data is the real gold of the deal.”
Ken Fenyo
President of Research and Consulting, Coresight Research
Kroger said it was prepared to sell between 100 and 375 stores to meet regulatory requirements. This projection looks more like an opening bid than a realistic range, given the many markets across the United States where the two compete and hold a dominant market share.
In a notice to investors, Wells Fargo analyst Edward Kelly noted that Kroger will be able to pay a $600 million severance fee if it is necessary to divest more than 650 stores. “It is unclear whether an FTC decision would cross this threshold, but we still expect a high number of disposals given that it can be difficult to find a buyer without providing adequate local scale,” he said. he writes.
In Southern California alone, the two companies have five combined banners – Kroger’s Ralphs and Food 4 Less chains, and Albertsons’ Safeway, Vons and Pavilions brands. In the Seattle area, where I live, Safeway stores and Kroger’s Fred Meyer and QFC stores are the top three grocers in terms of store traffic, according to Placer.ai. In Chicago, Albertsons’ Jewel-Osco and Kroger’s Mariano’s are the two best grocersby this same metric.
There are other questions surrounding the dizzying complexities of combining two sprawling supermarket operators. How would Kroger and Albertsons handle private labels, given Kroger’s unconditional strength in this area? Will Kroger want to inject its massively successful Simple Truth and Home Chef brands into Albertsons stores? Can these brands co-exist with Albertson’s brands like Open Nature and ReadyMeals?
Both Kroger and Albertsons have developed strong test-and-learn approaches to food retail, introducing innovations such as shadow kitchens, automated e-commerce ordering, robotic fulfillment and more. How will companies combine their innovation capabilities? And how will they continue to source local and niche products that consumers still love as they reach nearly 5,000 stores?
It is also worth considering the effect that a Kroger-Albertsons merger would have on the rest of the industry. I recently predicted in this column an increase in regional mergers and acquisitions in the grocery sector – an increase driven by the growing pressure major players like Walmart and Amazon are putting on the industry. If a third mega grocer joins the mix, that pressure increases even more, leading to what could easily become a food retail consolidation feeding frenzy.
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