Kroger-Albertsons merger: Many views, many angles

The Kroger-Albertsons merger announcement came hard and fast. So has the reaction from grocery retail industry stakeholders and observers.

Wall Street analysts say the $24.6 billion deal, despite facing high regulatory hurdles, will create a supermarket company with the reach and resources to fend off big retail grocery competitors like Walmart and Amazon. It also would bring the combined operator a range of benefits from more economies of scale, such as significant cost savings, lower prices for shoppers, and more workforce and omnichannel investment.

However, for smaller supermarket chains and independent grocers, the merger would spawn an even bigger competitor that could siphon more market share and have even more sway with suppliers. Union workers would have a more formidable party at the other side of the bargaining table come contract time, and the integration of two huge companies likely would lead to some job cuts.

For regulatory and redundancy reasons, Kroger and Albertsons — each with about 20 supermarket banners, resulting in sizable market overlap — also would have some tough decisions to make in terms of store divestitures and closures and, possibly, the future of some retail banners. The combination of stores going away and pressure on smaller operators, in turn, could impact consumer choice and grocery store access in some communities.

Related:Kroger, Albertsons to merge in $24.6 billion deal

Kroger and Albertsons said their combination would form a truly national company with 4,996 stores, 66 distribution centers, 52 manufacturing plants, 2,015 fuel centers and more than 710,000 associates across 48 states and the District of Columbia. The merged entity also would be the fifth-largest retail pharmacy operator, with 3,972 pharmacies.

The Kroger Co.’s family of store banners includes Kroger, Ralphs, Dillons, Smith’s, King Soopers, Fry’s, QFC, City Market, Owen’s, Jay C, Pay Less, Baker’s, Gerbes, Harris Teeter, Pick N’ Save, Metro Market, Mariano’s, Fred Meyer, Food 4 Less and Foods Co. Albertsons Cos. store base includes such banners as 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.

Kroger and Albertsons expect the transaction to close in early 2024, pending regulatory approval and other customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act.

Here’s a roundup of views and insights on the Kroger-Albertsons merger:

FROM WALL STREET…

Related:Analysis: Would Kroger-Albertsons merger pass muster with regulators?

“While we understand the benefits from acquiring Albertsons (cost synergies, price investment, geographic reach, scale, merchandising, etc.), such benefits only play out if the merger passes FTC scrutiny. If it doesn’t, then it’s a likely low-single-digit base business EPS growth over the next two years, in our view, as Kroger laps the ’22 pricing cycle and continues to reinvest in the business amidst a highly competitive backdrop. … We believe this could be transformational for Kroger but simply need more detail and a better view of deal consummation probability before becoming incrementally positive on the shares.” — Rob Dickerson, Jefferies

“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. … 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.” — Rupesh Parikh, Oppenheimer

“According to our 2021 estimates, a merger between Kroger and Albertsons implies 19% combined share of the U.S. grocery market (pre-divestitures), which compares to 25% for the largest player Walmart (30% including Sam’s Club) and 9% for the third-largest player Costco. … Store overlap for Kroger and Albertsons appears heaviest in Southern California, Chicago, the Pacific Northwest, eastern Texas (Dallas and Houston), Denver, Phoenix and the greater Washington, D.C., area.” — Robert Ohmes, BofA Securities

“We were surprised by the move, given it will be Kroger’s largest M&A in history and have steep regulatory risk given select overlapping markets, but believe Kroger is taking aggressive competitive action to expand its network and gain more cost, alternative profit and data scale to better compete against Walmart and hard discounters.” — Brian Callen, BofA Securities

“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.” — Arun Sundaram, CFRA Research

Areas of market overlap between Kroger and Albertsons include Ralphs (Kroger) and Vons (Albertsons) stores in Southern California...

INDEPENDENT GROCERY ANGLE…

“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. 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.” — Greg Ferrara, National Grocers Association

“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. When big grocery store chains merge together, these organizations tend to focus on the bottom line rather than their customers and employees. 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. If and when this merger is finalized, it will shine a spotlight on the flexibility, heart and passion that independent grocery stores have, giving us the opportunity to potentially open new stores, attract and retain quality talent, and better serve our community.” — Rachel Shemirani, Barons Market

“Americans don’t need another mega-grocer. Kroger and Albertsons together would control nearly 20% of grocery sales in the U.S. That’s on par with Walmart, whose power in food retailing has done widespread damage to communities, farmers, food workers and local grocers. A merger of these two supermarket chains would result in two mega-retailers — Walmart and Kroger/Albertsons — controlling more than 70% of the grocery market in over 160 cities, an unprecedented and extremely dangerous level of concentration. It would also give Kroger and Albertsons even more muscle to strong-arm suppliers, extracting deals for themselves while forcing up costs for competing independent grocers. If it’s allowed to go through, this deal would almost certainly put more rural towns and Black and Latino neighborhoods in cities at risk of becoming ‘food deserts’ as more local grocers are driven out of business.” — Stacy Mitchell, Institute for Local Self-Reliance

... as well as QFC (Kroger) and Safeway (Albertsons) supermarkets in the Pacific Northwest region.

MARKET RAMIFICATIONS…

“I believe this merger is the beginning of a trend and that we could see more consolidation. Our report on regional consolidation of grocery chains found that from 2015 to 2020, a number of substantial M&A deals boosted the market share of national grocers by acquiring midsize regional competitors. Hy-Vee is now the dominant supermarket chain in the Midwest, while Wakefern leads in the Northeast (holding 360 players including ShopRite, Price Rite and Fairway), Publix in the South, and Grocery Outlet in the West. The Krogers-Albertsons deal is essentially about efficiency and data sharing between two national players. … Many investors will see this proposed deal as a positive. More scale and Kroger’s leadership in data, analytics, retail media can unlock huge growth in sales and margins. Some tech-oriented investors may dislike the deal, however, seeing it as a distraction for both players from building out e-commerce capabilities and increasing automation to drive profits. Kroger and Albertsons will need to work on meshing different models, for example, with robotics like Ocado CFCs (customer fulfillment centers).” — Ken Fenyo, Coresight Research

“In markets where there is overlap, Kroger will have an opportunity to consolidate unprofitable units. Our experts expect the merger provides many potential opportunities for the Kroger-Ocado model. E-commerce penetration is expected to reach 20% of sales by 2025. … As a result, the Kroger-Ocado model is well-positioned to take advantage of the opportunities presented by the Kroger-Albertsons merger.” — Carlos Gallagher, Third Bridge 

ORGANIZED LABOR’S VIEW…

“The proposed merger between Kroger and Albertsons has serious implications for hundreds of thousands of our UFCW members and America’s families who are more concerned than ever about inflation’s impact on the price of their food and groceries, prescription drugs and gas. As America’s largest union of essential workers, protecting the livelihoods of this nation’s grocery workers, union and non-union, is our highest priority. Given the national impact such a merger would have, the UFCW and our local unions are discussing this and will stand together to prioritize the best interests of our members, their families and the communities they proudly serve. To be clear, the UFCW will oppose any merger that threatens the jobs of America’s essential workers, union and non-union, and undermines our communities.” — Marc Perrone, United Food and Commercial Workers International

“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. We fully stand with our members and will oppose any merger that threatens jobs or weakens working conditions. These essential workers keep the nation fed, and they must be considered first and foremost throughout every step of this process.” — Sean O’Brien, International Brotherhood of Teamsters