Thoughts on the Kroger, Albertsons merger (Part 2)

Rob Kaufelt was the owner of Murray's Cheese Shop in Greenwich Village, which he sold to Kroger Supermarkets. Today there are over 1,000 Murray's cheese shops across the land. Prior to that, he pioneered upscale supermarkets as President of Mayfair Supermarkets (Foodtown), and specialty foods at Kaufelt's Fancy Groceries. He lives in New York City with his wife and three children.

Kroger has an excellent case to make to the government as it seeks permission to merge with (acquire) Albertsons. And from where I stand, nothing would please me more than to watch Kroger bring good cheese coast to coast under the Murray’s brand. That was our mission at Murray’s long before our mom and pops were a gleam in Kroger’s eye.

I can see why it makes sense from Kroger’s perspective to go forward with the merger. 

It will be an entity to rival the big guns in grocery. If the deal does indeed go through, the combined sales of the newly merged company will exceed $200 billion, making the new entity on par in sales with Walmart and Amazon — something no other supermarket company can claim outside of the warehouse giant Costco. 

Though the anti-trust people warn that Kroger will dominate the markets where it competes with Albertsons, that’s not likely. The government will most likely require that many stores be divested in the most competitive markets, probably in areas like Southern California, the Pacific Northwest, East Texas, Chicago, Washington, D.C. and perhaps Denver and Phoenix. 

But that also means that many of the buyers of the spun-off markets could present strong competition themselves. 

In fact, I see Kroger being at a disadvantage from a branding point of view, compared to Walmart and Amazon (make it three if we include Costco), as the newly formed merger entity will most likely compete under many different names and brands —36 by my count (Jewel-Osco, Safeway, Shaw’s, etc..), while the big guys trade and market under a single brand.

The growth of online ordering is inevitable. Rolling out Ocado warehouses to fulfill online orders is key to Kroger’s growth, and is an advantage, not only for the company’s own operations, or even because of the competition it creates with Amazon’s distribution centers, but additionally, quite possibly as a new entity in food retailing itself. That is, an Ocado facility may eliminate the need for a conventional superstore at all. (For instance, there is currently a huge Ocado facility that supplies shoppers in Florida, but no actual Kroger stores.) 

Someday most of our food may be delivered chiefly via these facilities, leaving only the mom and pops, small independent grocers, and farmers markets for those who prefer the old ways of food shopping. 

Kroger’s stellar database will improve. Kroger has one of the best customer databases in the world. In grocery, data has been monetized in several ways, chiefly by selling advertising, and Kroger has also used it cleverly to build an exceptionally strong loyalty program. A manufacturer may well wish to spend advertising dollars on consumers who purchase goods at a market that:

With its huge database, Kroger could compete for ad dollars not only against Amazon, but also Google, Meta, and other big online players.

Scale will enable Kroger to improve its supply chain. With 50-plus manufacturing facilities, Kroger will be able to scale its production and keep the pipelines full, enabling a stronger supply chain with vertical integration. That has huge value for Americans, especially with the memory of the pandemic and the fear of food shortages still fresh in our minds. Vertical integration is hot now. But the real strength in manufacturing growth comes with private label, now close to 20% of sales and growing, as customers seek in-house brands for their traditionally lower prices vis-à-vis national brands. Since the advent of “premium” private label, as I first saw with Loblaw’s President’s Choice in the 1980s, quality is improving too. A chain producing a good in-house product at a fair price might be doing the customer a big favor, and of course those margins are typically higher for the retailer.

Market capitalization is likely to grow. When considering annual revenues, the Kroger, Albertsons merger entity would come in at $200 billion, which is modest compared to Amazon’s approximately $500 billion annually and Walmart’s $570 billion. 

Looking at market capitalization growth, over a five year period Kroger has grown around 73% (to $35 billion). By comparison, Walmart’s market cap of $389 billion looks huge compared to that Kroger cap of close to $35 billion, and that same Walmart market cap looks like small potatoes compared to Amazon’s at over a trillion dollars. 

If the government is looking into those two companies (and whether they present a monopoly) I must have missed that news.

A larger company with a national presence might also spur the stock price, at least if the synergies are realized: elimination of duplicate management teams; consolidation of warehouses, manufacturing, marketing, IT, and all the rest. In truth, this never quite works out the way it’s promised, but it makes sense on paper. The store-level people are often the last to be fired, as they actually do all the work and take care of all the customers.

Kroger shows it can compete with a unionized labor force. As for the workers of the proposed merger giant —with some 700,000 employees, the new entity would still have less than half of the number Amazon employs (roughly 1.6 million as of 2021) and less than a third that of Walmart (around 2.1 million, globally). Neither of those behemoths is unionized (though we did see the first independent Amazon union at a Staten Island warehouse in 2022), unlike the majority of employees at both Kroger and Albertsons.

Most Giant stores, owned by Ahold Delhaize, are unionized too, and I see Ahold likely becoming a major competitor of Kroger if the merger succeeds. Typically, a non-union workforce gives a company a competitive advantage; i.e., they pay lower wages than a union shop. However, despite not being unionized, both Walmart and Amazon pay an hourly wage far above the federal minimum wage of $7.25. (Walmart is $15 dollars per hour and Amazon pays $17). In 2021, Kroger announced it was raising its average hourly wage to $16 per hour. 

Nevertheless, despite Amazon and Walmart paying a decent hourly wage, Kroger still has strength in its assertion that the merger will offer secure employment in a stronger company with a unionized workforce (even if the United Food and Commercial Workers union does oppose the merger). 

Given these considerations, Kroger has a strong case to take over Albertsons. 

Stay tuned for the final part of this series in which I discuss my thoughts on the drawbacks of the merger.

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Rob Kaufelt writes that on one hand, the deal would be a good thing for the industry: due to the creation of a grocery giant that would rival the sales (and purchasing power) of Amazon and Walmart. (Among other reasons.) 
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Do you agree? Is this an oversimplification? Make a comment below.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of Supermarket News