Kroger’s Rodney McMullen sheds light on Albertsons merger at Groceryshop

The Kroger Co. Chairman and CEO Rodney McMullen said his company’s planned $24.6 billion acquisition of fellow supermarketer Albertsons Cos. won’t lead to another Safeway-Albertsons-Haggen debacle.

In a keynote session Tuesday at Groceryshop in Las Vegas, McMullen told CNBC interviewer Melissa Repko that Kroger and Albertsons did their homework on determining a divestiture deal that would address the antitrust concerns of regulators for their pending merger. That led to the Sept. 8 announcement of a $1.9 billion deal to sell 413 stores, eight distribution centers and two regional headquarters in 17 states and the District of Columbia to C&S Wholesale Grocers, the nation’s largest privately held grocery distributor. If required by the Federal Trade Commission, C&S would buy 237 additional stores under the agreement.

Repko noted that critics of the Kroger-Albertsons combination cite the bankruptcy of Haggen Inc. as an example that store divestitures are a questionable antitrust remedy. The 14-unit chain Pacific Northwest chain purchased 146 stores in five states being divested in the 2014 Albertsons-Safeway transaction—a more than tenfold expansion of its store base. Unsurprisingly, Haggen was unable to digest the acquisition and ended up going bankrupt, with Albertsons later repurchasing 33 stores it had divested.

Related:Post-merger, Kroger plans a bigger local product presence

“One of the things we did was study the prior case in terms of what was criticized and why. You had a situation where a company [Haggen] was highly levered. They went from like 15 stores to 150 stores or so with very little debt. They really didn’t have the management depth across the organization. They immediately had to change names, and they raised prices and all of those things,” McMullen explained.

‘So when you look at us on finding a divestiture buyer, it was really important to find somebody that had a strong balance sheet, had operated in the business and understood the grocery business, and had scale, talent and understood what they had and didn’t have to be able to,” he said. “One of the things that we’re doing is providing two divisions, all the organization to C&S. So all those things are why we felt so confident that C&S would check off all those boxes [of regulators’ antitrust concerns]. And then C&S also committed to recognizing labor contracts day one, and that was a commitment that we had made to the union. We had talked to dozens of potential buyers. Some of those were non-union players, some were union players. But one of the commitments that we had made to the union was we would sell them [stores] to somebody that recognized the labor contracts.”

Related:Kroger, Albertsons $1.9B sale to C&S tackles merger issues, creates big new grocer

McMullen opened Groceryshop 2023 with a keynote interview with CNBC's Melissa Repko. / Photo by Russell Redman

The Kroger-Albertsons merger pact, announced in mid-October, would combine the nation’s first- and second-largest supermarket retailers into a company with annual revenue of about $210 billion and 4,996 stores (excluding divestitures), 66 distribution centers, 52 manufacturing plants, 3,972 pharmacies, 2,015 fuel centers and 710,000 workers in 48 states and D.C. Expected by the retailers to close in early 2024, the transaction would mark the largest U.S. supermarket merger ever.

“If you look at the original premise of the merger, the values of the two companies were so similar. And if you look in terms of some of the things being worked on, scale was even more important. When you look at retail media and some of the aspects around that, the use of data, the use of technology, the amount of money that you need to invest in technology and having a bigger company to be able to spread those costs and leverage those capabilities was increasingly important,” McMullen said. “We had so much respect for Albertsons and the Albertsons team, and the talent they have is just really exciting. I can't wait to see when we get to one company.”

Related:Kroger execs: Asset sale to C&S ‘checks off the boxes’ for Albertsons merger approval

CNBC’s Repko asked McMullen about the perception that a huge company like Kroger-Albertsons, with more scale and leverage, might try to strong-arm suppliers. But he described the retailer-vendor relationship as a partnership, in this case a large company providing an opportunity for a smaller business to grow.

“Our partnership with everybody is we don’t look at it as an arm wrestle. We look at, how do we grow our combined businesses?” McMullen said. “A month or so ago, I had a chance to spend some time with a couple of our farmers in Colorado. Originally, they sold products to a few King Soopers and City Market stores. And now, when they’re in season, they sell products to hundreds of stores. They actually have partnerships with a lot more local farmers. They've been able to expand their own headcount. So I don’t look at any of this as, ‘You lose, I win.’ To me, we have to figure out a way where we both win together.”

Along similar lines, McMullen said that Kroger on Tuesday announced plans to give locally sourced brands more shelf space following the merger with Albertsons. Stores would see a 10% increase in the number of local products, or about 30 products per location.

“It’s just one extension of something that has really been important to Albertsons and to us: How do you identify local products that the customer is going to love but they may or may not know about? First of all, you’ve got to give it shelf space, but then you have to figure out a way to how tell the customer and get them to try it. The commitment we made this morning was at least 30 incremental products for every single store,” the Kroger CEO explained, noting the opportunity created for promising vendor partners.

“When somebody has an amazing great product, we’ll be able to get it into more stores, get customers to try it and, before you know it, you’ll have some entrepreneur that will probably end up selling out to a big CPG at some point. It’s kind of the cycle [where] they come up with some incredibly great idea, customers fall in love with it and then over time somebody bigger buys it,” McMullen said, citing The Hershey Co.’s 2021 acquisition of Dot’s Pretzels.