Kroger’s Rodney McMullen upbeat on Albertsons mega-merger’s potential

To Kroger Chairman and CEO Rodney McMullen, his company’s planned merger with Albertsons isn’t just about becoming stronger, but also becoming better.

The union of The Kroger Co. and Albertsons Cos. would form a national supermarket retailer that can take on larger competitors like Walmart, Costco Wholesale and Amazon as well as thrive in a food retail playing field that has evolved well beyond the traditional grocery store, McMullen told Winsight Grocery Business in an interview this week.

What’s more, he said, a merged Kroger-Albertsons would bring more benefits to customers, employees, producers and the communities that the two grocers serve.

“The combined companies will be able to more strongly compete against Walmart and Amazon and other players,” McMullen said, later noting, “Together, we’re able to support our customers, our associates, farmers and communities on an even bigger scale and in a more important way. And we think it’s a unique thing for our company, that some of our competitors would view the importance of those differently than we do.”

Cincinnati-based Kroger’s $24.6 billion deal to acquire Boise, Idaho-based Albertsons, unveiled in mid-October, would create a food and drug retailer with annual revenue of about $210 billion and 4,996 stores, 66 distribution centers, 52 manufacturing plants, 3,972 pharmacies, 2,015 fuel centers and 710,000 workers in 48 states and the District of Columbia.

Related:State secretaries urge FTC to halt Kroger-Albertsons merger

Kroger prefers to term acquisitions as mergers, and not for semantic reasons, McMullen pointed out.

“We always have found that every time we’ve merged with somebody, you learn from each other. If you think about our online business, Kroger was not in that at all until we merged with Harris Teeter,” he said, referring to the chain’s ExpressLane e-grocery service. “We basically took the Harris Teeter team and said, ‘If you had to do it over again, what would you do?’ And we’ve leveraged that, and that is the foundation of our online business—now well north of $10 billion. If you look at Fred Meyer, that’s how we ended up getting the Marketplace stores.

“If you look at our talent of our senior team, about half of them came from one of our merged companies. We think that’s really important because you can learn from everybody,” he added. “And as long as you approach it in that aspect, you become one company much quicker. But also, you are able to create something for customers, associates and communities that neither one of you could do without the other.”

M&A partners learn from each other, McMullen said, noting that Kroger's Marketplace format emerged from its acquisition of multidepartment store chain Fred Meyer. / Photo: Shutterstock

Related:Kroger, Albertsons CEOs tout merger in social media video

Merger review update

As the biggest U.S. supermarket merger ever—joining the nation’s two largest supermarket operators—the proposed transaction has generated substantial opposition, including from organized labor, consumer and community groups, and federal and state officials. Kroger has said it expects the agreement to close in early 2024, though industry observers have posited that the antitrust review—which included a second information request from the Federal Trade Commission back in December—may take up to two years given the deal’s size.

“We are where we thought we would be,” McMullen said when asked for an update on the merger review process. “We continue to expect to close in early 2024, and we always knew that the process would take a reasonably long time because of the work that would be done by the FTC.”

Kroger and Albertsons have estimated they would need to divest 100 to 375 stores to win regulatory approval to merge. Their agreement also includes a ceiling of 650 store divestitures, at which point they could revisit the deal. Stores would be divested through direct sales to other operators and/or via a new spinoff company called SpinCo.

Related:Federal court nixes consumer lawsuit to stop Kroger-Albertsons merger

McMullen reported there has been no shortage of potential suitors for divested stores. Yet Kroger and Albertsons aren’t just looking to unload stores—they want proven operators with unionized workers, he said.

“Overall, we’ve been really pleased with the number of people that are interested in the stores. Obviously, you’re looking for somebody that’s going to be a very, very good operator of the stores,” he explained. “Somebody that commits to keeping the stores open and to being a union operator, and somebody that has a lot of experience in the industry. Everybody that we’re talking to would satisfy all those things, and then a company would need to be well-capitalized so they have financial strength.”

Kroger’s confidence that it will get the green light for the merger stems from the homework it did in mapping out the market-by-market analysis to be undertaken by regulators and in anticipating potential remedies, according to McMullen.

“The professional advisers who we work with are people we’ve worked with for years on mergers. We spent months working with our advisers, actually going store by store in terms of how they believe the FTC would evaluate the transaction and how to make sure that there’s no reduction in competitive dynamics,” he said. “We had done a ton of work before we reached out to Albertsons, and we remain incredibly confident that the merger will close. But that doesn’t mean there won’t be a lot of questions. We would expect the FTC to have a lot of questions and look at it in-depth. So there haven’t been any surprises in that regard.”

Grocery shoppers have higher expectations for fresh food today than in years past, according to McMullen. / Photo courtesy of Kroger

Today’s grocery market, customers are different

A much broader food retail competitive arena—and the need to serve customers in new ways—provided an impetus for Kroger and Albertsons to come together. The focus on mass merchant and rival supermarket players has expanded to include warehouse clubs, limited-assortment chains, dollar stores, convenience stores, online-only grocers and an array of hybrids—not to mention, of course, Amazon.

“If you go back, say, 10 years ago, when we would have our business plan board meeting, probably 80% of the conversation would be around Walmart. What’s Walmart doing? How many stores are they opening? How long does it take for a store to start recovering from a new Walmart? And if you look at today, Walmart remains our No. 1 competitor. Costco is our second-largest competitor,” McMullen said.

“Then you have competitors that are in, I would call them buckets. You have warehouse clubs, Costco and Sam’s; you have dollar stores; you have Aldi and Lidl; you have restaurants; and then you have Amazon, which kind of touches all over the place when you look at delivery, Whole Foods, Amazon Fresh,” he explained. “So you really have significantly more competitors, and they’re from a much wider spectrum. The other common characteristic is if you look at the different players and those that are growing, they’re all non-union competitors as well.”

When asked about notable changes in the grocery space on the consumer side, McMullen pointed to the omnichannel experience, with customers now able to interact and transact with retailers via multiple avenues and easily switch between them.

“We call it ‘seamless’, but if you just look at the online trends 10 years ago, it really didn’t exist other than on a niche-type basis,” he said. “Today, I think we separate it more than a customer separates it. I think a customer looks at it as, ‘I have something I need. Is it easier to get pickup? Is it easier to get a delivery? Is it easier to physically go into a store?’ So a customer is just looking at ‘how do I solve something’ versus going to a different channel. To me, the importance is convenience.”

Customers also have developed higher expectations in fresh foods and getting more value from retailers, McMullen observed. And back on the convenience front, foodservice comes into the picture at mealtimes more often among today’s consumers.

“Half of the people today at lunch won’t know what they’re going to have for dinner tonight. And at some time, about two or three o’clock, they send a text to their family to decide what’s for dinner. That could be a combination of picking up something in a supermarket or picking up something at a restaurant. Over a half of restaurant meals are consumed at someplace other than the restaurant, either in a car or at home,” he said. “Those are the big trends if you look at today versus 10 years ago. Our Brands [private label] always continues to be an important component, but everybody has a much stronger Our Brands program today than they had 10 years ago.”

Together, Kroger and Albertsons would field nearly 5,000 stores (pre-divestitures) in 48 states and D.C./ Photos: Shutterstock

Dawn of a national supermarket company?

Kroger’s biggest competitors are not supermarkets yet boast a national scale, and these mass retailers have steadily gained grocery market share. Neither Kroger nor Albertsons, each with stores in less than three dozen states, are truly nationwide retailers. Yet a merger would make them so, and McMullen agreed that a bona fide, national supermarket company would buttress the format—a traditional community fixture—going forward.

“Supermarkets have been around a long time, but the formats continue to evolve. Albertsons does a great job with smaller stores. Kroger does a great job with Marketplace stores,” the CEO said. “When you look at the combined company, we’ll be able to leverage both of our skills on formats and from a technology and ‘seamless’ perspective. Obviously, when you merge, you create certain economies of scale. The customers will benefit from two aspects. One is just flat-out pricing. The long-term business model has been continually to reduce pricing, and we would expect to continue to do that. Some of that gets funded with synergies.”

Another benefit is employment. For many people, supermarkets provided a first job, and a lot of those opportunities ended up growing into a lifelong means of making a living.

“The thing that both of our companies are incredibly supportive of is people coming for a job and discovering a career. The majority of our store directors started out as hourly associates,” McMullen said. “I was in stores last week, and the number of people you talk to who have been here for 20, 30 or 40 years said they came here to make a little bit of extra money and figured out they enjoyed it or loved leading people. And they’ve become a store director or a district manager. Kroger has added over 100,000 union jobs since 2012. Albertsons has added a significant number of union jobs as well. Both of us coming together allows us to create more security for those long-term union jobs.”

Combined, Kroger and Albertsons also would offer producers and suppliers a bigger platform for growth.

“If you look at farmers and suppliers, both of us have great examples of where we’ve helped a local farmer and scaled it,” McMullen said, citing Olathe sweet corn and Rocky Ford cantaloupe from Colorado.

“The Wall Street Journal just had an article about sushi,” he continued, referring to a story about Kroger becoming the nation’s largest sushi retailer. “To me, the thing that’s so neat is the person that actually owns Snowfox [sushi] is an entrepreneur who started out in a couple of Kroger stores and now they’re in thousands of stores, and not just Kroger but some of our competitors, too. Those are the things where both of us can support local businesses and help them grow.”

Both Kroger and Albertsons field major ESG programs as well, including efforts to combat food insecurity via meal donations in communities around the country. Those initiatives would be elevated post-merger. “From a community standpoint, we’ve committed to providing 10 billion meals by 2030,” said McMullen.

Perhaps most notable about supermarkets, their raison d’être is food, which distinguishes the format from mass retail competitors, McMullen agreed. “One of the things that I will tell our teams when I do a store visit is, how long does it take me to get hungry?” he said.

In March, McMullen and Albertsons CEO Vivek Sankaran were pressed by U.S. senators in a subcommittee hearing on the planned merger. / Photo: U.S. Senate
    
Clearing up merger misconceptions

Back in late April, McMullen and Albertsons CEO Vivek Sankaran cited some public “myths” about the merger in a Cincinnati Enquirer op-ed article. They included “My store will close,” “I am going to lose my job and my union will be hurt” and “My groceries are going to be more expensive.”

Indeed, opponents of the merger contend the deal would reduce grocery market competition (including removing the competitive check of Kroger vs. Albertsons) and result in higher prices, fewer choices in where to shop and on the shelf, and less responsiveness to consumers. Labor leaders, meanwhile, have raised concerns about job security, store closings, divested stores going to non-union retailers, and pressure on wages and benefits.

By and large, the two CEOs restated in the op-ed what they’ve said publicly since the deal emerged: No store closings or job cuts are upcoming, and the combined company plans to use its scale to lower prices, not raise them.

Upon the merger’s announcement, Kroger said the combined company would invest $500 million of cost savings from merger synergies to lower prices at the shelf. An incremental $1.3 billion also is earmarked for investment to enhance the customer experience in Albertsons Cos. stores.

“From a customer standpoint, Kroger’s fundamental business model is to continue to invest in lower prices and connect with the customer in a deeper way so that you’re able to create some synergies from growing the company,” McMullen said. “Those are things that we’ve always done.”

He said price investment reflects Kroger’s historical practices. The company has reported investing $5 billion since 2003 to lower pricing. That includes $130 million after the 2014 Harris Teeter acquisition and $110 million following the purchase of Roundy’s in 2017.

“I just cringe when somebody tells me I want to raise a price,” said McMullen. “As a retailer, I’ve never, ever, thought about, ‘What’s the maximum price you can charge?’ It’s always, ‘What’s the minimum price you can charge and still make a fair return and be able to continue to support your associates from a job security and job growth standpoint?’”

Kroger, too, has said it expects to invest $1 billion to boost associate wages and benefits after the transaction closes. In March, the retailer announced plans to invest over $770 million in associates for 2023, including to raise average hourly wages, improve health care options, and create new training and development opportunities. The company said it raised average hourly rates by over 6% in 2022 and has now invested an incremental $1.9 billion in associate wages since 2018.

A brief released last month by the International Center for Law & Economics noted that about two-thirds of Kroger employees and a majority of Albertsons employees are represented by the United Food and Commercial Workers union.

“We’ve committed that no frontline associates will lose their job because of the merger. And with store divestitures, one of the things that will we make sure of is that the companies that buy the divested stores will support the associates’ union contract,” McMullen noted. “The only ones that would benefit if the transaction didn’t get approved are non-union players.”

Still, critics of the Kroger-Albertsons deal—including consumers and labor advocates—continue to raise a valid question: What’s the guarantee that Kroger will keep such commitments post-merger? McMullen’s response: Because Kroger has a track record of doing so.

McMullen recalled explaining that very point to Sen. Mike Lee (R., Utah) when he and Sankaran were grilled by lawmakers in March at a Senate Judiciary subcommittee hearing on the proposed merger.

“If you look at our history, when we make commitments, we deliver against those commitments,” McMullen told WGB. “I know the merged company will provide better job security, and it will provide a better experience for customers. It will allow us to be a very strong competitor against some of the non-union competitors. And we’ll be able to support communities in different ways and farmers and suppliers in new ways.”