Would C&S provide a Kroger-Albertsons merger solution?

All eyes will be focusing on The Kroger Co.'s Q2 earnings report, when industry watchers will see whether it also includes a major deal to divest stores to C&S Wholesale Grocers—a move for Kroger to win regulatory approval for its pending merger with Albertsons Cos.

The buzz over the past couple of days, thanks to reporting by Bloomberg and Reuters, has been that C&S is nearing a roughly $2 billion deal to buy 400-plus stores from Kroger-Albertsons. If such a transaction is in the offing, it could provide an antitrust remedy for the $24.6 billion merger, expected to close in early 2024.

None of the companies have commented on a potential store sale. But published reports have said a deal by C&S, with financial backing from Softbank, could come this week.

Looking at the stores

Aside from whether or not a transaction will happen, the big question is, which stores would C&S acquire and would they be enough to clear the way for Kroger’s acquisition of Albertsons? (OK, that’s actually two questions.)

Kroger needs to divest stores where it has sizable overlap with Albertsons to dilute market concentration. Looking at store maps from both companies, that generally includes the Pacific Northwest, California, Arizona, New Mexico, Texas, Colorado, metropolitan Chicago and the Washington, D.C., area. Kroger has no presence in the Northeast—where Albertsons has Acme, Kings/Balducci’s and Shaw’s/Star Market stores—and virtually no overlap with Albertsons locations from Great Lakes states on down into the Southeast (save for Jewel-Osco stores around the Chicago area and some Acme and Safeway stores in the Mid-Atlantic/D.C. market).

Related:C&S reportedly may buy stores from merger partners Kroger-Albertsons

The retail network of Keene, New Hampshire-based C&S includes nearly a dozen Grand Union supermarkets in upstate New York and Vermont plus hundreds of mostly licensed Piggly Wiggly grocery stores across the Southeast, plus a cluster of locations around the Wisconsin/Illinois border. Albertsons’ Northeastern stores, Jewel-Osco stores, and Kroger’s and/or Albertsons’ Mid-Atlantic stores would seem a good fit for C&S, as would Western stores if C&S wants to establish a retail presence out West. The wholesaler already operates distribution centers in California, Texas and Oregon out West (plus several in Hawaii); South Carolina, Louisiana, Florida and Maryland in the South and Mid-Atlantic; and in Vermont, New Hampshire, Massachusetts, New York, Pennsylvania and New Jersey in its core Northeast market.

A combined Kroger and Albertsons has significant overlap in certain market areas. / Image courtesy of The Kroger Co.

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

A good potential suitor

C&S certainly would fit the bill for Kroger-Albertsons as a potential purchaser of divested stores. As the biggest privately held grocery distributor in the U.S., C&S generates some $30 billion in annual revenue and supplies over 7,500 independent supermarkets, chain stores, military bases and institutions, offering more than 100,000 products.

“You’re looking for somebody that’s going to be a very, very good operator of the stores,” Kroger Chairman and CEO Rodney McMullen told WGB in a recent interview. “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.”

McMullen noted that Kroger did its homework on the antitrust review for the merger through a market-by-market analysis of grocery retail competition in Kroger’s and Albertsons’ trade areas and anticipation of possible remedies.

“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 explained. “We had done a ton of work before we reached out to Albertsons, and we remain incredibly confident that the merger will close.”

Related:Kroger-Albertsons: The pharmacy question

Kroger and Albertsons said they plan to divest stores via direct sales to other operators and/or through a new spinoff company called SpinCo. In announcing their merger deal last fall, the two companies figured they would need to shed 100 to 375 stores to get the regulatory green light for the transaction. The merger pact sets a 650-store limit for divestitures, at which point they could reassess the agreement.

Albertsons' current store base presents a number of divestiture opportunities for C&S Wholesale Grocers. / Image courtesy of Albertsons Cos.

Would C&S be enough?

A sale of more than 400 stores to C&S would appear to satisfy antitrust concerns—or would it?

Much of that decision rests on how federal and state regulators size up the retail grocery market. Do they just look at conventional supermarkets, or do they also include mass merchants, warehouse clubs, limited-assortment grocers, drug stores, convenience stores and other large chains that sell food at retail? It’s also not exactly clear whether the FTC would want Kroger-Albertsons to reduce concentration in certain markets, just divest a certain number of stores or both.

And the review process could be even more granular.

In a November webinar by JPMorgan, Numerator chief economist Leo Feler said the grocery retail market could be defined by certain product segments in the food/supermarket channel (meat and dairy only, groceries only or total basket) or by the total basket for supermarkets plus mass retailers; for supermarket, mass, drug and dollar retailers; for fast-moving consumer goods (FMCG) overall; or for FMCG, e-commerce, delivery and restaurants. He presented a Numerator analysis of the Kroger-Albertsons deal showing 68 high-risk and 50 moderate-risk core-based statistical areas (CBSAs) post-merger in terms of high HHI levels and high HHI changes (the Herfindahl-Hirschman Index is a measure of market concentration). Regulators also may evaluate the power that Kroger-Albertsons would hold in terms of leverage with suppliers and how that might impact the grocery market and the supply chain, Feler added.

Indeed, CFRA Research analyst Arun Sundaram observed that a 400-store divestiture to C&S likely wouldn’t solve the antitrust issue by itself, but it would put the Kroger-Albertsons transaction on firmer ground.

“The good news is that C&S Wholesale Grocers has the capital and experience to successfully operate these stores, including wholesale and distribution. That said, additional buyers may be required to fully satisfy regulatory authorities,” Sundaram wrote in a research note on Wednesday. “Furthermore, while store divestitures would help alleviate market concentration concerns, regulators could potentially challenge the merger on the grounds of price discrimination and/or labor monopsony concerns. All in all, while this development increases the likelihood of the deal closing, we continue to believe the FTC will challenge the merger, which would then lead to court/litigation. We lift our 12-month [Albertsons stock price] target $2 to $24 on greater odds of a deal closing.”