So far, 2022 has been all about rising grocery prices. But Friday’s news of the Herculean merger between Kroger and Albertsons will likely shift the conversation for quite some time.
Under the $24.6 billion proposed merger agreement, Kroger will acquire all of Albertsons’ stock for $34.10 per share and will assume the roughly $4.7 billion in Albertsons’ debt.
Shoppers are battling historic inflation at grocery stores and in the past 12 months, the food-at-home index has risen 13%, which raises the question of the timing of the merger.
“What makes this the right time and place for this merger: Mergers are not like sandwiches you can order in a restaurant with the toppings you want, they are combinations of unique, singular companies,” Richard Kestenbaum, partner of Triangle Capital LLC, a retail and consumer-focused mergers and acquisitions boutique, and an investor with Albertsons, told WGB.
“There is a need for consolidation because the industry will need fewer stores as more consumers shop online over time,” Kestenbaum added. “And to compete against Walmart and Amazon, the industry needs capital to acquire and develop technology to make last-mile delivery profitable, something that has not been done yet at scale. And Kroger and Albertsons need buying power that their combined scale will give them to compete as well.”
Merging the stand-alone grocers to become a bigger player is not necessarily better, some industry experts argue. Historically speaking, mergers and acquisitions in the grocery industry don’t always go as planned. In 2015 Albertsons and Safeway completed their $9.2 billion merger. As a condition of the merger, they agreed to sell 168 supermarkets to settle Federal Trade Commission charges, but critics at the time said that wasn’t enough to dampen higher prices and reduced choices.
If approved, the deal is expected to close in early 2024, putting the Cincinnati-based Kroger, which is the country’s second-largest grocer by market share, behind Walmart. Which drives the question: How much share will this deal score for Kroger?
“There is no reason to believe that super-competitors such as Walmart or Amazon will be impacted to any significant degree unless—and this is a huge unless—the merged operation finds new ways to create value to customers and consumers by crafting a better go-to-market strategy, new offerings that reflect new consumer lifestyles and realities, and adopt innovative new approaches to food retailing rather than continue the pattern of reactionary planning that has typified the chain grocery industry for the past 30 years or so,” Ryan Mathews, a former journalist, editor, publisher and declared “philosopher of e-commerce” by Wired magazine, told WGB.
“As it stands, Kroger controls nine% of the U.S. grocery market,” Mathews added. “Albertsons enjoys an approximate 4.5% market share. And, even if they kept all their stores, the combined market share would be less than the sum of the two independent companies. It's my law of merger economics; when it comes to supermarket industry mergers 2 + 2 always equal less than four.”
The biggest pitfall for the transaction to happen is antitrust approval from the FTC, Kestenbaum said. “Once the deal happens, combining cultures is always a risk in a combination.”
Looking at the merger from a shopper’s perspective creates a different lens in which Kestenbaum said there are both positive and negative outcomes if the merger happens.
“On the minus side, there will be fewer stores for them to go to as the two companies consolidate,” Kestenbaum said. “But that was going to have to happen over time whether this deal happened or not. On the plus side, the two combined companies have a higher likelihood of surviving against Walmart and Amazon, and that means consumers will have more choices in the long term. Also, the two combined companies will have more resources to buy better and to develop the technology they need to serve consumers at home, and that means more choices for consumers in the long run.”
The National Grocers Association (NGA), which represents the independent supermarket industry and advocates for independent grocers on a variety of issues, finds the merger puts local grocery store owners at an uneven playing field.
"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," said Greg Ferrara, NGA president and CEO, in a statement. "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."
Last year, in a move to strengthen advocacy against anticompetitive tactics and "unfair exercises of market power," the NGA along with other independent business groups formed the Main Street Competition Coalition. "These large buyers act as gatekeepers in the marketplace," the NGA's Chris Jones, SVP of government relations and counsel, said in a virtual roundtable with the American Antitrust Institute in July of 2021.
Whether the merger creates significant harm to independent grocers by dominant players in the grocery marketplace will be closely watched as details unfold.
“There is the question of what impact this will have on independent grocers and local and regional supermarket chains,” Mathews said. “My sense is that this will—in the mid- and long- terms—boost the competitive position of these, at least relatively, smaller operators who have demonstrated an uncanny ability to adjust to change and grow despite challenges from competitors with far deeper products.”
As for the impact grocery workers will face regarding the merger, the United Food and Commercial Workers International Union (UFCW), said its first priority is to protect the nation's grocery workers.
“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," UFCW International President Marc Perrone said in a statement Friday. "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."