Kro-zhay You Say?

jon springer

Reports of a Target-Kroger mega-merger appear to be greatly exaggerated for the time being. But the possibilities inherent in the speculation intrigue some analysts who believe each retailer could provide the other with capabilities they currently lack, and together, they could flex the financial muscle required to compete in the rapidly evolving retail landscape.

More generally, the retail industry seems to be reaching the Showcase Showdown stage of "Let’s Make A Deal"—if I can mix game-show metaphors—and Kroger and Target are surely contestants with interest in spinning the big wheel.

Chatter on a Kroger-Target hookup arose late last week, when Fast Company, citing anonymous sources, reported the companies were in discussion since last summer. Neither company offered comment, but off-the-record sources following up said there was “no truth” to the rumor. The extent to which Target and Kroger were talking, others said, was to discuss a potential partnership using Shipt, the delivery facilitator acquired by Target last year, which only makes sense.

Whether the reports ultimately have any substance, they were a reminder of the big issues retailers are facing as they fight it out in a retail world upended by the convergence of digital and physical. Analysts say both companies could use greater scale and synergy savings unleashed by a merger in order to generate more cash to invest in that transition, even as both are already in the throes of separate multibillion-dollar initiatives—which, incidentally, each refers to as a "Restock." Kroger late last year introduced its $9 billion, three-year Restock Kroger program. Target, only months before, that said it would invest $7 billion in transformation over the next three years. In both cases, officials acknowledged that the pace of change was quickening, driven by consumers whose lifestyles and shopping expectations have taken new trajectories amid the digitization of society.

“Given the unprecedented challenges facing the consumables industry, scale is increasingly important, especially for cash flow,” said Scott Mushkin, an analyst at Wolfe Research, in a note to clients last week with the clever title "Kro-zhay"—which, in the spirit of Kroger and Target's twin restocks, I'm borrowing for this column. “The bottom line is that the cost of doing business is increasing as Amazon’s omnichannel vision for the consumables market looks like it will become a reality. This is likely to require significant investment to offer consumers a seamless experience whenever and however they want to shop.”

Specifically, Kroger is trailing rivals such as Walmart in establishing an omnichannel presence, and has less developed offerings outside of food, despite a stated intention to get there. Target, in the meantime, has long lacked the kind of food expertise that can draw frequent traffic to its stores; and, according to Mushkin, its consumables offering is too often plagued by poor stock conditions.

“In many respects, Target is the yin to Kroger’s yang, and a merged company, in theory, would be a much more formidable competitor, with over 70% of Kroger’s stores within five miles of a Target, likely leading to significant improvement in asset utilization,” Mushkin said.

In a separate note, Barclays analyst Karen Short said there was an opportunity for “shared learnings” between the retailers, who between them do many things well.

Target, for example, is a whiz in developing private label clothing, Short said. It’s got great merchandise and assortment online, ship-from-store experience, and the new partnership with Shipt for delivery. Its credit card is also an advantage. Kroger, meanwhile, knows how to develop food brands; has expertise in fresh supply chain, merchandising and click-and-collect; and owns data analytics firm 84.51. 

So, do we have a match?

Don’t rule it out, said Short, who believes Target was among the suitors (identified as “company Y”) that approached Whole Foods a year ago before the natural foods giant teamed up with Amazon and, reportedly, had also approached Sprouts Farmers Markets. Kroger has been discussed as a potential partner to Boxed.com and the Chinese virtual retailer Alibaba in the last month alone, so it's not as though either company isn’t thinking about teaming up, if not with one another.

There’d be more than a few issues to iron out (union vs. non-union, centralized vs. decentralized, how big of a bite federal antitrust regulators might take, how to structure a deal and how much it might cost). Finally, they’d have to put it all together during this critical period for adjusting to the new world—but the big wheel is spinning whether they walk the aisle or not.


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