As would be expected, there were lots of stories over the weekend offering a wide variety of perspectives about the proposed $24.6 billion acquisition of Albertsons by Kroger, which was announced on Friday.
First, let's recap:
The deal requires the approval of the Federal Trade Commission (FTC), which has taken a hawkish stance on antitrust issues.
It would combine the assets of Kroger, the nation's second-ranked grocery retailer, with a 9.9 percent market share, and Albertsons, the nation's number four grocery seller with a 5.7 percent market share. Combined, the new company would have a 15.5 percent market share, second to Walmart's 20.9 percent of national grocery market share. (Costco would remain in third place.)
These market share numbers, however, are before any FTC-mandated divestments.
The merger agreement says that Albertsons Cos. is prepared to establish a subsidiary dubbed SpinCo, which would be "spun-off to Albertsons Cos. shareholders immediately prior to merger closing and operate as a standalone public company. Kroger and Albertsons Cos. have agreed to work together to determine which stores would comprise SpinCo, as well as the pro forma capitalization of SpinCo. The establishment of SpinCo, which is estimated to comprise between 100 and 375 stores, would create a new, agile competitor with quality stores, experienced management, operational flexibility, a strong balance sheet, and focused allocation of capital and resources to provide customers with continued value and quality service and associates with ongoing compelling career opportunities."
The merger is expected to be completed by early 2024.
Here is a synopsis of some of the weekend coverage:
• From Bloomberg:
"Kroger had eyed Albertsons for a while. So it quickly assembled a team of lawyers and analysts to answer a basic question: Would it even be able to buy the parent of Safeway, Vons and Albertsons supermarkets, given antitrust concerns around the two largest US grocery chains pairing up?
"The group spent months evaluating where it might have to unload stores, according to people familiar with the plans, who asked to not be identified because the details aren’t public. It drew up maps to understand shopping behavior like who shops where and how far they drive for groceries.
"Satisfied it could pull off a deal that would give it the heft to take on Walmart Inc., Kroger started working with Citigroup Inc. and Wells Fargo & Co. to figure out other details of the $24.6 billion deal announced Friday.
"Albertsons had already been working with Goldman Sachs Group Inc. and Credit Suisse Group AG on its review. Major shareholder Cerberus Capital Management had been looking to cash out, following the grocer’s initial public offering in 2020.
"Cerberus was heavily involved in the talks, the people said, which started over Zoom and involved late-nighters in recent weeks. They used code-names to keep the project quiet: Acorn for Albertsons and Kettle for Kroger."
• From the New York Times:
"A 2008 study conducted by Orley C. Ashenfelter, an economist at Princeton, and Daniel S. Hosken of the Federal Trade Commission, found that in four of the five mergers they evaluated, prices appeared to have increased between 3 and 7 percent. The authors cautioned that the study was not necessarily a reflection of the impact of all deals. It is unclear whether the dynamics have changed in the years since.
"But any increase in prices now could have a painful impact, as food prices in general continue to shoot up. The cost of food across the United States last month rose 11 percent from the year before, according to the Bureau of Labor Statistics.
"The companies for their part suggested on Friday that cost savings might not be the same everywhere.
"'It is market-by-market in terms of what we feel like we need to invest to be able to get pricing where we feel comfortable,' Rodney McMullen, Kroger’s chief executive, said in an analyst call."
• CNBC reports that in anticipation of pushback from regulators, Kroger already has started making its case, saying that "the combination would lower food prices in a time of high inflation, boost profitability and speed up innovation in an otherwise fragmented industry." However, "some investors question whether the merged companies can increase profits since the grocery business, already known for thin margins, is facing higher costs and cost-conscious shoppers."
CNBC writes that "Kroger has done its homework and feels confident that the deal can go through, CEO Rodney McMullen said. 'We’ll sit down with the FTC as soon as we can.'
"Some investors are already skeptical, if the stocks’ performance Friday is any indication. (Both Kroger and Albertsons were down midday.)
"That’s because Wall Street has already seen a spree of grocer acquisitions — including some by Kroger and Albertsons — but no meaningful changes in profit margins. Costs have grown for everything from transportation to packaging, too.
"Kroger said this acquisition is different. In the first four years of combined operations, Kroger said the companies expect to save about $1 billion in annual recurring savings."
CNBC goes on:
"McMullen pointed to a few examples of where it can drive higher profits and better margins. One of the biggest opportunities is capturing more shopper data across a wider number of banners, which can be turned into lucrative online ads. The combined company would have reach to about 85 million households across the country.
"Many retailers, including Walmart, Target and Kroger, have turned to advertising as an alternative stream of revenue after seeing the success of established online players like Amazon. The business has much higher margins than selling cans of soup or gallons of milk.
"A bigger Kroger would also have cheaper manufacturing costs and better bargaining power, too, McMullen said. Together, the companies would become one of the largest consumer packaged goods companies in the country with a combined portfolio of about 34,000 total private label products across price points. Those include organic items and premium products that often retail for less than namebrand national competitors."
• From the Wall Street Journal, more about the advertising implications:
"The proposed merger of Kroger Co. and Albertsons Cos. would reshape the U.S. supermarket industry by combining its two largest operators. It also would create a big player in so-called retail media, one of advertising’s fastest-growing sectors.
"Retail businesses from Walmart Inc. to Uber Technologies Inc.-owned alcohol delivery service Drizly have been developing advertising networks that use their websites, apps and even outside properties to show brands’ messages, often targeted by the data that retailers collect directly from their own customers. Kroger and Albertsons entered the retail advertising market in 2015 and 2021, respectively.
"Total revenue from retail ad sales in the U.S. will increase 31% this year to $40.81 billion, which is more than three times its 2019 total, according to market-research firm Insider Intelligence Inc."
“The strongest rationale is that it’s about building a retail media juggernaut,” said Andrew Lipsman, principal analyst for retail and e-commerce at Insider Intelligence, regarding the Kroger-Albertsons merger. “These digital ad businesses are completely transforming economics, and you get disproportionate gains from scale. It’s a case where 1+1 is going to equal 3, or maybe 4.”
• The Cincinnati Enquirer reports that there already are lawmakers expressing dismay about the merger.
U.S. Sen. Bernie Sanders called Kroger's latest move an "absolute disaster," the story says. "At a time when food prices are soaring as a result of corporate greed, it would be an absolute disaster to allow Kroger, the 2nd largest grocery store in America, to merge with Albertsons, the 4th largest grocery store in America," Sanders wrote. "The Biden Administration must reject this deal."
And "Sen. Elizabeth Warren reacted to the then-rumored merger in an interview with MSNBC on Thursday. The Massachusetts Democrat said the U.S. has failed to utilize antitrust laws for decades.
"'For example, with grocery stores, remember how many grocery stores there used to be? And now what you have is a handful of giant chains,' Warren said.
"The senator said Kroger earned almost $900 million in the third quarter of 2021, more than three times the amount it made in the same time period in 2019. 'That's because they have a lot of market dominance,' she said. 'If we move in on antitrust law, break up these giant corporations, then we get real competition and then we get markets that are truly competitive'."
Bloomberg adds that "Mike Lee, a Republican on the US Senate Judiciary Committee, said in a statement Friday that he would do everything in his power to ensure 'antitrust laws are robustly enforced to protect consumers from anticompetitive mergers that could further exacerbate the financial strain we already feel in the grocery store checkout aisle'."
The story notes that "FTC Chair Lina Khan hasn’t commented yet on the combination,:" but that "her earlier criticism of Albertsons’ acquisition of Safeway could be salient. In a 2017 Harvard law review article, Khan concluded that FTC remedies, including selling stores in shared markets, failed to protect consumers."
• Greg Ferrara, president-CEO of the National Grocers Association (NGA), released the following statement:
"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. 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."
• From Axios:
"Consumer watchdogs are questioning Kroger's sincerity, expressing concern about the impact on customers already grappling with surging food inflation.
"'With food prices rising, the last thing Americans need is a supermarket merger that will spike food prices even further,' Robert Weissman, president of Public Citizen, said in a statement. 'Rejecting this merger proposal should be a no-brainer for federal antitrust officials,' he added."
• “There is no reason to allow two of the biggest supermarket chains in the country to merge — especially with food prices already soaring,” said Sarah Miller, Executive Director of the American Economic Liberties Project. “With 60% of grocery sales concentrated among just 5 national chains, a Kroger-Albertsons deal would squeeze consumers already struggling to afford food, crush workers fighting for fair wages, and destroy independent, community stores. This merger is a cut and dry case of monopoly power, and enforcers should block it.”
• From the Seattle Times:
"Unlike on the East Coast and in the Midwest, where Kroger and Albertsons are in largely separate markets, the two retailers overlap in several Western states, especially California and Washington, said Arun Sundaram, a market analyst at CFRA Research who follows the grocery business. In the Seattle area, the two grocery retailers appear to be each other’s biggest competitor.
"'The area is kind of messy for them … so I think we’ll probably see more of these divestitures' in those states, Sundaram said.
"Some analysts think a merger could improve operations at both chains. But at least some Seattle-area shoppers fear a tie-up could mean more expensive groceries or changes at neighborhood grocery stores."
• If the deal goes through, the West Seattle Blog writes, "an immediate result would be the same ownership for five of West Seattle’s 11 supermarkets, and in the longer run, the question would be whether any local closures might result. Kroger is proposing buying Albertsons. Kroger is parent company of QFC (among many other brands, including regionally prominent Fred Meyer), and Albertsons owns brands including Safeway (which it bought in the mid-2010s). West Seattle has two QFC stores and three Safeway stores, and among those, two – Junction QFC and Jefferson Square – are barely a block apart. To the south, Westwood Village QFC and Roxbury Safeway (a former Fred Meyer) are just a few blocks apart."
There is, the blog writes, early opposition to the merger, including from "UFCW locals who represent many local stores’ workers. They allege the merger would create a 'monopoly … for many communities'."
However, the blog also points out that this represents a narrow view of the market: "West Seattle has a relatively diversified supermarket scene, including independent West Seattle Thriftway, mini-chain stores PCC, and Metropolitan Market, and three stores that are part of national chains, Whole Foods, Trader Joe’s, and Target."
- KC's View:
Talk about strange bedfellows - at the moment, it would appear that Greg Ferrara, Bernie Sanders, Elizabeth Warren, Mike Lee, Lina Khan and organized labor all seem to have a common rooting interest.
One argument is that a Kroger-Albertsons mashup will have greater buying power and cheaper manufacturing costs, which would give it the ability to provide shoppers with more options and cheaper prices.
But the opposite argument is that the mashup is anticompetitive - it positions the new entity to better compete with Walmart and Amazon, but it also manufactures a business that will further put independents and regional chains at a disadvantage. It also gives workers one fewer major retailer to work at, which could depress wages.
I have no sense at the moment of how this will play out, except that it seems certain that it will take every bit of the next 15+ months to get this approved, and it seems equally likely that they'll have to divest a lot more stores than they are talking about at the moment. The FTC seems unlikely to be compliant on this one.
I am not yet persuaded - just speaking for myself - that this will be as good for shoppers as the announcement suggests. There will be so many banners, so many different stores and operations, that it strikes me as unwieldy. And I think one of the battles they'll have to fight is the perception that this will end up being better for shareholders in the long run than it will be for anyone else.