Published on: October 14, 2022
Kroger and Albertsons this morning announced what they are calling "a definitive agreement under which the companies will merge two complementary organizations with iconic brands and deep roots in their local communities to establish a national footprint and unite around Kroger's Purpose to Feed the Human Spirit." The combination, the press release says, "creates a premier seamless ecosystem across 48 states and the District of Columbia, providing customers with a best-in-class shopping experience across both stores and digital channels.
The price: approximately $24.6 billion, including the assumption of approximately $4.7 billion of Albertsons Cos. net debt. Even combined, the new company will remain in second place to Walmart's 20.9 percent of national grocery market share, with about a 15.5 percent market share.
This, of course, does not factor in any divestments required by the Federal Trade Commission (FTC), which of late has been hawkish on the subject of antitrust.
The announcement conceded that "Kroger and Albertsons Cos. expect to make store divestitures. As described in the merger agreement and subject to the outcome of the divestiture process, Albertsons Cos. is prepared to establish an Albertsons Cos. subsidiary (SpinCo). SpinCo 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 deal, if approved by regulators, is expected to be concluded in early 2024.
CNBC writes, "To team up, Kroger and Albertsons would need regulators to sign off. Regulators would look at where the companies have dominance and weigh if they would have too much power if combined, said Eleanor Fox, a New York University professor who specializes in antitrust and competition policy. A merger would be less likely to get approved if they are the top two grocers in many markets, she said.
"Some of the companies’ markets have significant overlap, such as Southern California, Colorado, Seattle and parts of the Midwest and Texas, Simeon Gutman, a retail analyst for Morgan Stanley, wrote in a research note Thursday. Other regions, such as the Northeast and Southeast, have very little overlap" … The combination will likely undergo a lengthy review period by regulators and may require store divestitures, Morgan Stanley’s Gutman said.
"Gutman also cautioned on the financial upside of the deal. Consolidation in the grocery industry has not historically paid off in the form of higher profits, he said. However, he said the industry could be at a tipping point where a big merger could also lift margins."
“Albertsons Cos. brings a complementary footprint and operates in several parts of the country with very few or no Kroger stores,” Kroger CEO Rodney McMullen said in a news release announcing the deal.
The press release also said that "Consistent with prior transactions, Kroger plans to invest in lowering prices for customers and expects to reinvest approximately half a billion dollars of cost savings from synergies to reduce prices for customers. An incremental $1.3 billion will also be invested into Albertsons Cos. stores to enhance the customer experience. Kroger will also build on its recent investments in associate wages, training and benefits. Kroger has invested an incremental $1.2 billion in associate compensation and benefits since 2018. The combined company expects to invest $1 billion to continue raising associate wages and comprehensive benefits after close."
McMullen said in his statement that "as a combined entity, we will be better positioned to advance Kroger's successful go-to-market strategy by providing an incredible seamless shopping experience, expanding Our Brands portfolio, and delivering personalized value and savings. We'll also be able to further enhance technology and innovation, promote healthier lifestyles, extend our health care and pharmacy network and grow our alternative profit businesses. We believe this transaction will lead to faster and more profitable growth and generate greater returns for our shareholders."
In an internal memo to employees this morning, Albertsons CEO Vivek Sankaran wrote,
"In recent years, we have been on a transformational journey to evolve Albertsons into a modern omnichannel food and drug retailer focused on building lasting relationships with our customers. We have delivered top-tier performance while furthering our purpose. We have also grown our customer base, strengthened our data, technology, and productivity capabilities and learned how to be locally great and nationally strong.
"In February, we launched a strategic review to consider all possible ways for our business to create more value and build even further on our success; today’s announcement marks the successful outcome of this review. I, along with our Board of Directors and Senior Leadership Team, firmly believe that combining with Kroger provides a tremendous opportunity to offer more value to all stakeholders – including associates, customers, and investors – in the long term."
Kroger is the nation's second-ranked grocery retailer, with a 9.9 percent market share; it also is the number one pure-play supermarket chain, with 2,800 store in 35 states and 25 different banners.
Albertsons is the nation's number four grocery seller with a 5.7 percent market share; it is the number two pure-play supermarket chain, with 2,200 stores in 34 states and Washington, DC, and 22 different banners.
Walmart is the number one grocery retailer with a 20.9 percent market share. Costco is number three, with a seven percent market share.
For more than six months, Albertsons has been engaged in a review of its strategic options as it looks to boost shareholder value.
- KC's View:
That happened fast.
First of all … I have to admit that yesterday when I saw the story cross the wires, I thought I was having a Covid-induced fever dream. (The Urban Dictionary defines "fever dream" as a "dream or nightmare, altered by a fever to become particularly confusing and bewildering at the time and even more so in remembering, like a Bad Trip."). I also knew that it was time to get to work. Covid be damned.
We all knew that Albertsons was examining its options, but I never dreamed that Kroger would end up being one of them - under what circumstances would Kroger and Albertsons even consider the possibility that antitrust regulators would allow such a deal to go through?
Obviously, both companies have financial advisors and lawyers telling them that there is a deal to be had.
The question is, at what price?
Of their total 5,000 stores, how many will have to be divested in order to satisfy the Federal Trade Commission (FTC)? One thousand? Fifteen hundred? What companies, precisely, are positioned to buy them - especially because, at the moment, money is a lot more expensive than it was a year ago.
The "between 100 and 375 stores" that the two companies suggest would be spun off into the new SpinCo public company sounds awfully optimistic to me.
I still think that this could be good news for Amazon, in the sense that the metrics of this deal illustrate how small a player it actually is the supermarket space - estimates are that roughly four percent of its total sales - or about $20 billion - are in the groceries. (Kroger's sales are about $132 billion, while Albertsons are about $75 billion.)
Bottom line: The FTC almost certainly has to look at this deal through hardened, skeptical eyes … and it is hard for me to imagine that an agency that refused to let Staples and Office Depot to merge will let Kroger and Albertsons do so without exacting some significant concessions.
However, even after divestments and concessions, it is true that a concluded deal would create a national pure-play grocery retailing entity better positioned to compete with Walmart (and Amazon), and potentially with an enormous competitive advantage of regional chains and independents.
Let's assume that the deal is able to be concluded. I still would have a question (lots of questions, actually, but for the moment, let's boil it down to one):
Will the resulting retailing entity - both bricks-and-mortar and online - really be better able to serve consumers?
Big doesn't always equal better. Sure, the company will be larger, with greater access to resources. But there's a thin line between bigger/better and being unwieldy.
One point: The last time we had something close to a national supermarket chain (other than Walmart, which isn't a supermarket chain) was the Great Atlantic & Pacific Tea Co. (A&P), and we all know how that turned out. I'm not suggesting that there is a direct parallel, but…
This story has only begun to unfold.
Content Guy's Note: I'll be back on Monday with a full-blown, post-Covid edition of MNB. In the meantime, have a great weekend… stay safe … stay healthy.