Kroger, the nation’s largest supermarket chain, is likely to gain leverage and bargaining power with vendors, expand its brick-and-mortar footprint and boost its online-delivery capabilities through its planned $24.6 billion acquisition of grocer Albertsons Cos., creating a juggernaut that can better compete with rivals such as Walmart, Amazon and Costco.
At present, Kroger, based in Cincinnati, and Albertsons, headquartered in Boise, Idaho, would have an enormous combined real estate portfolio that includes 4,996 stores, 3,972 pharmacies, 2,015 fuel centers, 66 distribution centers and 52 manufacturing plants.
The acquisition, announced Friday, would give Kroger an estimated 11.8% of the food and grocery market, according to Neil Saunders, managing director of research firm GlobalData, still about 5 percentage points behind Walmart in the top spot. Kroger alone is currently the largest pure-play U.S. grocery chain.
“In a market where margins are under pressure, the additional scale is useful for Kroger as it improves economics through better buying power,” Saunders said in a statement. “This is critical at a time when inflation is acting as a drag on both the top and bottom lines.”
The grocery industry has seen heightened competition from value-oriented rivals such as Walmart and Amazon, as inflation and rising costs put pressure on consumers, according to Saunders. The acquisition should allow Kroger and Albertsons to face these rivals better as a merged entity, he said. And the deal would expand Kroger’s reach, to an audience of roughly 85 million households, something the chain has been trying to do without opening actual stores in certain markets, by instead offering online delivery via highly automated fulfillment centers.
The acquisition will “greatly expand our national footprint,” Kroger Chairman and CEO Rodney McMullen said during an investor call Friday on the transaction. He plans to serve as chairman and CEO of the combined company.
But the deal faces the hurdle of getting approval from the Federal Trade Commission because of the antitrust issues it raises. In fact, Sen. Bernie Sanders on Friday immediately voiced his opposition to the acquisition.
In a tweet, Sanders said, “At a time when food prices are soaring as a result of corporate greed, it would be an absolute disaster” to allow Kroger to merge with Albertsons.
“The Biden administration must reject this deal,” Sanders tweeted.
Spinoff Company
In order to obtain regulatory clearance for the transaction, Kroger and Albertsons said they would divest stores. Albertsons plans to spin off a company to its stockholders immediately prior to the merger’s closing that would 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 grocers said in their joint statement. “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.”
As currently laid out, the companies do not anticipate any closures, but rather the creation of the standalone entity “to satisfy FTC concerns (it is highly debatable whether this will satisfy regulators given high food inflation and the overall consumer sensitivity of the sector, but that is another story),” Brandon Svec, national director of U.S. retail analytics for CoStar, said in an email.
“The company currently is expecting efficiencies to come from sourcing, manufacturing, distribution and technology,” Svec said.
Kroger’s stores are mostly concentrated in the eastern half of the United States, while Albertsons primarily operates in the West. Kroger has roughly 2,800 stores, and Albertsons has about 2,200, compared with the roughly 5,300 Walmart and Sam’s Club stores across the country, according to the companies’ respective websites. Combined, Kroger and Albertsons had revenue of $208 billion in 2021, earnings reports show.
“Overall, I would say that this transaction would be a positive for Kroger and Albertsons as the combined entity would be better equipped to compete with Walmart, Amazon and the growing threat from discount grocers in a high-inflation economy,” Svec said.
“While there would be some overlap in some key markets such as Chicago, Houston, and along the West Coast in California, Washington state and Oregon, the portfolios are mostly complementary,” he said. “Regulatory approval is a big if, but if the transaction does close, the impact to the combined retail portfolio looks to be relatively minimal considering the size of the store counts involved.”
Multiple Chains
Kroger’s roughly 20 chains include Kroger, Fred Meyer, Fry’s Food Stores, Ralphs, King Soopers and Gerbes. Albertsons’ banners include Acme, Kings, Balducci’s, Safeway, Shaw’s, Vons and United Supermarkets. Kroger said it would invest $1.3 billion into Albertsons’ stores to “enhance [the] customer experience.”
As of the end of last year, Albertsons owned or ground-leased about 39% of its stores and 51% of its industrial properties, as well as its corporate headquarters in Boise, according to CoStar data.
“These properties would be included in the transaction and sell to Kroger, so in a sense there would be property sales as a result, but they wouldn’t necessarily impact the broader grocery-property market unless Kroger decided to do a sale-leaseback with some of the stores in the future,” Svec said. “If Kroger determined it had too much overlap in certain locations and needed to close stores it did not own, it will buy out the leases of those locations being cannibalized or under-performing, in which case the owner would need to look for a new tenant.”
Through the merger, Kroger said it can expand its omnichannel offerings and have a digital ecosystem to serve “customers anything, anytime, anywhere.”
Expected Improvements
By combining Kroger and Albertsons stores and fulfillment centers, the merged entity, according to company officials, would: improve customer experience and grocery freshness with an expanded network; expand capacity and shorten lead times for delivery; increase the use of an automated fulfillment system through large, medium and small fulfillment centers; and improve overall efficiency and lower operating costs.
“Importantly, we will have an expanded network of stores, distribution centers and automated fulfillment centers to provide a superb digital system for our customers,” McMullen said.
The combined business will have 25 fulfillment centers, including six Kroger automated fulfillment centers, 12 Kroger online delivery “spokes” and seven of Albertsons’ automated micro-fulfillment centers. Kroger has been opening high-tech robotic centers in markets where it doesn’t even have stores in order to expand its online delivery network.
The combined company expects to achieve roughly $1 billion of annual run-rate synergies, net of divestitures, within the first four years of combined operations with about 50% being achieved within the first two years following the deal’s close. Kroger and Albertsons said they will achieve those synergies “largely through improved sourcing, optimization of manufacturing and distribution networks, and technology investment amplification opportunities.”
The acquisition agreement marks a consideration of $34.10 per share, roughly 30% above Albertsons’ average share price over the course of September. The $24.6 billion amount also includes Albertsons’ $4.7 billion in debt.
The deal, slated to close in early 2024, has been approved by both companies’ boards of directors but still requires regulatory approval.
When federal regulators approved a $9.2 billion merger of Albertsons and Safeway in 2015, they required the companies to first sell off a total of 168 stores to prevent unfair competition in 130 U.S. metropolitan areas. Post-merger, the combined company closed several other stores to eliminate duplication in neighborhoods where stores were deemed too close.
Some analysts note that regulators may be less restrictive about a Kroger-Albertsons deal in a climate where Walmart now accounts for about a quarter of all U.S. grocery sales and Amazon continues to open high-tech stores and build up its food delivery infrastructure.
Staff writer Lou Hirsh contributed to this story.
For the Record
Citi and Wells Fargo Securities are serving as financial advisers and Weil, Gotshal & Manges and Arnold & Porter Kaye Scholer are serving as legal counsel to Kroger. Goldman Sachs and Credit Suisse are serving as financial advisers to Albertsons, while and Jenner & Block is serving as corporate legal counsel and White & Case and Debevoise & Plimpton are serving as antitrust legal counsel.