Kroger Co snapped up Albertsons Cos Inc in a $25bn deal on Friday, creating a US grocery behemoth to better compete with leader Walmart Inc on prices while bracing for antitrust scrutiny.
The mega-merger between the Number 1 and 2 standalone grocers in the United States will bring under one roof nearly 5,000 stores that include banners such as Albertsons’ Safeway and Kroger-owned Ralphs and Fred Meyer.
The deal could, however, stifle competition and lead to higher prices for American shoppers already grappling with this year’s surge in inflation, according to some analysts.
To help ease those concerns, the companies have charted plans to divest some stores and Albertsons is ready to spin off a standalone unit to its shareholders immediately before the Kroger deal closes. The new public company is estimated to comprise as many as 375 stores.
“We have a clear path to achieve regulatory approval with divestitures,” company executives reassured investors on a conference call on Friday, adding that it was still too early to narrow down which markets the restructuring would occur in.
Neil Saunders, managing director of GlobalData Retail, said “these [concerns] are mostly local issues where a merger produces a very high market share in certain areas. From a broader national perspective, a combined Kroger and Albertsons does not pose any major threat to the competitive dynamics of the market.”
“Scale is necessary to deliver the prices and investments that consumers demand.”
Battle for lowest prices
With a customer base of 85 million households and 66 distribution centres, Kroger and Albertsons would together have an edge over negotiations on product prices with suppliers, including consumer goods companies, at a time when prices of groceries and essentials are soaring in the country.
Kroger said it expects to reinvest about half a billion dollars of cost savings from deal synergies to reduce prices for customers. An incremental $1.3bn will also be invested into Albertsons.
Market leader Walmart has been doubling down on its own grocery business and has traditionally used its scale to demand the lowest possible prices from food and beverage suppliers, leaving rivals at a disadvantage in price negotiations.
“The merger will accelerate our position as a more compelling alternative to larger and non-union competitors,” Kroger Chief Executive Officer Rodney McMullen said.
Together, the stores would control about 13 percent of the US grocery market, assuming the sale or closure of a few hundred stores for antitrust reasons, according to JP Morgan analyst Ken Goldman.
Still, that is a distant second to Walmart’s 22 percent share. Amazon, which bought Whole Foods in 2017, is also a growing player in the space, with a 3 percent share. Warehouse store Costco controls 6 percent.
Value chains like Aldi and Dollar General – which have a combined 4 percent market share – have also been squeezing traditional grocers like Kroger and Albertsons, particularly as red-hot inflation pushes people to cut costs.
Goldman said a stronger combined company could possibly help tame food price inflation, since it would have more power to reject food producers’ price increases. The two chains combined have 34,000 private-label products at various price points that compete directly with food manufacturers.
Kroger will pay $34.10 for each Albertsons share, representing a premium of about 33 percent to the stock’s closing price on Wednesday, a day before media reports emerged of a deal between the two.
Shares of Albertsons were down about 6 percent in morning trading, after closing up 11 percent on Thursday, while Kroger’s stock was down about 3 percent.
Ohio-based Kroger plans to fund the deal using a combination of cash on hand and proceeds from $17.4bn in debt financing in place from Citi and Wells Fargo. It would also have to pay Albertsons $600m if the deal is terminated.
After the deal close, which is expected in early 2024, Kroger CEO McMullen will continue to serve as the head of the combined company.