What’s ahead for Kroger & Albertsons after their failed merger
After more than two years since it was first proposed, Kroger’s $24.6 billion acquisition of Albertsons is not happening after judges in Oregon and Washington blocked the deal Tuesday.
The Federal Trade Commission, which sued the companies earlier this year, called this a victory that protects Americans from higher grocery prices. Washington Attorney General and Governor-elect Bob Ferguson called the state’s decision “an important victory for affordability, worker protections and the rule of law,” according to the Associated Press.
On Wednesday, Albertsons terminated the merger agreement and sued Kroger for not taking the best efforts to secure regulatory approval of the merger. The smaller grocer said it is seeking billions of dollars in damages from Kroger and that Kroger owes it a $600 million termination fee. Kroger called Albertsons’ claims “baseless and without merit.” The company said it would prove in court that Albertsons breached the merger agreement and is not entitled to the termination fee.
This will continue to play out in court. Meanwhile, the grocers will keep operating as two separate companies. The threat of competition from larger retail companies like Walmart, Amazon and Costco was central to Kroger and Albertsons’ arguments in court; the companies argued that the deal would create efficiencies that would bring grocery prices down.
In 2022, Kroger and Albertsons said the merger would lower prices, expand their selection of private-label products, make their supply chain more efficient and personalize customer experiences with a large data network and technology platform, among other benefits.
Now, they will have to find new ways to make those gains. Financial earnings calls, statements as well as analyst reports and interviews give an idea of what key areas the companies will likely invest in individually to gain more market share in the competitive grocery space.
Invest in e-commerce & advertising platforms
Digital investments have driven sales growth for both companies and both have been building out their own retail media networks. In their last reported quarters (which ended in September for Albertsons and November for Kroger), Kroger’s digital sales grew 11% year over year and Albertsons’ increased 24%.
One of those efficiencies likely would be the combination of Kroger and Albertsons’ e-commerce, data and advertising capabilities. The deal would have created a grocery chain around the same number of locations as Walmart — which has 4,600 U.S. stores, not counting Sam’s Club — a formidable competitor.
“I think the real thesis behind the acquisition of Kroger and Albertsons was really in garnering digital advertising revenues,” said Sean Turner, chief technology officer and co-founder of Swiftly, a technology provider that works with brick-and-mortar grocery and convenience stores on mobile apps, websites, loyalty programs and advertising platforms. Neither Kroger nor Albertsons are Swiftly clients.
“The combined company will be able to reach an expanded national audience of approximately 85 million households nationwide,” Kroger and Albertsons said when announcing the potential deal in 2022, “fueling growth in alternative profit businesses such as Retail Media, Kroger Personal Finance, and Customer Insights. With an expanded footprint and the addition of the recently launched Albertsons Cos. Media Collective, Kroger will enhance its services to media clients and provide more targeted, sophisticated solutions.”
Walmart’s advertising platform has grown rapidly in recent years, growing 28% last quarter. Turner said that poses a significant threat to smaller grocers. Kroger expects its ad business to grow 20% this year. Additionally, Walmart’s growing e-commerce efforts have helped them attract a new range of shoppers and gain market share from smaller retailers.
“If I’m anybody smaller than a Walmart, I really, really need to be thinking very hard about my digital strategy and how I’m going to get a share of those revenues,” Turner said. “There’s so much profit in the advertising that Walmart can sell their products even at a loss and still be profitable just on the ads.”
Improve their private label brands
When the Kroger and Albertsons merger was first announced, the companies said the deal would create a portfolio of about 34,000 private-label products. Brad Jashinsky, director analyst for Gartner, expects the grocers to still have a big focus on growing their store brands.
Albertsons offers across its banners private labels like health and wellness brand Signature Care and Value Corner, which encompasses everything from milk to paper towels geared toward the budget-conscious customer. Meanwhile, Kroger offers private labels like the pet product brand Pet Pride and the baby essentials brand Comforts. Both Kroger and Albertsons announced new private-label products this year.
“I think that was a huge opportunity for them if the merger would have gone through. But I think, even without that, there’s still going to be a huge focus on expanding private label,” said Jashinsky.
Pursue different mergers or acquisitions
On the M&A front, both Kroger and Albertsons could pursue new prospects, and antitrust experts believe a Trump-controlled FTC may allow more retail consolidation.
“There’s a lot of speculation that the merger climate is going to open up, and there are a lot of regional chains out there,” Jashinsky said. “I do think there are opportunities for both companies — if they decide to go that route — to do smaller acquisitions that are going to be in areas where there’s no overlap, where they’re not already operating.”
However, Kroger’s Chairman and CEO Rodney McMullen said earlier in December the company doesn’t need mergers to make the business successful and that it is unlikely to look for another merger partner. “There’s probably nothing else that would be transformational that would use the balance sheet capacity that we would have,” McMullen told investors. “So I don’t know that we would be out there trying to find what’s the next Albertsons.”
“Kroger could seek out smaller regional chains or tech companies to bolster its omnichannel capabilities,” Ross Cloyd, director of grocery insights for research firm Kantar, said in an email. “Albertsons might explore partnerships with local grocers or invest in innovative in-store experiences to differentiate itself.”