Recently, Kroger and Albertsons announced plans to merge, with Kroger to acquire Albertsons for $24.6B. The combined entity would create the second-largest grocery store chain in the nation, behind Walmart.
Rocking the Grocery Space
In what has already been a disruptive year across the grocery space – marked by inflationary headwinds, a continued push by Amazon into the offline grocery arena, and increased competition by discount chains like Aldi – a Kroger and Albertsons merger could have a significant ripple effect. For starters, it would bring a wide number of grocery store banners under one umbrella. Together, Kroger and Albertsons own over 30 grocery brands, including Ralphs, Smith’s, King Soopers, Fry’s, and Pick n’ Save (owned by Kroger), and Safeway, Vons, Jewel-Osco, Shaw's Supermarket, and ACME Markets (owned by Albertsons). At present, the two companies have a presence in 48 states, with almost 5,000 physical stores, 4,000 pharmacies, and 2,000 fuel centers.
Combined Brand Dominance
Leveraging brand dominance metrics for these brands shows just how wide the combined entity’s footprint will be. As illustrated by the charts below, chains belonging to Kroger’s banner led the grocery category in September 2022 in 15 states and took second place in nine more. Chains belonging to Albertsons topped the list in eight states and were ranked second in 11 others. In 10 states – concentrated in the Western U.S. – a Kroger or Albertsons banner ranked both first and second for monthly foot traffic.
Given the companies’ size and regional overlap, it should come as no surprise that the merger is already attracting significant antitrust scrutiny. In anticipation of potential regulatory hurdles, the companies announced that Albertsons is prepared to establish a subsidiary stand-alone company that could hold between 100 and 375 locations.
Joining Forces to Take Online Grocery by Storm
Beyond creating one of the largest grocery chains in the United States, a Kroger-Albertsons transaction would also have implications for the world of online grocery. One of Albertson’s key competitive advantages – likely an important factor behind Kroger’s interest in the company – is the Just-for-U loyalty program and app, which has helped drive increased visitation among Albertson’s most loyal households. Kroger, for its part, boasts a significant online presence and loyalty program of its own, as well as a growing network of highly-automated customer fulfillment centers (CFCs).
A look at foot traffic data for two of the chain’s first CFCs shows just how much Kroger’s delivery operations have grown over the past year. Since September 2021, the Monroe, OH CFC (established in April of that year), saw an 84.6% increase in foot traffic – including employees – while the Groveland, FL location (established two months later) saw an increase of 66.7%.
Massive Ad Reach
Another major opportunity arising from this transaction involves alternative profit drivers such as retail media networks – which allow chains with significant foot traffic to turn their brick-and-mortar fleets into advertising platforms. With a combined reach of almost 85M households nationwide, the companies stand poised to grow their media capabilities significantly.
In-person visits are for physical stores what ad impressions are for websites: Each visit to the store creates an opportunity for the shopper to be exposed to a network’s various advertising channels – including in-store and digital ads, product sampling, and more. A glance at the average number of monthly visits enjoyed by several of the two companies’ leading banners in Q3 2022 illustrates just how lucrative in-store marketing is likely to be for the combined venture.
Lowering Costs
The planned merger also positions the companies to better compete with discount stores – at a time when inflation-wary consumers increasingly seek out value-priced grocers. While the move will not completely eliminate the chains’ price gap with hard discounters – which owe a lot of their low pricing to outsized private label portfolios or opportunistic surplus inventory models – the estimated $1B in cost savings will allow the new entity to differentiate itself by investing in both experience and bringing down costs.
Key Takeaways
Should the merger be approved, it will rock the grocery category, further empowering Kroger and Albertsons to take on giants like Walmart and Amazon. By combining their strengths and lowering costs, the deal would help each of the companies maximize their competitive advantages while offering them even greater reach.
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