A customer shops for eggs in a Kroger grocery store on August 15, 2022 in Houston, Texas.
Brandon Bell | Getty Images
Kroger knows it needs the blessing of investors and federal regulators to pull off its $24.6 billion deal to buy rival grocery company Albertsons.
It started making its case Friday, when the companies announced the deal. Kroger said the combination would lower food prices in a time of high inflation, boost profitability and speed up innovation in an otherwise fragmented industry.
If approved, the grocers would become a more formidable second place in terms of grocery market share behind Walmart. Together, the companies would capture nearly 16% of the U.S. grocery market, according to market researcher Numerator. Walmart had roughly 21% of the market as of June 30. Albertsons is fourth place. Kroger said it anticipates closing the deal in early 2024, pending regulatory approval.
Significant hurdles remain: Some investors question whether the merged companies can increase profits since the grocery business, already known for thin margins, is facing higher costs and cost-conscious shoppers.
Since Kroger and Albertsons significantly overlap in several markets, regulators may be concerned that a merged company could price out smaller competitors. The companies employ a combined 710,000 people across about 5,000 stores, so potential job losses are a concern, as well.
Convincing regulators
Kroger said it already has a plan to convince regulators. Chief Financial Officer Gary Millerchip said on Friday’s call with investors that the companies anticipate that they will have to divest between 100 and 375 stores.
One possibility, he said, is establishing a subsidiary that would be spun off to Albertsons’ shareholders prior to the deal closing and would operate as a standalone public company. Kroger and Albertsons would work together — and with the Federal Trade Commission — to decide which stores would be part of the spinoff company.
By the numbers
KROGER
- 2,800 stores in 35 states
- 420,000 employees
- 25 banners, including Fred Meyer, Ralphs, King Soopers and namesake stores
- $33.3 billion market capitalization, as of Thursday’s close
ALBERTSONS
- 2,200 stores in 34 states and Washington, D.C.
- 290,000 employees
- 22 banners, including Safeway, Acme, Tom Thumb and namesake stores
- $15.2 billion market capitalization, as of Thursday’s close
Source: Company websites, FactSet
Millerchip said the $34.10 per share price of the deal would be reduced based on the number of stores.
Kroger has done its homework and feels confident that the deal can go through, CEO Rodney McMullen said. “We’ll sit down with the FTC as soon as we can.”
Winning over investors
Some investors are already skeptical, if the stocks’ performance Friday is any indication. (Both Kroger and Albertsons were down midday.)
That’s because Wall Street has already seen a spree of grocer acquisitions — including some by Kroger and Albertsons — but no meaningful changes in profit margins. Costs have grown for…
Read More: How Kroger plans to win over regulators, investors