Kroger must win over Wall Street and Washington with its deal with Albertsons – that’s how it plans to do it

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A customer buys eggs at a Kroger supermarket on August 15, 2022 in Houston, Texas.

Brandon Bell | Getty Images

Kroger knows it needs the blessing of investors and federal regulators to close its $24.6 billion deal to buy a rival grocery company Albertsons.

It began defending its case Friday, when the companies announced the deal. Kroger said the combination would lower food prices at a time of high inflation, boost profitability and accelerate innovation in an otherwise fragmented industry.

If approved, grocers would be a formidable second in terms of market share at the back of the supermarket walmart. Together, the companies would capture nearly 16% of the U.S. grocery market, according to market researcher Numerator. Walmart had about 21% of the market on June 30. Albertsons is in fourth place. Kroger said it expects to close the deal in early 2024, pending regulatory approval.

Significant hurdles remain with some investors questioning whether the merged companies can boost profits as the grocery industry, already known for its thin margins, faces increased costs and budget-conscious customers.

Since Kroger and Albertsons overlap significantly in different markets, regulators may worry that a merged firm could price out smaller competitors. The companies together employ 710,000 people in about 5,000 stores, so potential job losses are also a concern.

Convincing regulators

Kroger said it already has a plan to convince regulators. Chief Financial Officer Gary Millerchip said in a meeting with investors Friday that the companies expect to have to divest between 100 and 375 stores.

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One possibility, he said, is to create a subsidiary that would be transferred to Albertsons shareholders prior to the closing of the deal and operate as a standalone publicly traded company. Kroger and Albertsons would work together — and with the Federal Trade Commission — to decide which stores would be part of the spin-off company.

By the numbers

KROGER

  • 2,800 stores in 35 states
  • 420,000 employees
  • 25 banners, including Fred Meyer, Ralphs, King Soopers and stores of the same name
  • $33.3 Billion Market Cap, As Of Thursday’s Close

ALBERTSONS

  • 2,200 stores in 34 states and Washington, DC
  • 290,000 employees
  • 22 banners, including Safeway, Acme, Tom Thumb and stores of the same name
  • $15.2 Billion Market Cap, 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 is confident the deal can go through, CEO Rodney McMullen said. “We will sit down with the FTC as soon as possible.”

Investors win

Some investors are already skeptical if Friday’s performance is any indication. (Both Kroger and Albertsons were down in the afternoon.)

That’s because Wall Street has already seen a series of grocery takeovers — including some by Kroger and Albertsons — but no meaningful changes in profit margins. Costs have also risen for everything from transportation to packaging.

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Kroger said this acquisition is different. In the first four years of combined operations, Kroger expects the companies to expect approximately $1 billion in annual recurring savings. For the first four years after the close, McMullen said total shareholder returns will be “well above Kroger’s standalone model of 8% to 11% per annum.”

Kroger plans to continue paying its quarterly dividend and said it expects to increase its dividend over time, subject to board approval.

McMullen pointed to a few examples of where it can drive higher profits and better margins. One of the biggest opportunities is capturing more customer data through a wider range of banners, which can be turned into lucrative online advertisements. The combined company would reach approximately 85 million households across the country.

Many retailers, including Walmart, Target and Kroger, have advertised as an alternative revenue stream after seeing the success of established online players like Amazon. The company has much higher margins than selling cans of soup or liters of milk.

A larger Kroger would also have lower production costs and better bargaining power, McMullen said. Together, the companies would become one of the largest consumer packaged goods companies in the country with a combined portfolio of approximately 34,000 private label products in all price ranges. These include organic items and premium products that often sell for less than the brand’s national competitors.

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What about the shoppers?

More personalized coupons, fresher products and lower prices. Those are some of the benefits Kroger promises buyers if the deal goes through. McMullen said some of the savings will go straight to lower prices for customers.

Kroger plans to invest about half a billion dollars of its cost savings in lower prices. It also said it will spend an additional $1.3 billion on improving the customer experience in Albertsons stores. And it plans to spend $1 billion on higher wages and better benefits for store associates after the deal closes.

By having a larger network of stores and more distribution centers, McMullen said it can move fresh items like meat, dairy or produce to shelves and coolers faster, so it lasts longer in customers’ refrigerators.

It can also better cater to customers’ online preferences, as more stores can lead to faster delivery times and more pick-up options. In addition, the CEO said, the larger portfolio of private labels means customers have more budget-friendly choices.

Kroger’s pitch to customers may have come at the right time. This week, shoppers got new evidence that higher grocery bills can linger. According to the Bureau of Labor Statistics, food prices rose 13% year-on-year, with everyday items like butter and eggs seeing even steeper jumps.

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