While Kroger’s failed effort to merge with Albertsons raises questions about what the supermarket companies could have done differently as they plotted their combination, the abandoned deal also spotlights key issues — and opportunities — facing grocers of all stripes as the sector adapts to rapidly changing market conditions.
Looking ahead, a central theme for the grocery industry is how Albertsons will proceed now that the chain will no longer be able to bolster its prospects with resources it would have gained from Kroger, analysts said.
As the company highlighted in the lawsuit it filed against Kroger last week, Albertsons was forced to sit on the sidelines while people’s shopping habits changed following the COVID-19 pandemic and rivals such as Walmart and Costco invested heavily in their grocery operations. That puts pressure on Albertsons to rethink its strategy for remaining competitive, said Arun Sundaram, senior vice president of equity research for CFRA Research.
“Albertsons really needed this merger to go through, in our view,” Sundaram said. “I think Albertsons needs to kind of look at itself in the mirror and figure out ‘Where do we want to go? Are we going to bet on being acquired by someone else? Or do we need to carry out a new strategy going forward?’”
Kroger is also likely to examine ways to juice growth in the years ahead, although if it does pursue that course, the company will probably look at smaller-scale deals that could potentially help it expand in markets where it doesn’t have a presence, such as the Northeast, Sundaram added.
The decisions by Kroger and Albertsons to invest billions of dollars in stock repurchases suggest that neither company is in a hurry to move forward with substantial changes, said David Halliday, associate teaching professor of strategic management and public policy at the George Washington University School of Business.
“What that tells me is that they don’t want to make any other large strategic decisions” in the immediate aftermath of the merger effort, Halliday said. “Cash does not grow on trees.”
Here are five takeaways about what the collapse of the Kroger-Albertsons merger could mean for the grocery industry.
Stay sharp on merger messaging
Grocers looking to merge need to keep the customer impact first and foremost in their messaging and marketing around the combination, said John Clear, senior director in the consumer and retail group at consulting firm Alvarez & Marsal. While M&A can be a vehicle for driving sales growth, grocers need to publicly share how a deal would benefit shoppers, he said.
“It was a Kroger-Albertsons-centric approach rather than a consumer-centric approach,” Clear said.
Kroger initially framed the merger as “‘We need this to help us compete with the big guys,’ and Albertsons, they were saying that ‘We needed it in order to survive.’ But neither of them really led with the ‘Why is this important for U.S. customers?’” message, Clear said. Nearly two years after announcing the deal, Kroger pushed a price cuts promise tied to the merger — pledges the federal ruling said are unenforceable.
Grocers especially need to be mindful of the broader consumer and political landscapes and how they are viewed against that backdrop, then factor those considerations into their messaging, analysts said. Grocery has become a charged topic amid societal frustration with food prices and inflation, with consumers blaming grocers, Oliver Wyman partner Bobby Gibbs said, adding that there’s prominent public skepticism around corporate America and corporate profits.
“Even though more and more people go to non-traditional grocery stores for their food, people still think about the traditional grocery store as the real source of food for America,” Gibbs said, adding, “There’s an emotional element to this that politicians had reacted to.”
The Kroger-Albertsons merger is a prime example: The deal turned into a “political football” amid worries that it could worsen grocery prices at a time when consumers are already bemoaning inflation, Clear said.
“Grocery stores are held to a much higher standard by the regulators because [retailers] interact directly with customers, and there’s a perception that they control the pricing ultimately that customers pay, when, in actual fact, consolidation of the market on the CPG side theoretically has a much larger impact on the price that consumers pay,” according to Clear.
The Mars-Kellanova merger announced this year, for example, is a major deal that will result in a huge consolidation of food products yet “went through without a blink from the FTC,” Clear said.
And strong opposition to a deal — which Kroger and Albertsons faced with their merger — may incentivize antitrust regulators and state officials to investigate and then articulate how it could harm consumers or workers, Clear said.
Avoid mega-mergers
The Kroger-Albertsons merger was a high-risk, high-reward combination that Albertsons acknowledged would face antitrust scrutiny. While big deals have the potential to reap major benefits for the involved parties, experts cautioned against following in the go-big-or-go-home footsteps of this deal.
“The FTC doesn’t want these mega-riders whereas they’re much more open to small-scale, slow change,” Clear said.
Clear pointed to Aldi’s purchase of Winn-Dixie and Harveys Supermarket as a situation where a national discounter’s purchase of two regional chains under Southeastern Grocers sailed through regulatory clearance and doesn’t dilute competition.
The Albertsons merger was a stark departure from Kroger’s traditional merger playbook of targeted purchases, Clear said. For Kroger to “crack the Northeast,” for example, Clear said the grocer could look to buy a grocer already in that area or purchase a regional banner from a larger company.
Going forward, grocers looking to M&A to grow may have better luck with smaller deals, especially if they can bypass antitrust concerns, Clear said.
“I think the biggest lesson from Kroger-Albertsons is [it was] a lot of money [and] a lot of wasted time,” Clear said.
Carefully select divestiture partner(s)
Kroger and Albertsons faced widespread industry criticism for choosing C&S Wholesale Grocers as their divestiture partner. Both the federal and Washington state rulings blocking the merger flagged the choice as shaky, pointing out that C&S has a limited and lackluster track record with running retail locations.
Clear said that the selection of C&S created a “major stumbling block” for the merger, noting that quickly growing C&S from about two dozen stores to roughly 600 was “setting that company up for failure” in the shadow of Albertsons’ ill-fated divestiture plan with Haggen 10 years ago.
Wholesalers can be a strong choice for some M&A plans, though, Gibbs said, noting that several wholesalers already have retail stores to help them build credibility with the independent retailers they serve.
“I do think that it’s [to] the advantage for wholesalers to add some amount of retail into their portfolio, but they have to have the right kind of merchandising programs in place,” Gibbs said.
“Had [Kroger and Albertsons] said, ‘We’re gonna sell the stores in 50 store tranches to eight different people, but all of those eight people were legacy retailers’ — I think that would have been an easier way to say, ‘ Well, we are actually going to strengthen eight retailers in our areas, but none of them was going to get enough to then really kill us, like, on a global scale,’” Clear said.
Gibbs, though, said he thinks it would be harder for grocers to execute a divestiture plan that involves multiple players getting divested assets. Having one divestiture partner also then provides that partner with scale.
“When you have scale, you’re able to make commitments that actually lower the entire cost to get the product all the way to the shelf,” Gibbs said.
Scale is key as traditional grocers look to compete
Kroger and Albertsons might have been unable to achieve the high-octane expansion they originally set out to unlock by combining, but the forces that drove them to attempt to come together are just as potent now as they were when the companies announced their merger more than two years ago, analysts said. This suggests that grocers with greater scale and more expansive resources are likely to be in a better position to compete, they said.
In fact, the failure of the Kroger-Albertsons merger highlights that traditional supermarket chains are vulnerable to deterioration in the face of the relentless pressure they face from giants like Walmart and Costco, which continue to wield outsized influence over the industry, said Michael Infranco, assistant vice president of retail intelligence provider RetailStat.
“What really kind of strikes me through this whole merger process that wound up falling through, is [that] what ultimately may happen is what the FTC was seeking to prevent,” Infranco said. “They didn’t want stores to go away … but yet, as they leave the status quo, these things may happen unilaterally.”
That reality creates ripe conditions for grocers to seek to fortify themselves by coming together, Infranco noted.
“I think in 2025 we’ll definitely see more M&A,” he said. “A lot of it has to do with what everybody has been saying over and over and over again. We need scale.”
Albertsons itself could help drive the M&A train next year because the company could benefit from slimming down as it looks to rebuild its value in the eyes of future partners, Sundaram said.
“You could potentially see Albertsons sell off certain banners … to try to become a more simple company, and then they can focus all their resources on that smaller company and try to really improve the business there, and then maybe become an attractive acquisition target again,” Sundaram said.
Traditional grocers face pressing questions
Among the lingering questions facing grocers in the wake of the unsuccessful Kroger-Albertsons merger is what traditional supermarkets, especially smaller ones, need to do to remain financially viable in the years ahead as Walmart keeps growing and specialty grocers make further inroads with consumers.
“The more you’re in the middle and you’re just a conventional kind of middle-of-the-road vanilla offering, I think there’s big exposure,” said Doug Munson, head of advisory services business development for RetailStat.
This suggests that grocers that have strong ties with their local communities, like Market Basket in New England and Schnuck Markets in the Midwest, could be in the best position to thrive, while less-differentiated regional grocers could struggle to hold on, analysts said.
Many regional grocers are having a tough time competing, setting them up for potential failure if they don’t take action soon, Sundaram said.
“There’s a very long tail of small, regional, independent grocers out there that are really struggling,” Sundaram said. “I think some of these smaller ones, especially the smaller independent ones, are at risk of going out of business — not immediately, but within the next three to five years.”
That dynamic could open up opportunities for Kroger, said Infranco.
“If you look at a location map, it’s wide open for Kroger,” he said. “So I would look for Kroger to be looking at that type of situation, something where they haven't been before, something that might be a less aggressive dance with the FTC.”
