In a mega-deal that could have a huge impact on grocery shopping in America, Kroger and Albertsons announced Friday plans to merge.
If approved by regulators, the nearly $25 billion deal would be one of the biggest in US retail history.
The proposed merger, which the companies expect to complete in 2024, would combine the fifth and tenth largest retailers in the country. The companies own dozens of chains, including Safeway, Vons, Harris Teeter and Fred Meyer and reach a combined 85 million households.
Kroger (KR) and Albertsons, which both employ mostly union workforces, want to merge to be more competitive against non-union giants such as Walmart (WMT), Amazon (AMZN), and Costco (COST). The grocers are also facing increased pressure from Aldi, the fast-growing German discount supermarket chain.
There’s no guarantee the deal will go through, however.
The merger will face intense scrutiny from the Federal Trade Commission and other regulators. Opponents, Sens. Bernie Sanders and Elizabeth Warren, have already called on regulators to block the deal. The companies say they will divest hundreds of stores in areas where they overlap to win regulatory approval.
Here’s how the mega-merger could impact grocery shopping in America.
Lower prices…for now
Prices at the grocery store are a major concern for shoppers right now.
Grocery prices increased 13% in September over the last year, the fastest pace in decades.
The companies say that they will be able to use $500 million in cost savings from the deal to reduce prices for shoppers and tailor promotions and savings. They will also invest $1.3 billion in Albertsons, including on lowering prices.
“Our expanded portfolio, along with more personalized promotions and benefits, will help customers save… and help to relieve the inflationary pressures facing shoppers across the country,” Kroger CEO Rodney McMullen said Friday.
Albertsons stores are concentrated more on the West Coast, while Kroger is dominant in the Midwest.
Albertsons has higher prices than Kroger and other grocers, analysts say, and they predict Kroger will try to reduce Albertsons prices to be more competitive against discount chains like Aldi.
“This deal could provide some food pricing relief for consumers,” said Ken Fenyo, a retail analyst at Coresight Research. “With Aldi, Lidl and other discount grocers coming in, this positions Kroger to drive the market forward.”
But supermarket mergers can also lead to higher prices for shoppers.
A 2012 study published in the Journal of Economics and Management Strategy found that “mergers in the supermarket industry can result in significant increases in consumer prices and thereby harm consumers” in highly concentrated markets.
Mergers in less concentrated markets are most often associated with price decreases, the study found.
Antitrust advocates say the merger would force out competition and concentrate power among the largest chains, driving up prices.
“A Kroger-Albertons deal would squeeze consumers already struggling to afford food,” said Sarah Miller, the executive director of the American Economic Liberties Project, a policy group against concentrated economic power.
More store brands
Kroger and Albertsons have each been building out their own exclusive food brands in recent years as alternatives to big-name brands.
Kroger, for example, offers its own brands such as Private Selection and Simple Truth, while Albertsons has O Organics, Open Nature and others.
The two companies’ brands generated a combined $43 billion in sales last year.
This is an important strategy for these stores because it’s more profitable to sell their own brands than national labels, and it helps keep big brands’ prices in check.
By merging, the companies plan to expand their own brand selection and lower production costs.
Store closures and pain for mom-and-pops
Grocery stores in the United States are on the decline.
The number of US grocers fell by roughly 30% from 1993 to 2019, according to a report last year by Food & Water Watch, a consumer advocacy group.
Analysts say that Kroger and Albertsons are likely to close some of their overlapping stores, particularly in some cities where they are heavily concentrated, such as Los Angeles and Chicago.
“There will, no doubt, be some closures if a merger goes ahead,” said Neil Saunders, an analyst at GlobalData Retail. “Over time, the rate of closures may be more pronounced as the combined chains seek to minimize duplication,” he said.
Analysts and advocates also say that a merger would make it harder for smaller grocers and mom-and-pop stores to stay in business.
The National Grocers Association, which represents small retailers and wholesalers, said the merger would put smaller competitors at an “unfair disadvantage” and increase “anticompetitive buyer power over grocery suppliers.”
This would disproportionally hurt cities and rural areas, where independent stores are typically located.
“This deal would almost certainly put more rural towns and Black and Latino neighborhoods in cities at risk of becoming ‘food deserts’ as more local grocers are driven out of business,” said Stacy Mitchell, the co-director at the Institute for Local Self-Reliance, a research and advocacy organization that challenges economic concentration.
The food industry in America has consolidated in recent decades.
The top five grocers – Walmart, Kroger, Costco, Ahold Delhaize and Amazon – control about half the market, according to UBS.
A Kroger-Albertsons merger would spark a fresh wave of mergers and acquisitions as companies seek to keep up, analysts predict.
The proposed deal “accelerates the ongoing consolidation of the sector,” said UBS retail analyst Michael Lasser.
Amazon “has aspirations to be larger in the space,” he said. “The warehouse clubs, hard discounters, strong [regional grocers] and specialty players will look to fortify their positions.”