Kroger-Albertsons Inch Closer to Joining Forces: What it Means for the Industry (Part 1)

This is the first part of a two-part blog series covering the Kroger-Albertsons merger and associated sale to C&S Wholesale Grocers. Check back next week for the second part of the series covering a local perspective on how these deals could impact consumers in the Chicago market.

A year ago, Kroger and Albertsons announced the groundbreaking news that the two companies were entering into a definitive agreement to merge, leading to widespread speculation about the fate of stores to be spun off or divested, whether the deal would gain federal approval, and ultimately what the impact would be on the millions of Americans who regularly shop at these stores. Last month, we gained some clarity as it was revealed that C&S Wholesale Grocers agreed to acquire 413 stores for $1.9 billion in connection with the proposed merger. In this two-part blog series, we take a closer look at what this means for the companies involved, other supermarket competition, and for U.S. grocery shoppers.

The key assets to be divested to C&S Wholesale include the following:

• 413 stores across 17 states and Washington, D.C., 8 distribution centers, 2 offices
• 5 private label brands: Debi Lilly Design, Primo Taglio, Open Nature, ReadyMeals and Waterfront Bistro
• Rights to the use of the QFC, Mariano’s and Carrs brand names
• Exclusive licensing rights to the Albertsons brand name in Arizona, California, Colorado and Wyoming

What does this mean for the companies involved – Kroger-Albertsons and C&S Wholesale?

The proposed $24.6 billion merger between Kroger and Albertsons positions the combined entity to become the #2 player in the grocery industry based on market share, strengthening their joint positioning behind #1 market leader Walmart and leapfrogging them over #2 incumbent Costco.

The most recent market share data released by Numerator indicates that competitors Walmart and Costco grew in market share compared to years prior, while Kroger and Albertsons have either lost share or remained relatively stagnant, potentially strengthening the case for a merger between the two companies to defend against encroaching competition from beyond the core grocery channel, namely from the likes of Walmart, Amazon, and Costco.

Founded in 1918, C&S is an industry leader in food wholesale, supplying more than 7,500 independent supermarkets, retail chains, and military bases with a selection of over 100,000 products. C&S also operates Grand Union stores and franchise- and corporate-owned Piggly Wiggly stores. The proposed divestiture would quickly grow C&S Wholesale’s retail division to a formidable size and expand its retail presence into the West Coast and Mountain regions, providing the company with national retail coverage, greater scale, and an increased ability to compete with Walmart and Amazon (and Kroger). Supplying the sizable retail division will also bolster the company’s core wholesale business and enable a more robust vertically integrated, self-distribution model that could be better protected against the supply chain woes that many retailers experienced during the pandemic.

What does this mean for other supermarkets?

The U.S. grocery industry has been shaped by several significant changes in recent history. Among them include the acquisition of Whole Foods Market by Amazon in 2017 and the pandemic in 2020 that drove grocery sales and consumer stockpiling to new heights. The Kroger-Albertsons merger and associated divestiture to C&S Wholesale, if approved by the Federal Trade Commission, would be the next major event whose impact would reverberate across the industry.

We can expect increased consolidation of regional grocery players seeking to combine strengths to better compete against industry behemoths Walmart, Amazon, and Kroger.

We have seen several examples of industry consolidation in recent years:

• In August, Aldi announced plans to acquire 400 Winn-Dixie and Harveys Supermarket stores in the southeastern U.S.
• Minnesota-based Coborn’s acquired Sullivan Foods, expanding its presence into Illinois
• Texas-based Brookshire Grocery Company acquired Reasor’s stores in northeastern Oklahoma
• Raley’s of West Sacramento, CA acquired Bashas in Arizona to form a new enterprise, The Raley’s Companies
• Price Chopper/Market 32 and Tops Markets merged under new parent company Northeast Grocery Inc.

The increased consolidation of independent and regional grocers is a trend emerging out of necessity. Smaller grocery operators are relatively sub-scaled and not positioned to compete with major competitors whose massive buying power and shared backend services (e.g., human resources, IT, legal) drive lower prices and G&A cost structures that are difficult for smaller companies to replicate. Although it will be an increasingly uphill battle to compete on price, regional grocers can continue to set themselves apart by emphasizing locally sourced products and ties to the community, offering a differentiated assortment and private label, making strategic investments in technology to drive cost savings, and providing elevated service and memorable guest experiences to drive customer loyalty and repeat shopping.

Stay tuned for the second part of this blog series, which provides McMillanDoolittle’s local take on how these acquisitions could impact consumers in the Chicago market.