Kroger agrees to buy Albertsons for $24.6 billion

Albertsons and Kroger supermarkets

Bridget Bennett | Bloomberg | Getty Images; Brandon Bell | Getty Images

Competing Dealers Kroger and Albertsons announced on Friday that they would merge.

The companies said Kroger agreed to buy Albertsons for $34.10 per share, valued at $24.6 billion. Albertsons shares closed at $28.63 Thursday after reports that a deal was imminent.

Kroger is the second largest grocery retailer in the United States by market share Walmartand Albertsons is fourth after that Costco. Together, Kroger and Albertsons would be closer to Walmart.

The boards of directors of both companies have unanimously approved the agreement, which also requires regulatory approval.

The collaboration comes at a challenging time in the food industry. Supermarkets need to keep up as shoppers embrace new ways to stock the fridge. Businesses have had to invest in automation, staff training and more as consumers jump back and forth between browsing the aisles, ordering home delivery and using curbside pickup.

Grocery retailers have also been hit hard by inflation. According to the latest data from the Bureau of Labor Statistics, food prices are up 11.2% year-on-year. Companies have had to weigh when to pass higher costs on to customers and when to bear them in order to remain competitive.

Kroger and Albertsons in 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
  • Market cap of $33.3 trillion

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 trillion market cap

Source: Company websites, FactSet

The food industry is highly fragmented. Privately owned regional grocers such as HEB in Texas and Publix in Florida remain powerful players and enjoy strong loyalty. Relative newcomers like the discounters Aldi and Lidl etc Amazon‘s Amazon Fresh, have also attracted customers. Also, some Americans stock up on groceries at warehouse clubs like Costco, Sam’s Club, and Walmart owners BJ’s Wholesale.

Kroger and Albertsons also each have numerous store banners, including names the operators have acquired over the years. Kroger banners include Fred Meyer, Ralphs and King Soopers, and Albertsons banners include Safeway, Acme and Tom Thumb.

Together, Kroger and Albertsons employ more than 700,000 people in approximately 5,000 stores.

Kroger captured about 9.9% of the U.S. grocery market in the 12 months ended June 30, according to market researcher Numerator. Albertsons’ stake was 5.7%. The next three big players after Albertsons are Ahold-Delhaize, Publix, Sam’s Club and Target. Ahold DelhaizeBanners from include Food Lion and Stop & Shop, as well as Fresh Direct, an online grocery retailer the company acquired.

To join forces, Kroger and Albertsons would have to get regulatory approval. Regulators would look at where the companies dominate and weigh whether they would have too much power if combined, said Eleanor Fox, a New York University professor who specializes in antitrust and competition policy. Amerger would be less likely to get approval if they were the top two grocers in many markets, she said.

Some of the companies’ markets have significant overlap, such as Southern California, Colorado, Seattle and parts of the Midwest and Texas, Simeon Gutman, a retail analyst for Morgan Stanley, wrote in a research note Thursday. Other regions like the Northeast and the Southeast have very little overlap.

“Albertson’s Cos. has a complementary footprint and operates in several parts of the country with very few if any Kroger stores,” Kroger CEO Rodney McMullen said in a press release announcing the deal.

The merger is likely to undergo lengthy regulatory reviews and may require store divestitures, Morgan Stanley’s Gutman said.

Gutman also warned about the financial side of the deal. Consolidation in the food industry hasn’t translated into higher profits in the past, he said. However, he said the industry could be at a tipping point where a big merger could also boost margins.

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