Key Kroger Metrics
Key Albertsons Metrics
Since our initial assessment, we have had more time to consider last week's Kroger and Albertsons announced merger and review its merits. Our conclusion is that should the merger be approved by regulators, which we are not so certain about given the precedent of Dollar General and Family Dollar (which was rejected by the FTC because it wouldn’t consider Walmart as part of "the market" definition), it will result in a longer-term transition and segmentation of the market between scaled players and neighborhood "shops." Morgan Stanley estimates that Wall Street is putting a 50/50 chance on approval. Competing for market share with hard discounter and warehouse clubs is likely not the focus of the combined Kroger/Albertsons; however, conventional grocers, Walmart, and Target are very much in where we'd expect long-term competition. With a transaction closing not expected until 2024, we don’t expect any amplified competitive pressure from Kroger or Alberstons over the next few years, beyond 2025 may be different depending on the 50/50.
The slides below frame management’s pitch for the advantages of the combination. We've offered some additional thoughts regarding the transaction rationale below:
Source: https://www.krogeralbertsons.com/
- Serve America with fresher food, faster is an amplification of Kroger’s strategy of "Leading with Fresh, Accelerating with Digital" and this will be the company’s principal strategy to drive superiority in fresh compared to all competitors (conventional grocers, small-format, discount, and club). Kroger/Albertsons will seek to dominate the best suppliers of fresh to cut off competitors and push fresher produce onto its shelves, into the trunks of drive-up customers, and into customer’s kitchens via Ocado. Amazon earned its position with household wallet share by providing extensive selection, at unprecedented convenience, at a lower price. Kroger/Albertsons will seek to replicate that success in grocery and the shared footprint allows for a much greater service network (which the slide below amplifies).
Source: https://www.krogeralbertsons.com/
- Accelerates Kroger’s go-to-market strategy is the greater service network allowed by the shared store footprint, consumer fulfillment centers (CFCs), and asset base. The unit economics and Ocado and CFCs are all about network density. As such, accelerating to get to high densities draws forward those more favorable unit economics. Moreover, it also perhaps gives the company the "breathing room" to move faster with CFCs and service/delivery investments. Morgan Stanley estimates that seven additional CFCs would be needed to penetrate Albertson’s complimentary footprint.
- Grows higher-margin alternative profit businesses is primarily shopper insights data, digital advertising (both on Kroger and Albertsons properties and as part of cookie-based tracking), and digital slotting fees paid by packaged food and beverage brands. Kroger/Albertsons moves KR from 60M served households to 85M. The broader the "surfaces" Kroger/Albertsons have, the more relevant the data, impressions, and slotting (something we laid out in our retail media network whitepaper). More relevant equates to a higher price; as such, there is a network effect here as well.
- The slide below caught our attention, as none of the $1B in annualized cost savings come from customer-facing and front-of-the-house expenses. Moreover, our interpretation of management’s comments is that very little of the $1B is to come from its fresh vendors. Additionally, $500M of that is to go back in the form of lower prices. Those lower prices will likely be for the very visible and basic items like milk, eggs, and bananas. Moreover, the $500M level is de minimus to the combined Kroger/Albertsons $210B go-forward revenue (before divestitures).
Source: https://www.krogeralbertsons.com/
- To win regulatory approval, Kroger/Albertsons is establishing SpinCo which would comprise a minimum of 100 stores and up to 375 stores that the Federal Trade Commission/Department of Justice characterize as problematic in a merger. (Last week, we wrote about which markets and banners these may be). If the FTC considers a "narrow" market definition as the relevant market, Kroger/Albertsons combined market share of the conventional channel could be closer to 30% which would be problematic and may require divestitures beyond the 375 stores.
- None of this will happen until closing which management doesn’t expect to be until early 2024. Additionally, why did Kroger do this now? At a time in the market is concerned about disinflation and the impact to food retailer earnings, this merger would turn the Kroger story towards the strategic and merger synergies over the next few years, and keep the focus, in particular, on what Ocado can deliver. Additionally, it was well known that Albertsons was undergoing a strategic review and this acquisition will solidify Kroger’s market leadership position.
