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Kroger: Will C&S Divestitures Get the Deal Done?

Thomas Paulson
Sep 8, 2023
Kroger: Will C&S Divestitures Get the Deal Done?

Kroger reported soft top-line results and it expects second-half 2023 comparable-store sales to be slightly negative despite food price inflation running at a +3.6% rate as of July. The implied decline in units (units per transaction and comparable transactions) is less than it seems as consumers are trading down into Kroger’s private label brands, CPG suppliers are rolling back prices, consumers are trading over to produce which has not experienced the height of price increases seen for packaged food, and some consumers are switching from beef to chicken (we mean this allegorically). Nevertheless, the difference between Kroger’s comps and that of Walmart and Grocery Outlet on a 1-, 2-, and 3-year basis is striking.


Kroger’s volumes are under pressure as many households are cross-shopping deep value and hard discount brands like Aldi and Trader Joe's; thus, splitting the grocery budget between brands. In addition, households are seeking out deep discounts and cherry-picking promoted items (as we have written about a lot this year). In other cases, households are just shopping value formats entirely; for example in the quarter, visits to the Kroger banner were down -6%. This channel shift is highly visible in the traffic shown below of Kroger’s various banners--premium brand Mariano’s down sharply, whereas City Market and Food 4 Less are nicely up.

With earnings, Kroger also announced, along with Albertsons, a divestiture plan with C&S Wholesale Grocers. The plan includes the sale of 413 stores, 8 distribution centers, and 5 private label brands. The agreement includes the sale of the QFC, Mariano's, and Carrs banners and the rights to the Albertsons brand name in Arizona, California, Colorado, and Wyoming (i.e., not necessarily all of those banners’ locations.) How this looks is shown in the map below.

The regulatory pushback to any divestiture plan (a SpinCo) was that the divested entity would need the financial wherewithal and operational foundation to thrive. C&S is a supplier to more than 7,500 independent supermarkets and retail chain stores; it also operates Grand Union and Piggly Wiggly grocery stores. The press release quotes Kroger CEO Rodney McMullen saying, “Following the announcement of our proposed merger with Albertsons Cos., we embarked on a robust and thoughtful process to identify a well-capitalized buyer who will operate as a fierce competitor and ensure divested stores and their associates will continue serving their communities in the ways they do today. C&S achieves all these objectives. C&S is led by an experienced management team with an extensive background in food retail and distribution and has the financial strength to continue investing in associates and the business for the long run." The release also reads, “Prior to the closing, Kroger may, in connection with securing FTC and other governmental clearance, require C&S to purchase up to an additional 237 stores in certain geographies." Management continues to expect the deal to close early 2024.

On the potential for 237 more divested locations, CFO Gary Millerchip noted, “What you saw in the announcement today was that we essentially wanted to make sure we align the agreements between Albertsons and C&S and ourselves to make sure that there is a commitment there to be able to flex up if that was something that was needed.” And McMullen said, “And the announcement today also, no more work will be done in terms of the SpinCo. That's not something that's part of the solution going forward.”

From Kroger’s earnings call we also learned that management sees the consumer and operating environment as “challenged.” McMullen stated that sustained inflation is pressuring spending, especially less affluent households, and these customers continue to trade down in package sizes and price points. In response to the channel shift, Kroger is doubling down on initiatives to build back units and basket size, including introducing lower price points and increasing its shelf space for Kroger’s private brand, while also highlighting the relative value of its fresh offering. In all its consumer communication and touchpoints, Kroger is strongly emphasizing value, value, and value (did we say “value”). These initiatives come at a loss for national packaged brands. On national consumer packaged goods (CPG) manufacturers, McMullen said, “We're also finding CPGs, in many cases, are partnering in more aggressive ways on helping us move [units] as well.” “Helping us” in this case means the CPG companies are decreasing their prices. (See our presentation on grocery inflation for how all of this came to a head.) McMullen continued, “If the CPGs are doing things that aren't justifiable, our [private label brands] always gain share because we have an amazing set of products. And when people try them, the repeat rate is incredibly strong as well.” (This is what is happening now.)

Millerchip on their expectation for an improvement in volume for the second half of 2023, “We do expect inflation to continue to decelerate...It's down 3.5% from the start of the quarter to the end of the quarter, and we're expecting to be between the 1%-2% by the end of the year. We expect that to continue by leaning into some of the things that are working really well for us around growing households...and then also continuing to execute our plan of delivering more promotions for customers and...private label products and continuing to deliver those merchandising strategies that connect with that customer in the store as well.”

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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