The Kroger-Albertson merger: What it means for grocery prices

New York
CNN business

In a mega deal that could have a major impact on American grocery shopping, Kroger and Albertsons announced plans to merge on Friday.

If approved by regulators, the nearly $25 trillion deal would be one of the largest in U.S. retail history.

The proposed merger, which the companies hope to complete in 2024, would combine the country’s fifth- and tenth-largest retailers. The companies own dozens of chains, including Safeway, Vons, Harris Teeter and Fred Meyer, and reach 85 million homes.

Kroger ( KR ) and Albertsons, which both employ union workers, want to merge to become more competitive against non-union giants such as Walmart ( WMT ), Amazon ( AMZN ) and Costco ( COST ). Retailers are increasing pressure on Aldi, the fast-growing German discount supermarket chain.

However, there is no guarantee that an agreement will be reached.

The merger will face intense scrutiny from the Federal Trade Commission and other regulators. Opponents, including Senators Bernie Sanders and Elizabeth Warren, have already called on regulators to block the deal. The companies say they will dismantle hundreds of stores in the overlapping areas to get regulatory approval.

Here’s how the mega-merger could affect grocery shopping in America.

Grocery store prices are a big concern for shoppers today.

Food prices rose 13% in September last year, the fastest pace in decades.

The companies say they will be able to use $500 million in cost savings from the deal to lower prices for shoppers and adjust promotions and savings. They will also invest $1.3 billion in Albertsons, including lowering prices.

“Our expanded portfolio, along with more personalized promotions and benefits, will help customers save … and ease inflationary pressures facing shoppers across the country,” Kroger CEO Rodney McMullen said Friday.

Albertsons stores are more concentrated on the West Coast, while Kroger dominates the Midwest.

Albertsons has higher prices than Kroger and other grocers, analysts say, and they expect Kroger to try to lower Albertsons’ prices to become more competitive against discount chains like Aldi.

“This deal could provide some relief to consumers on food prices,” said Ken Fenyo, retail analyst at Coresight Research. “With the arrival of Aldi, Lidl and other discounters, this positions Kroger to lead the market.”

But supermarket mergers can also mean higher prices for shoppers.

A 2012 study published in the Journal of Economics and Management Strategy found that “mergers in the supermarket industry can cause a significant increase in consumer prices and thereby hurt consumers” in highly concentrated markets.

Mergers in non-concentrated markets are most often associated with lower prices, according to the study.

They say the merger would eliminate competition and concentrate power among the biggest chains, raising prices.

“A Kroger-Alberton deal would squeeze consumers struggling to afford groceries,” said Sarah Miller, executive director of the American Economic Liberties Project, a policy group opposed to concentrated economic power.

Kroger and Albertsons have each been building their own exclusive grocery 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 offers O Organics, Open Nature and others.

Both companies’ brands generated $43 billion in sales last year.

This is an important strategy for these stores, as it is more profitable to sell own brands than national brands, and it helps to control the prices of big brands.

By merging, the companies plan to expand their brand selection and reduce production costs.

Grocery stores in the United States are in decline.

From 1993 to 2019, the amount of food in the U.S. declined by roughly 30%, according to a report last year by the consumer advocacy group Food & Water Watch.

Analysts say Kroger and Albertsons are likely to close some of their overlapping stores, especially in cities where they are heavily concentrated, such as Los Angeles and Chicago.

“There will certainly be some closures if a merger goes ahead,” said Neil Saunders, analyst at GlobalData Retail. “Over time, the closing rate may become more pronounced as the combined chains seek to minimize duplication,” he said.

Advocates fear the merger will hurt small grocers.

Analysts and advocates also say a merger would make it harder for smaller stores and mom-and-pop shops 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 “buyers’ anticompetitive power over suppliers.”

This would disproportionately harm cities and rural areas, where independent shops are typically located.

“This deal would put more rural towns and urban black and Latino neighborhoods at risk of becoming ‘food deserts’ as more local grocers go out of business,” said Stacy Mitchell, co-director of the Institute for Local Self-Government. -Reliance, a research and defense organization that questions economic concentration.

The American food industry has grown stronger in recent decades.

According to UBS, the top five retailers – Walmart, Kroger, Costco, Ahold Delhaize and Amazon – control half of the market.

A Kroger-Albertson merger would spark a new wave of mergers and acquisitions as the companies look 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 bigger in the space,” he said. “Warehouse clubs, hard, strong discounts [regional grocers] and the specialty players will seek to consolidate their positions.”