Why are Kroger & Albertsons merging?
On October 14th, the American grocery giants Kroger and Albertsons announced plans to merge (link). The announcement sent shockwaves throughout the industry. The response resembled the astonishment that Amazon's Whole Foods acquisition received five years ago.
Why is the planned merger such a big deal?
Kroger and Albertsons are the second and fourth biggest grocers in the US. Currently, their market shares stand at 9,9% and 5,7% respectively. Together they would create the second biggest grocer in the US with a combined market share of about 15,5%. If the merger were to go through, the companies would need to shed stores in some areas leading to a reduced market share.
Image source: Chartr
The combined revenue of Kroger & Albertsons for 2021 was approximately $210 billion. To put that into perspective, Walmart’s US grocery revenues were $219 billion. If one also includes Sam’s Club’s grocery revenues ($47 billion), the total for Walmart would increase to $246 billion.
These two companies would represent $456 billion in grocery revenues out of the market of $783 billion (according to the Census bureau). This would put their combined market share at 58%. If one includes Liquor stores in the overall market, the market share decreases to 51%.
Some European markets have similar concentration levels (in the UK the two biggest have a bit more than 40%; Germany: a bit less than 50%) and some significantly higher numbers (the Nordics). However, the European markets are much smaller geographically.
The other point to note for the proposed merger is the unbalancing of competition that it might result in. After Kroger/Albertsons, the third biggest grocer in the US would be Costco. As a warehouse club it is not a typical grocery retailer despite selling many grocery products. Costco would have a mere 7% market share.
The next ”regular” supermarket and the fourth biggest grocer, Ahold Delhaize, would have only a 5,6% market share. With revenues of $45,5 billion it would be only about a fifth of Kroger/Albertsons’ revenue.
That is quite a significant gap leaving the long tail of smaller grocery stores as significantly less competitive nationally.
How about Walmart?
Despite not being a European style market leader, Walmart is a force in many parts of the US. The 20% market share does not produce a complete picture of the local power of Walmart. The network of stores is heavily skewed to some states.
As Walmart has much less presence on the east and west coasts of the US, the market share is more significant in some smaller regions of the country. According to an ILSR study (link), there are 43 metropolitan and 160 smaller markets where Walmart has more than 50% market share. Most of the markets have less than 100 000 inhabitants.
However, there are two markets with around one million people living: Oklahoma (Walmart: 60% market share) and Tulsa (52%).
Image source: Institute for Local Self-Reliance
How about Kroger & Albertsons stores?
When comparing the store networks of the big US grocers, one can see that Kroger and Albertsons have smartly been investing in store networks that are not competing head-on with the giant from Bentonville. Additionally, the two chains’ networks are complementary (not overlapping).
On the other hand, the merger might create more areas, with one grocery chain having an outsized market share. Especially California will probably have areas where the overlap between Kroger and Albertsons is so significant that the companies will need to divest some stores. Same might apply to North-West areas of the country.
Image source: Grocery Dive
Why are Kroger and Albertsons merging?
One of the most apparent reasons for the merger is the economies of scale. With such huge revenues combined, Kroger/Albertsons could become the other grocery giant alongside Walmart that can match the scale of the big FMCG brands in the US.
This would lead to better negotiation terms. They are one of the biggest motivators for the deal as well as one of the most critical competitive advantages in the modern grocery trade. With low margins for selling, even small benefits in sourcing can lead to millions in the bottom line.
As the grocery retailers have become more and more similar to each other with big stores, big assortments and rather low prices, the biggest differentiation comes in the form of decreased sourcing prices.
Kroger and Albertsons are the biggest US retailers operating with a supermarket format. The supermarket format has been under losing market share to superstores, warehouse clubs, online retailing, restaurants and discount stores. In order to turn that trend, Kroger and Albertsons have opted for a merger, which should give them more efficiency against the competition.
Doing more of the same vs doing different
Kroger/Albertsons is not the first attempt of merging two big grocers. The second and third biggest grocers in the UK, Sainsbury’s and Asda, tried to merge in 2019. Their combined market share would have surpassed 30% and the competition authorities did not approve the deal.
One reason for the consolidation within big grocery retailers is the growth of the German discounters Aldi and Lidl. In Europe the discounters have been growing longer than in the US (Lidl entered US only in 2018). Therefore, their impact is significantly bigger in Europe.
They operate a very differentiated business model with limited assortments and efficient operations. This has enabled them to push prices down more than the traditional grocers. A model that is winning big on today’s inflationary environment.
The vast efficiency difference for the discounters arises from two sources: big revenues, but especially small assortments. With revenues beyond $120 billion (Aldi) and $130 billion (Lidl), the German discounters are among the world’s top 10 retailers.
They are not the biggest retailers in any individual market, but they are the only grocers that have been able to truly internationalise. With less than 10% of products sold compared to Kroger or other big supermarket chains, Lidl & Aldi can source individual products in totally different quantities.
The revenues per product for both German retailers are more than tenfold to a traditional big assortment supermarket.
For the local traditional big grocers who are not able to compete on effectiveness with their big assortments, increasing scale (locally) remains the only option to compete with Aldi & Lidl.