Shock Waves in Aisle 8: How to Interpret the Kroger and Albertsons Merger

In an industry that faces providing value to shoppers against major economic headwinds, does consolidation provide a winning solution for all?
Elizabeth Lafontaine
Chief Retail Analyst, Retail Leader
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Kroger Pickup

The Kroger acquisition of Albertsons is the latest in a long series of retail consolidations, but it has sent shock waves across the entire retail industry.

In the press conference following the announcement, Kroger CEO Rodney McMullen noted that the scale created by the merger can enable their combined banners to better service customers and provide them with elevated promotions, efficiencies, quality and, above all else, value. But, what does this mean for the broader retail industry, other grocery chains, manufacturers and the consumer? 

In an industry that faces providing value to shoppers against major economic headwinds, does consolidation provide a winning solution for all?

While I can only speculate on the implications of this $24.6 billion acquisition across the retail landscape, here are my thoughts on the potential trickle-down effect.

Through a competitive lens, the Kroger-Albertsons merger creates another major player in the grocery market to challenge the goliath multinational banners of Walmart, Amazon and Costco. Any outside specialty grocer posing a challenge to these brands is worth celebrating in the industry, as increased competition tends to breed positive impacts for consumers and industry innovation. It forces everyone to step up their game, and the consumer benefits greatly.

However, a shiny new competitor to challenge other large retailers places even more pressure on smaller, regional grocery chains. Regional darlings like H-E-B, Publix, Meijer and others will face even tougher adversaries in their markets, and a daunting challenge of creating value and a premium experience in an industry where prices and low margins are paramount. Loyalty becomes a key differentiating factor for these chains, but with a consumer that is more distracted and less loyal than ever, that might not be a winning-strategic direction.

These regional brands need to be on the offensive when it comes to building trust and loyalty with consumers, acting now in advance of the deal and investing in their digital infrastructure and last-mile options. A positive shopping experience still goes a long way with consumers.

Then, the manufacturers, brands, farmers and producers come to mind. I have to assume that this news isn’t as exciting for them as it is for the grocers involved in the acquisition. Larger retail banners means more bargaining power, even tighter margins and higher demands of brand partners. With this change though, it can also be a time for increased innovation in the food supply chain by partnering with the new conglomerate and their expansive network of distribution centers, as well as new features and benefits in products themselves. 

Another positive of the merger is the increased presence and access to retail media networks for manufacturers. With the acquisition, Kroger will be able to merge their retail media efforts with Albertsons Cos. Media Collective — providing even greater first-party insights, data and solutions to brands. This will create another sophisticated retail organization that can provide deep knowledge of the consumer within the four walls of the store.

Finally, the M&A activity in the grocery sector will undoubtedly have an impact on the consumer.  I live in Los Angeles, a stronghold market for both Kroger and Albertsons, and can already envision the changes headed to my neighborhood depending on how things shake out. It’s logical to think that many other consumers have similar thoughts and concerns. McMullen mentioned in his remarks that plans to retain both sets of banners in some cases exist, and that SpinCo has been created to spin off some of the Albertsons locations (to be determined before the deal goes into effect). 

Consumers, despite the potential changes to store banners and divestitures, will certainly benefit from the merger in terms of store enhancements, a more efficient supply chain and increased shopper benefits, such as digital delivery and fulfillment. Grocery retailers have notoriously been behind in the digital retail evolution, so the new organization's digital power could become a key competitive advantage. Kroger also highlighted their strength in private-label products this past quarter, which continue to gain momentum as inflationary price hikes squeeze disposable income. 

Ultimately, the consumer does still maintain the power of choice in where and how they shop for groceries, which should bring shoppers some comfort and serve as a reminder to all grocery retailers that they report to the checkout lane.

Grocery shopping elicits an emotional response from consumers and many shoppers have their favorite store—myself included—and it’s paramount that retailers keep that in mind as this evolution continues. Brands and retailers must never take their eyes away from the end consumer, even with the excitement and trepidation around this latest acquisition.