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Kroger Needs Albertsons to Take on Walmart, Target, Amazon, and Costco

The National Grocers Association has come out against the deal (because they seem unaware of Amazon, Walmart, Target, and Costco).

Kroger (KR) – Get Kroger Company (The) Report has done pretty much everything right for the past few years and it still faces, if not extinction, at least irrelevancy. The company’s precarious position was somewhat obscured by the covid pandemic, a time when any chain that had groceries and other needed supplies thrived.

The problem — and it’s a big one — is that Kroger operates in an industry where margins are historically low. Inflation has put added pressure on margins as it’s not always possible to pass on the full increase to customers. That means that any grocery chain needs the biggest economies of scale possible in order to compete with Walmart (WMT) – Get Walmart Inc. Report, Target (TGT) – Get Target Corporation Report, Amazon (AMZN) – Get Amazon.com Inc. Report, and Costco (COST) – Get Costco Wholesale Corporation Report — four companies in the grocery space that don’t actually need to make money selling groceries.

Getting bigger through a $25 billion merger with Albertsons does not solve Kroger’s problem (or make it a good investment) but it is the right move. It’s very possible, that Kroger actually faces an impossible problem, at least when it comes to shareholder returns. It can make all the right moves and still find itself as a less desirable place to shop than its rivals.

What’s very clear, however, is that regulatory concerns over the deal, must take into account that grocery sales are not limited to stores that use the words grocery store. Amazon, Target, Walmart, and Costco are the competition here, and getting bigger increases Kroger’s ability to compete.

food, amazon, kroger needs albertsons to take on walmart, target, amazon, and costco

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Kroger Should Be Allowed to Buy Albertsons  

Kroger has reached an agreement to buy Albertsons in a $25 billion deal that will create the largest standalone grocery chain in the United States with nearly 5,000 stores and annual revenues of more than $200 billion. That’s something that the National Grocery Association (NGA) takes issue with.

“A merger of the nation’s top two grocery chains should raise serious questions about a single supermarket giant gaining unprecedented dominance over the nation’s food supply chain,” said NGA CEO Greg Ferrara in a statement. “A merger would not only put smaller competitors at an unfair disadvantage, but also increase anticompetitive buyer power over grocery suppliers, which ultimately would harm consumers. It is our expectation that this deal will receive rigorous scrutiny from federal antitrust enforcers.”

This would be a real thing to worry about if grocery chains could only compete against other grocery stores. The reality is that smaller chains already compete with Walmart, Target, Amazon, and Costco. The merger would make Kroger a little more like its bigger rivals, but smaller chains facing five competitors with significant pricing power advantage rather than four does not change anything.

Not allowing this deal to go through actually hurts Kroger without helping any other chain, effectively giving consumers fewer choices.

Kroger Is In an Impossible Position  

Amazon, Walmart, and Target can afford to not make money selling groceries. They can use food and other grocery staples to get you into their stores and onto their platforms, sacrificing margin for market share.

Kroger can’t do that if it wants to make enough money to drive its stock price up. Getting bigger gives the chain added buying power, but it’s very hard to be a good investment when you have multiple competitors willing to take lower margins in the space you operate in.

The grocery chain has shown resilience and management has largely run the company well in a very competitive environment. At the end of the day, however, that might be enough to make Kroger a good business, but not a good investment.

When you compete with giants, it’s hard to win. Kroger may hold its own and being bigger will help, but there’s a cap on how much the company can charge and remain competitive. That limits its ability to grow earnings and there’s very little the chain can do that would meaningfully change that.

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