A Supermarket Megamerger Will Redefine What You Buy at the Grocery Store

Kroger and Albertsons want to merge in a $20 billion deal. If antitrust regulators approve, the definition of a grocery store grows further.

As the countrys two biggest supermarket chains envision the future of their planned megamerger, youll be able to purchase groceries, a coffee, patio furniture, and your allergy medicine prescription. The store deduces you might also like a humidifier to help the sneezes and some local honey, all of which it has ready for you. At dinnertime, order in sushi, which was made by a kitchen owned by the supermarket.

When Kroger Co. KR -0.90%decrease; agreed to buy Albertsons ACI -0.97%decrease; Cos. for about $20 billion in October last year, it marked a milestone in the quest to invent the modern supermarket by rethinking what shoppers could buy while they pick up milk and meat for the weeks meals.

You used to make money selling a can of corn, said Rodney McMullen, Krogers chief executive, who started at the company in 1978 as a part-time bagger. Now, he said, you have to figure out other ways of creating value for the customer.

Just what this new emporium will look like is at the center of the Federal Trade Commissions antitrust review, and central to any potential battle will be the shape-shifting definition of the markets in which Kroger and Albertsons are competing. Regulators are examining the possible combined companys impact on grocery markets around the country as well as specific areas like online delivery, digital advertising and pharmacy operations, said people familiar with the matter.

Kroger executives said this month they are cooperating with regulators and that the deal is on track to close in early 2024. An FTC spokesman declined to comment.

Kroger is testing stores with only self-checkout lanes. A clerk processes a customer at an Anderson Township, Ohio, Kroger.

Albertsons representatives declined to comment. Its Chief Executive Officer Vivek Sankaran said at a November Senate hearing that the merger was its best path to compete against Walmart Inc. and Amazon.com Inc., two retailing giants whose conquest of new markets has increasingly put them in direct competition with grocery stores.

Some lawmakers and union officials have expressed concern that the deal could lead to job cuts, stifled competition and price increases on food at a time of high inflation for basic goods.

The companies have said the merger would do the opposite. By expanding their network of suppliers, the united supermarket could more easily lower prices for customers and get fresh products to shelves more quickly. They have said they plan to increase wages for employees and promised no front-line worker layoffs.

The companies together employ more than 710,000 employees and operate nearly 5,000 stores, including Ralphs, Food 4 Less, Safeway and Vons among them. Both companies run stores in Southern California, Seattle and Chicago, as well as in other areas. They have more than 50 manufacturing plants and nearly 70 distribution centers.

Kroger and Albertsons together operate nearly 5,000 stores.

Kroger executives have been open about seeing the companys future beyond its grocery aisles. The chain already runs more than 1,000 Starbucks locations in stores. It is now setting up what the industry calls ghost kitchens across California, Texas and Ohio that allow customers to order restaurant meals and pick them up from some stores, without any actual restaurants. The company began delivering store-made sushi to peoples homes in December.

Were trying to improve our share of food away from home because we see it as a massive opportunity, Mr. McMullen said at the companys investor day last year.

Stretching the definition of a grocery store has helped both supermarket chains tap into faster-growing businesses and help fund operations. Krogers digital advertising business is one of its fastest-growing areas, and Albertsons sales and gross profit rose during the pandemic partly because it administered Covid-19 vaccines at its stores, executives at both companies have said.

Kroger uses consumer data to build loyalty programs and sell advertising to brands, putting it in emails, coupons and on its website. This brings it into competition with tech giants data-driven advertising arms at Facebook parent Meta Platforms Inc. and Alphabet Inc.s Google. The supermarket is also staking out a presence on platforms such as Snapchat and smart TVs, another venue where the company can sell ads for products.

Albertsons in late 2021 started its digital advertising business, and the company is using data to offer coupons and rewards through its loyalty programs, which have grown to 33 million users. Albertsonss digital offerings now include recipes and health-related content.

Besides being the biggest U.S. grocery store operator, Cincinnati-based Kroger has been expanding its private-label business to boost margins and capitalize on emerging trends in food. It runs more than 30 of its own plants that make store-brand fan favorites, including strawberry lemonade seltzer and unicorn-swirl ice cream. It has almost doubled the number of products it sells under its store brands since 2005, and these private-label products make up nearly 20% of its sales.

In Florida, where Kroger operates no physical stores, robots pick products in a 375,000-square-foot Kroger warehouse for online orders before drivers deliver them in trucks to homes. The company has opened additional warehouses in the state.

Michelle Packard, who lives in Coconut Creek, Fla., said she grew up near Kroger stores in Indiana and tried its delivery business after receiving fliers in the mail. She said the prices were good, and Kroger offered a wide range of products she cant get elsewhere. Now, Ms. Packard said, she only goes to shops when shes unable to find what she needs online.

The goal is to forge deeper and longer-lasting relationships with shoppers, said Kroger Chief Financial Officer Gary Millerchip, as the company competes for grocery sales against retailing giants like Walmart, Amazon.com and Costco Wholesale Corp.

There are so many different players out there that we are fighting every day, he said.

European grocery chains, including Aldi Inc., are gaining shoppers as they expand across the U.S. with a low-price, no-frills approach. Dollar, convenience and drugstores are growing their own food businesses to grab more consumer spending, while independent and regional retailers build out edgy brands with offerings like celebrity smoothies that go viral on TikTok.

As it roamed into entirely new markets, some of Krogers big ideas have failed. An effort to sell mortgages to shoppers proved overly complicated, Mr. Millerchip said. The company pulled the plug on a push into car insurance, partly due to complexities in state-to-state regulations. It sold hundreds of convenience stores in 2018 partly to cut costs, and has closed some jewelry stores.

Kroger has bolstered its health business so much that it is now one of the biggest pharmacy operators in the nation along with CVS Health Corp., Walgreens Boots Alliance Inc. and Walmart. Kroger and Albertsons together operate nearly 4,000 pharmacies.

During the pandemic, Kroger and Albertsons administered millions of Covid-19 vaccinations at stores, drive-through centers and schools. Executives at both companies have said the health business helps them build shopper loyalty, and this year Kroger is offering testing for colorectal cancer at some of its pharmacies and health clinics.

During the pandemic, Kroger and Albertsons administered millions of Covid-19 vaccinations. Customers wait in line at a Kroger pharmacy in Cincinnati.

Karen Brokken, who lives in Tigard, Ore., said she started going to an Albertsons pharmacy in her neighborhood after other drugstores became busier. Last year, she got a flu shot and a Covid-19 booster shot at Albertsons and received coupons that gave her 10% off with each vaccination, she said.

I get some basic stuff there such as peanut butter, she said, adding that she buys groceries at Albertsons when she goes to pick up her prescriptions from the pharmacy.

Kroger traces its roots back to a single store that Barney Kroger opened in Cincinnati in 1883. The company added its first in-store meat department in 1904, later opening its first pharmacy in 1961 as it spread new stores across the country and bought rival chains.

The supermarket modelwhere shoppers could buy fruits, vegetables, milk and meat all in one placegained popularity in the U.S. during the 1930s, with early stores primarily focusing on offering low prices. Amid population growth across the country, businesses opened more stores and operators began adding a wider range of products and services like in-store bakery shops.

A Kroger in Cincinnati in the early 1900s. Barney Kroger started the supermarket chain in 1883.

Albertsons, too, started as a single store in Idaho in 1939, where it was known for its store-made ice cream and racks of magazinesnovelties to shoppers at the time. Later, it added processing plants and now runs 19 of its own production facilities for milk, baked goods and other foods. Boise, Idaho-based Albertsons now makes about 10% of its store brands, which executives say are growing faster than branded items. The company has also been testing mobile clinics in Texas for pets that offer exams and vaccinations.

Albertsons, like Kroger, seeks to fill a broader range of shoppers needs, and broaden the number of households the company serves, executives say. You can complete a basket in our store. Absolutely get everything you want, Mr. Sankaran said at an industry conference in 2021.

Albertsons said in February 2022 that it was exploring strategic alternatives, including a sale, less than two years after it went public. Some industry analysts have said the companys ownership structure has weighed on the stock price. Private-equity firm Cerberus Capital Management LP invested in Albertsons in 2006 with subsequent investments and holds about a 27% stake.

Kroger officials reached out to Albertsons in late April about a potential acquisition, according to a filing with the Securities and Exchange Commission, and Kroger signed the deal to acquire Albertsons in October.

In recent months, FTC officials have reached out to grocery retailers and wholesalers of varying sizes across the U.S., inquiring about their business models, which companies they see as competitors, and their view of the proposed Kroger-Albertsons deal, said people familiar with the matter.

Albertsons started as a single store in Idaho in 1939. It now runs 19 of its own production facilities for milk, baked goods and other foods. Shoppers in the bakery department of a Phoenix Albertsons recently.

Officials are asking about how products are sourced, priced and sold by suppliers and how online operations work, some of the people familiar with the discussions said. They are also looking into usage of shopper data, pharmacy operations and private-label businesses of Kroger and Albertsons, some of the people said, as well as store labor dynamics.

Traditionally, antitrust investigations of supermarket mergers have zeroed in on specific geographic areas where companies operate overlapping stores, examining whether mergers would reduce competition. Regulators havent typically included discount or club stores like Walmarts Sams Club or Costco in evaluating supermarket mergers, nor have they looked at newer facets of the business such as data analytics, said industry and antitrust officials.

The evolution of what grocery stores sell is a complicating factor in analyzing the effects of a supermarket merger, said Logan Breed, who leads the antitrust practice at law firm Hogan Lovells International LLP. It isnt clear that the antitrust authorities model for analyzing such deals still works given the industrys changes, he added. Mr. Breed, who has worked on other supermarket tie-ups, said he isnt involved with the Kroger-Albertsons merger.

Both the FTC and the Justice Department are extraordinarily aggressive in their enforcement, he added. The regulators have challenged deals including JetBlue Airways Corp.s purchase of Spirit Airlines Inc. and Penguin Random Houses acquisition of Simon & Schuster. A federal judge blocked the publishing deal.

Albertsons is expanding what it sells, including flowers in a Phoenix location.

Antitrust authorities remedy for supermarket mergers hasnt always been smooth. In 2015, Albertsons bought back 33 stores that the FTC had required the chain to sell as a condition of approving its acquisition of Safeway Inc. After Albertsons sold stores to smaller chain Haggen Holdings LLC, Haggen struggled to integrate them and filed for bankruptcy within months.

Kroger has said that the regulatory process could take up to two years. A so-called second request for information, during which FTC officials gather information on the companies and the sector, can take at least several months, antitrust experts said.

The companies have said they expect to sell stores in some markets to seek regulatory approval, and have agreed to sell up to 650 stores. They are working to identify potential buyers and have received interest for those they expect to divest.

What is a modern grocery store? said Suzy Monford, who previously led e-commerce and fresh food departments at Kroger and now leads consultancy Food Sport International. We feed you. We clothe you. We help you manage all your prescriptions. We are the place you go to when you celebrate.

Question 1. What are the external factors influencing the decision Kroger made to acquire Albertsons? Do not just list some factors, but also provide clear, well-written explanation of each factor.

Question 2. What internal factors of either or both companies will need to be addressed in this merging of the two companies and as they operate as one company?

Question 3. What is the strategy behind Kroger and Albertsons acquisition? Be sure to remember the difference in goals, strategy, and tactics

Question 4. What is the goals behind Kroger and Albertsons acquisition?

Question 5. What is the tactics behind Kroger and Albertsons acquisition?

Question 6. External Factor Evaluation (EFE) Matrix for Kroger and Albertsons merger