Kroger/Albertsons vs. Wal-Mart
By George Anderson
If the rumors are true and Kroger’s bid for Albertsons eventually leads to a takeover of its grocery rival, then the stage will be set for the combined company to take on Wal-Mart.
Wal-Mart would still be number one in the sale of groceries ($115.1 billion last year), but the combination of Kroger and Albertsons would move the company into a solid second position at more than $95 billion.
The deal, should it go through, would not be a clear cut win for Kroger. The retailer would gain added clout and move into markets where it doesn’t have any presence while gaining added share in others where it has been competing with Albertsons for customers.
But, as many pointed out in a report in The Wall Street Journal, companies have found acquisitions often do little to improve performance.
“We have not found that consolidation has significantly helped grocery retailers,” says Paul Weitzel, vice president of Willard Bishop Consulting. “A lot of the big chains went after scale to compete against Wal-Mart, and what they’ve found was that scale does not always mean efficiencies.”
Lehman Brothers Holdings analyst Meredith Adler also has concerns. She wrote in a note to clients that acquiring Albertsons “would create a distraction for a company already dealing with the threat of Wal-Mart’s expansion.”
Moderator’s Comment: Would a deal to buy Albertsons be good for Kroger? What do you see as the opportunities and challenges the company would face should
the rumored deal take place? –
George Anderson – Moderator
I don’t know enough of the details to offer definitive answers, but after reading the WSJ article, I offer the following observations.
The WSJ said it is likely Kroger would have to divest 45% of the stores in order to avoid regulatory conflicts. This “forced sale” would certainly not be at full price. Not a good way to begin.
Wal-Mart exploits three key advantages: they are non-union, which effects wages and business process design; they dominate the market, which allows them to negotiate acquisition costs; and they have a large non-foods segment, which allows them to subsidize the lower gross food categories.
Flexibility in business process design has allowed Wal-Mart to use technology to its fullest advantage, from centrally managing remote operations through highly integrated information networks, to using high capital investment in central processing operations for meat and other traditionally store manufactured items.
Market domination allows intensive price negotiation, but this is also based on “services” capability. Menu pricing again ties into the effective application of technology that reduces supplier costs to serve Wal-Mart and justifies lower costs.
Product categories are the same across most Supermarkets, with some greater emphasis on non-foods here and there. Specific “high end” banners that emphasize service and organic or other specialized features create a unique experience.
So how does all this relate to the question at hand? It really doesn’t seem that “buying more of the same” will help Kroger. It appears they have to do a lot with technology and business process (as much as they can within a union environment). Maybe they missed their chance when Sears was looking for a suitor. Perhaps a better investment would be to broaden the banners and do more to utilize the internet and reach the upscale consumer.
The realities of large scale mergers in this industry have been that the pre-merger synergy expectations simply are not met. All three major players have struggled with post-merger integration, both in terms of timelines and cost synergies.
Most large scale same-niche acquisitions seem to work best as real estate plays. Outside of that, regional expansion or regional market share growth has been the most successful form of acquisition. In those cases, the acquiring company either has no presence in the market, or a weak one, and the acquired operation becomes the core business.
The one advantage Kroger has is they do tend to treat regions semi-autonomously and have minimized the systems and process integration required.
Overall, I can see this as large enough to choke Kroger. An acquisition of this scale usually requires the acquirer be operating with peak efficiency in operational, finance, and systems areas. Is this true of Kroger?
This one is thorny. I agree with the above; if they get to pick and choose, Jewel and Shaw’s are obviously valuable. But much of Albertsons is broken and some of it is probably beyond fixing because the stores themselves are part of the problem. There is no way I can see Kroger making this acquisition and still having the ability to make aggressive capital spending plans. They already have one of the lowest remodel rates in the industry.
Kroger’s history of acquisition is that they don’t sweep in and take over everything – they allow a lot of regional autonomy (which drives some suppliers crazy, but that’s the price of flexibility to Kroger). This works for them where a team is in place and the history is good, as with Shaw’s, but does nothing for them in the many markets where Albertsons is suffering. It would be years before those markets were turned around, if ever.
If Kroger actually bought the whole thing (doubtful) they would almost certainly have to sell off large parts, including Sav-On and Osco (probably all the free standing drug stores) and be utterly ruthless about disposing of underperforming assets. I am not sure they are able to do that fast enough to prevent a problem.
If they buy it all, Kroger would have to sell most of the Southern California Albertsons stores as they duplicate their existing Ralphs stores.
A better opportunity would have Kroger buying Jewel, Shaws, Acme, Albertsons Mountain West Division and possibly the free standing drug stores from Albertsons. These acquisitions would allow Kroger to “hit ’em where they ain’t” from a Wal-Mart perspective.
Historically, Kroger has done a better job than most of not totally screwing up new acquisitions. Safeway is probably the worst at this (Dominick’s, Randalls/Tom Thumb) with Albertsons (Lucky) coming in a close second in the turning gold to dross sweepstakes.
Overall, Albertsons’ acquisition of Lucky may be the definitive case study on how to take over a vibrant entity and run it straight into the ground. They couldn’t have botched the takeover more if they had sat down and said “how fast can we run Lucky out of the market.”
It seems like a lot of the Albertsons divisions would be geographically accretive for Kroger (Shaws, Jewel, Acme, Florida…). The other advantage here is the willingness to actually drive divisions that don’t have the ‘banner’ name on them; Albertsons never wanted to hear that Jewel and Acme were best practices divisions for anything, even though you could see them doing a better job with some categories than other Albertsons bannered divisions. Kroger has no such qualms, and could drive Shaws, Jewel and Acme to greater success in some pretty big markets. Not sure how CA would work, but could you imagine them bringing back the Lucky banner? Safeway has enough market share in CA that Kroger might be allowed to buy those stores; in SoCal, they could revive Lucky and make it more upscale than Ralphs and Vons, attacking a different segment and allowing Kroger to get beyond the low price game there.
Lots of opportunity, but the devil’s in the details; how much, and how will they manage such a far-flung empire?
It all depends on the price paid. At many auctions, “the winner is the loser” because he/she pays more than the item is worth. Kroger will get some great real estate and a very difficult culture. It might be better to buy some regions and ignore the rest.
The market share Albertsons holds varies widely. Kroger will have too many diverse battles on too many fronts to be able to effectively win them all. Therefore, a deal that has Kroger buying Albertsons would be biting off more than they could chew.
There are, however, some obvious drug store divisions and other markets that could be best managed by another retailer. If Kroger could pick and choose, then the opportunity to improve their situation would be more available.
If you are not Wal-Mart then the best bet for success is to be a privately held regional retailer. Albertsons and Kroger are both pretty much duds. Sure, they have a few stellar divisions but, overall, they can’t compete with the well run regionals like HEB, Publix, Ukrops, WinCo, Crest, Hy-Vee, etc. These well run regionals would love to see Kroger double itself in size, only to have their large bureaucratic structure bogged even further. If the stock market goes down, Kroger would be forced to “make numbers” by cutting labor and raising prices. This would play right into the hands of the regionals and Kroger’s problems would only be twice as big as before. Further, problems are compounded even more because both companies employ expensive union labor. When has either Albertsons or Kroger acquired something and been able to improve it? Did Smiths, Dillons, King Soopers, Fred Meyer get better when Kroger bought them? Those were good companies. What happens when Kroger buys a really troubled company like Albertsons? It won’t be pretty.
Consolidation in the retail industry?!? Who’da thought?? Anyway, it’s interesting to see the different tactic in the food retail industry vs department stores: i.e. retaining local/regional nameplates vs. a single national banner (Macy’s, Dillards. et al.)
Of course, not all foodies follow the rule (R.I.P. Lucky’s), and the two industries are (perhaps) at different levels of maturity, but I think it makes an interesting comparison.
For decades, the economy of scale required to compete in grocery retailing was defined by the distribution center. You needed a concentration of stores sufficient to get high capacity utilization from a well managed distribution center. This is one reason why grocery retailing remained regional and un-concentrated. Wal-Mart changed that by significantly upping the ante on information management and new logistical methods.
Now the required scale is defined by leveraging an IT infrastructure that produces low cost distribution, e.g., retail link (at least if you want to compete against Wal-Mart). In theory, the larger size of the combined Kroger-Albertsons could help the company leverage IT.
However, there should be doubt that Kroger can effectively deploy the technology. For one, they may struggle to pay for Kroger and, therefore, short change new investment in IT. Second, though Kroger is a well managed firm, they aren’t particularly noted for their IT prowess. Third, Albertsons has been a mess for a very long time and Kroger management is going to be preoccupied trying to fix it for a very long time.
This merger could work out if Kroger would apply the best of Albertsons’ customer service positions with the best of theirs. Kroger’s customer service is not the same caliber as Albertsons’. I have never observed their managers on the sales floor to assist or take comments from customers. Setting strong customer service standards could be a plus and add up to a winning situation.
I believe the Kroger company has no business buying additional Real Estate – literally. To be a strong competitor to Wal-Mart, Kroger may need to involve its developing employee resources to become more knowledgeable in keeping and gaining new customers. Just remember, Kroger was around long before Wal-Mart and its roots are sunk deep, especially on the East Coast. Albertsons seems like a likely alternative, but why not become stronger in the areas that would make Kroger a second and not a third? Being first is not always the favorable position.
Kroger needs to improve all their properties to be as great as Sessel’s was. The Sessel’s family had a fantastic store, in which all employees and customers were proud to be a part.
Kroger will be a Godsend to the Delaware Valley regions of Delaware, Pennsylvania, and New Jersey. The generic products that Kroger produces are of high quality and low price. That is what today’s consumer looks for and needs. This area where I serve needs to abandon ACME and its high costs and small profits. Kroger will fill the void and be an alternative to the so called super stores.