Kroger May Bag Albertsons

Last month I reported that Albertsons, once a darling of the supermarket industry, has decided to put itself up for sale after years of floundering in its efforts to remain competitive. Traditional supermarket chains face increasing pressure from warehouse clubs like Costco, upscale "gourmet" operators like Whole Foods, and (of course) Wal-Mart, whose push into Supercenters has enabled the big-box superstar to become the nation's largest grocer.

Recent reports indicate that Kroger, Albertsons' largest supermarket competitor, is among the suitors for the company. Another mega-merger is possible for the retail sector, following fast on the heels of the mammoth Kmart-Sears and Federated-May combinations earlier this year. This trend speaks to the evolution of retailing in the United States, as it creates organizations on the kind of massive scale required to compete with Wal-Mart.

Kroger's move is largely defensive in nature, as there is significant overlap in many markets. However, an Albertsons purchase would bring the company into several important and potentially lucrative areas, such as Chicago, Florida, and the Northeast. In many parts of the West, however, Kroger would be compelled to sell or close numerous stores due to regulatory concerns or simple economic realities.

Such a merger would be unthinkable even a decade ago due to anti-trust issues. The Federal Trade Commission (FTC) has recognized that the competitive landscape among supermarkets has shifted in the age of Wal-Mart and its growing share of grocery sales. As recently as 1999, the FTC required that Albertsons sell many of its Las Vegas units to Sacramento-based regional grocer Raley's as a condition of its approval of the company's acquisition of American Stores, which controlled the Lucky chain. However, in 2002, the FTC allowed the sale of Raley's unsuccessful Las Vegas division to Kroger although its Smith's subsidiary was already a major player in the market, largely because of the many Wal-Mart Supercenters that had popped up all over town in the interceding years. While the government would probably not reject a Kroger-Albertsons union, it may force concessions in markets where Wal-Mart does not have a significant presence.

As was the case with the Federated-May merger, Southern California is the largest market in the country that would be affected by a Kroger-Albertsons combination. Albertsons became a major player after acquiring Lucky in 1999, though it has met middling success after dumping the local banner in favor of its own. Kroger already controls Ralphs, the market leader. While there are some Albertsons locations that could be converted to one of Ralphs' formats (conventional stores, upscale Ralphs Fresh Fare units, and no-frills Food 4 Less warehouse stores), numerous store closings would be likely. Since Wal-Mart has few Supercenters in the region, Federal and State regulators may require that some units be sold to competitors. Vons, a division of Safeway that also operates local Pavilions stores, could add a few locations as a result, but the main company that could take advantage would be Stater Brothers, a local supermarket chain that is successful in the far-out suburbs but largely unknown in the Los Angeles Basin. It would be interesting to see what Kroger would do with Bristol Farms, an upscale local chain recently acquired by Albertsons.

In Phoenix, Kroger owns market-leader Fry's, a local banner that has already grown by absorbing the legendary local Smitty's chain and most of the Arizona stores formerly operated by Smith's. As recently as 15 years ago, 8 supermarket chains competed for customers in the Salt River Valley -- today there are 4. Regulatory concerns may be negligible there, as Wal-Mart has blanketed the metropolis with Supercenters and Neighborhood Markets. However, competitors Safeway and family-owned Bashas (which operates upscale AJ's stores and Hispanic-oriented Food City units in addition to its traditional namesake stores) could end up expanding as a result.

Kroger is unlikely to have much interest in Albertsons' stand-alone drugstore operations, Osco and Sav-On, which are former divisions of American Stores. CVS, Rite-Aid, and Walgreens are all reportedly interested in acquiring them, so the end of Albertsons could also result in a consolidation of the drugstore sector of retailing in the United States.

Kroger is competing with several teams of private equity firms, who are most likely to sell off Albertsons piece-by-piece if successful. Even if Kroger fails in bagging the whole chain, it may end up taking control of a few key Albertsons divisions, albiet at a higher price. It will be interesting to see how the competition to buy the once-mighty chain pans out.