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FTC to block grocer Kroger's $25 billion acquisition of Albertsons

Wednesday, February 28, 2024

The Federal Trade Commission's bid to block grocer Kroger's $25 billion acquisition of Albertsons could benefit Walmart, a rival whose close relationships with suppliers already gives it a price advantage over other chains, investors, consultants and analysts said.

Overall Walmart (WMT.N) had a 24% share of the U.S. grocery market in 2022, according to CFRA Research. Walmart intends to focus on keeping its grocery prices as low as possible, a move that its executives said on an earnings call helps Walmart continue to draw shoppers into its 4,700 U.S. stores.

One factor in Walmart's success has been its buying power with major food and household staples suppliers, such as Procter & Gamble (PG.N) and Conagra (CAG.N). Walmart alone already accounts for 15% of P&G's total annual sales to retailers, and 28% of Conagra's.

The FTC challenge to Kroger's acquisition of Albertsons on antitrust grounds "just makes Walmart stronger," said Burt Flickinger, managing director at retail consulting firm Strategic Resource Group. If the deal fails following the FTC's challenge, companies that make consumer products like Tide detergent and Huggies diapers will continue to be "beholden to Walmart," Flickinger said.

"The government is de facto helping an entrenched competitor" - Walmart - "by not letting others get big enough to challenge them," said Walmart investor David Klink, senior research analyst at Huntington Private Bank, which also owns shares of Target and Amazon.

Bernstein analysts wrote in a note on Tuesday that they remain "cautiously optimistic" the deal will close, although the FTC lawsuit may delay completion by six months.

Just 10 chains - Walmart, Kroger, Costco, Albertsons, Sam's Club, Publix, Ahold-Delhaize, Dollar General, Target and Aldi - controlled 60% of the total U.S. grocery market in 2021, according to Bernstein research.

The National Grocers Association, a trade group that represents smaller independent food retailers and wholesalers, says that four big food retailers - Walmart, Kroger, Costco and Albertsons - leverage market share to "box out" suppliers, farmers, and ranchers, resulting in deals that shift higher prices onto smaller stores.

The deal falling apart could be good for packaged food makers— if that happens— because they would have a bigger pool of buyers, said Robert Klaber, a portfolio manager at Parnassus Investments, which holds P&G and Mondelez shares.

Store count is another area where Walmart may gain an advantage. Walmart declined to comment.

To counter concerns of overlapping stores in certain areas, Kroger and Albertsons have agreed to sell 413 total stores to C&S Wholesale Grocers, 104 of which are in Washington state, representing one third of the total.

But Walmart operates only 52 Supercenters and four neighborhood markets in Washington, according to a lawsuit filed by the state Attorney General challenging the merger. Walmart, meanwhile, plans to open 150 new stores over the next five years and renovate 650 others across 47 U.S. states and Puerto Rico this year. Walmart has not disclosed all the locations it will open and renovate.

Generally, Walmart tends to operate four Walmart Supercenters for every 25,000 to 30,000 people in a residential area. In California, Walmart has only has one Supercenter for every 100,000 people, indicating room for expansion there, Flickinger said.

The FTC lawsuit also poses a distraction, especially for Albertsons employees facing an uncertain future following any acquisition by Kroger. "We have seen it oftentimes. When the acquirer and the target are in limbo, they lose a lot of talent," D.A. Davidson analyst Michael Baker said.

Walmart's price gaps with competitors and curbside pickup and delivery options is also attracting a lot more high-end customers from rivals since the pandemic. Kroger and Albertsons will have to "play catch-up," he said.

The prolonged uncertainty surrounding the merger could also stymie Albertsons' progress on growth initiatives, while Walmart continues to demonstrate strong sales, according to Arun Sundaram, an analyst at CFRA Research. In their most recent quarterly performance, Kroger posted a 0.6% drop in U.S. comparable sales, while Albertsons posted a 2.9% increase and Walmart a 4% rise.

Kroger and Albertsons have cautioned that a blocked merger would empower Amazon and Walmart.

"This (FTC) decision only strengthens larger, non-unionized retailers like Walmart, Costco and Amazon by allowing them to further increase their overwhelming and growing dominance of the grocery industry," Kroger said in a statement on Monday.

By: DocMemory
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