Fascinating piece in The Street analyzing the proposed Kroger acquisition of Albertsons.
First of all, it stipulates that “in retail, bigger almost always equals better. That might not be true in niche specialty markets, but when you move into broad commodities — like the grocery business — size matters.”
Then, The Street argues that “inherently, Kroger and Albertsons are small, local players in relation to Walmart, Amazon, and Costco. Merging — as the two grocery chains are trying to do — would give them more scale, more buying power, and a bigger network of stores to leverage delivery and loyalty programs against.”
The rationale for the “small local player” observation: “Kroger has a $32 billion market cap while Albertsons’ currently sits at $11.5 billion. Together, the two companies would have a $43.5 billion market cap, a number that’s less than 10% of Walmart’s $382 billion and a rounding error for Amazon’s $1 trillion market cap. Costco “only” has a $228 billion market cap which still makes the potentially combined Kroger and Albertsons a small, regional player in comparison.”
Whether the Kroger-Albertsons combination will lead to lower prices remains to be seen, The Street writes: “Grocery prices move largely based on buying power and supply chain costs because most Americans have multiple choices when they shop. Yes, there are certain areas where consumers have limited brick-and-mortar choices, but Amazon and Walmart pretty much serve the entire country.
“Some consumers, of course, want to shop at dedicated grocery chains and a combined Kroger and Albertsons would be a stronger company with improved buying power and greater efficiencies.”
But, The Street suggests, a combined Kroger-Albertsons entity “would still be at a major disadvantage to Amazon, Walmart, and Costco.”
KC’s View:
Which, I think, is precisely the argument that Kroger and Albertsons will be making to federal regulators … that even if it lowers prices, it still will be disadvantaged.
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