The Los Angeles Times has an op-ed piece by Benjamin Lorr, author of “The Secret Life of Groceries: The Dark Miracle of the American Supermarket,” in which he writes about the proposed $24.6-billion merger of Kroger and Albertsons, suggesting that it will have “profound implications.”
Lorr – who talked to MNB about his book in September 2020 here and here – writes that the supermarket industry is trapped in an unsustainable model, “chasing higher and higher volume to fund cheaper and cheaper prices. Which by necessity means grocers are always looking over their shoulder at their competition. Getting underpriced is an existential threat. Growing bigger is your only chance at survival.
“This has been, and will always be, a rickety and unstable path. It creates a route to the top that allows for two or three dominant firms to grow so big they have a real advantage. And it simultaneously creates a race to the bottom for nearly everyone — including those dominants lest they lose their place. This is why Kroger and Albertsons can be both mighty and insecure.
It is a model where costs forever need to be cut. Where labor is always a tax on the bottom line. As a paradigm shift, using volume to drive price cuts was an explosive engine for individual chains. When it becomes the only game in town, we suddenly have a self-devouring feedback loop as an industry.
“Because there truly is no lowest point. Because you will always live in terror that one of your competitors will go lower.”
Lorr suggests that the drive to lower prices and yet maintain the kinds of margins that will assuage investors means that retailers almost always have to look for ways to exploit the system, cutting costs everywhere and anywhere: “Exploitation isn’t an exception to the system; it is its only logical extension.”
Lorr writes that “the endgame consolidation — the type that pushes two giants like Kroger and Albertsons together” means that “the incentives to keep margins low break down. Kroger executives will swear that this deal will allow them to reduce prices. They claim they are going to take $500 million in synergies and plow it back into consumer prices.
“If they had a few more competitors, I might take them at their word.
“As it is, they’ve gobbled them all up.”
You can read the entire piece here.
KC’s View:
It is worth reading the entire piece just for Lorr’s historical perspective. (Indeed, it is worth reading his book.)
From the moment this was announced, I was pretty sure that this would be a good deal for the investor class (at least in the short term). The larger question is whether it will be good for employees, good for customers, and good for the competitive balance in the industry. (It goes almost without saying that it will be good for the lawyers and lobbyists.)
The biggest challenge these folks will face is making sure that the two companies’ leadership teams are not so preoccupied with all the nuts and bolts of engineering such a mammoth merger of companies, banners and operations that they are not as focused as they should be on individual stores. Because someone has to be charge of that … making sure that individual stores – and, most importantly, their people – deliver on whatever differentiated value proposition they’re offering to shoppers.
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