So far, 2014 has been a year of consolidation. Safeway and Albertsons, one of the biggest retail mergers has just been announced, and analysts are still anxiously suggesting that Kroger make its own bid following rumors it was eyeing a possible acquisition of the company. But how worthwhile will it be for Kroger to make its own bid now that the deal has been announced? In the end, the biggest benefit always seems to relate back to grabbing as much share of the market as possible.
Some analysts, like Karen Short with Deutsche Bank, suggest that there are still plenty of short and long-term economic opportunities that lend Kroger a compelling number of strategic reasons to bid for Safeway. As of its latest financial report released March 6, Kroger owns 2,640 supermarkets and multi-department stores across 34 states under 12 different banners
. However, the combined Safeway/Albertsons company will span over 2,400 stores – stiff competition for Kroger
“In our view, a 2,400 store Albertsons/Safeway would create a formidable competitor for Kroger, particularly in markets such as Phoenix, Denver, LA, and Dallas,” Short wrote in a report. “Cerberus has proven to be a highly effective operator, and we expect them to reinvest cost savings/synergies into lower prices, which could erode Kroger’s pricing advantage
Short went on to say that a “successful Kroger bid would block Cerberus from narrowing the competitive gap” and would be able to “drive substantial cost savings, which could be reinvested in price.”
If there’s a chance for Kroger to take a greater share of the market, why not take it?
Here’s a few possible reasons…
1) Anti-trust concerns:
Kroger is already a massively successful company with annual sales reaching nearly $100 billion, according to its latest financial report, while Safeway has annual sales around $40 billion. Industry insiders already note that if Kroger could potentially control 60% of the grocery market in Colorado if they acquire Safeway. It’s not unreasonable to think it would be difficult for Kroger to acquire the entirety of Safeway’s assets due to antitrust regulations. Regardless, Kroger would be required to divest some stores because it would acquire such a large amount of the market.
2) Kroger just completed a $2.5 billion purchase of Harris Teeter:
Jeff Thomison, an analyst at Hilliard Lyons, suggests that while Kroger is financially positioned to do another deal, “it would have to be the right place and right time.” He added, “I’m not sure that Safeway is either of those.” The Motley Fool suggests that Kroger could possibly acquire Sprouts to better position itself in the natural and organic food space, while also giving the company a mini-store concept.
3) Kroger is simply not interested:
In a conference call with analysts following its latest financial report, Rodney McMullen, CEO, was asked if the company was exploring a possible bid with Safeway. “The model that we’ve outlined in terms of growing our business for our shareholders doesn’t require any type of mergers to achieve,” he said. Even if Kroger took a sudden interest, they would have to pay a $150 million termination fee to cancel the Safeway/Albertsons merger; $250 million after a certain period.
Although the benefits appear to outweigh the cons, it’s still tough to say for sure whether a bid from Kroger is worthwhile or not. Either way, if the merger between Albertsons and Safeway does go through, the market is only going to keep getting more competitive.
Stay tuned to DeliMarket TV as we analyze how this recent wave of consolidation is changing the produce/grocery/foodservice landscape.