RETAIL VIEW: Kroger Said to Be Eyeing Albertsons

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RETAIL VIEW: Kroger said to be eyeing Albertsons

October 27, 2005

If it happens, the Kroger Co. would become the nation's largest supermarket with sales approaching, if not topping, $100 billion.

If it happens, Kroger would receive about $1 of every $5 America spends at the supermarket.

What the "it" is, of course, the potential sale of the No. 2 supermarket-specific chain in the United States to the chain occupying the No. 1 slot in that category.

Though those rankings can be disputed, depending upon who is counting and what is counted, there is no doubt that the resulting firm would be No. 1 by a large margin.

Albertsons operates 2,500 stores in 37 states and has sales in the neighborhood of $37 billion to $40 billion. Kroger's sales are approaching $60 billion with more than 2,500 grocery stores in 32 states.

According to industry research, the nation spends about $700 billion at food-retailing outlets annually, with about 60-65 percent spent at supermarkets. (This would include Wal-Mart's grocery sales, which are slightly greater than Kroger's, making it the top retail grocery store in the country. But because of its general merchandise component, it is usually ranked separately.)

Neither Albertsons nor the Kroger Co. have confirmed the reports, but the nation's consumer media were abuzz with the rumors of a potential merger through acquisition. The New York Times broke the story, and it soon appeared in The Wall Street Journal, Reuters and in the hometown Idaho and Ohio papers of the two supermarket giants.

Wall Street analysts and supermarket experts were dissecting the potential partnership and weighing in on its viability and likelihood. Learning of Kroger's interest in Albertsons, as well as that of a

1 / 3 number of investor firms, apparently set well with the investing public as the stock price of both Albertsons and Kroger initially rose -- Albertsons stock jumped 5 percent, while Kroger registered a 1 percent gain.

Albertsons announced in early September that it was looking for ways to increase shareholder value, including the possible sale of the company. Initial reaction was that a likely buyer could either be an investment firm that would then break the firm into pieces, or a retailer, such as Target, that could use the purchase to enter Wal-Mart's realm in both general merchandise and food.

Foreign-owned supermarkets were also thought to be potential buyers, as Albertsons could give European giants such as Tesco or Carrefour an instant presence in the lucrative U.S. market.

Regardless of who bought Albertsons, smart money said that the company's drug subsidiaries - Sav- On and Osco - would likely be sold off as separate entities. Drug store rivals Walgreen Co. and CVS Corp. are said to be interested in the Albertsons drug store chains. And Royal Ahold, the Netherlands- based retail giant that operates Stop & Shop and Giant stores in the United States, has publicly expressed an interest in the Northeastern-based Shaw's stores. While that is a potential scenario if Albertsons stays in the supermarket business and reinvents itself as a smaller retailer, it is probably not a possibility if Kroger is the winning bidder.

Speculation is that one of the major reasons Kroger is looking at Albertsons is because the Shaws chain's ability to give the Midwest-heavy Kroger an entry into the populous Northeast.

Dick Spezzano of Spezzano Consulting Service Inc. in Southern California said that the Kroger model of acquisition has worked well over the years - definitely better than its rivals. "They have done as good a job as any [when acquiring other chains]. They tend to let the locals run their own business."

Mr. Spezzano said that it was difficult to speculate how Kroger could assimilate a giant chain like Albertsons into the Kroger family, but he suspects that the smaller pieces -- such as Shaw's markets in the Northeast -- would continue to operate under their own names. "That's how they have done things. That's how they did it in L.A. with Ralphs."

The long-time Southern California produce retailer at Vons said that the biggest impediment to a Kroger takeover of Albertsons would probably be the Federal Trade Commission. In the late 1990s, when each of the major players purchased smaller chain stores, the FTC often held up the sale for many months as the larger chain sold off individual stores to competitors. Mr. Spezzano said that one would expect the same thing to occur in many markets if Kroger purchased Albertsons. That alone, he said, might make Albertsons turn to one of the other bidders - such as investment group -- where divestiture would not be an issue, and the sale could probably occur much more quickly.

Ron Pelger, another long-time retail expert who now makes his living consulting, said that he was not surprised by Kroger's interest in Albertsons.

"I have been saying for five years that one of the majors would buy one of the other majors," said Mr. Pelger. "Everyone is trying to cut costs and be more efficient."

He said that mergers such as this do cost people jobs and do cost some suppliers accounts. "There are companies out there supplying one of these chains but not the other. If they consolidate buying, somebody's going to be out of luck," Mr. Pelger opined. "I hate to see that."

2 / 3

While the major chains have often cited increased efficiencies as justification for mergers, it doesn't always work that way.

For example, Mr. Spezzano said that both Albertsons and Kroger, through its Ralphs banner, have Southern California warehouses operating at pretty much full capacity. He indicated that a merger would not allow Kroger to close one of those warehouses if it still kept the same number of stores open. Southern California would no doubt be one of the markets where the divestiture of some stores would be required. Kroger's Ralphs competes head-to-head with Albertsons in many Southern California neighborhoods. The FTC would most likely require that many individual stores be sold to keep competition alive.

That is also the case in many other markets around the country, said Mr. Spezzano, including much of the Northwest, Southwest and Colorado.

Kroger has been one of the successful survivors of the Wal- Mart onslaught. Consequently, many financial analysts like the chain's aggressiveness in this matter.

The New York Times quoted Burt Flickinger III, managing director of the Strategic Research Group, as saying, "Wal- Mart entered Kroger's markets in the early '90s. Kroger has been going toe-to-toe with Wal-Mart Supercenters for 14 years, where Albertsons really didn't face the full force of the Wal- Mart Supercenter tsunami until recent years."

While Mr. Pelger sees these types of mergers as inevitable, he said that the acquiring chain has to move with caution. He has often witnessed supermarket executives concentrate on assimilating the new chain and streamlining operations, while forgetting to keep their customer in mind. "All their energies go to cutting costs and they forget about their own customers."

Mr. Spezzano believed initially that Albertsons might sell off some pieces and emerge as a stronger, regional supermarket entity. But with this latest speculation and the names of potential bidders that have surfaced, he said that it does appear that Albertsons is going to sell the entire chain.