Rob Kaufelt | Apr 12, 2023
Rob Kaufelt was the owner of Murray’s Cheese Shop in Greenwich Village, which he sold to Kroger Supermarkets. Today there are over 1,000 Murray’s cheese shops across the land. Prior to that, he pioneered upscale supermarkets as President of Mayfair Supermarkets (Foodtown), and specialty foods at Kaufelt’s Fancy Groceries. He lives in New York City with his wife and three children.
Thoughts on the Kroger, Albertsons merger in 3 parts:
Part 1: examining the good and bad of the potential Kroger, Albertsons merger
Whether the merger succeeds, of course, is up to the government — Management can make the case that, in order to remain competitive with Walmart and Costco, and with Aldi and Lidl and Trader Joe’s creeping up from behind, a traditional chain needs all the muscle it can muster.
Kroger, like most major public companies, will finance this transaction with debt.
I was wary of debt early in my career, perhaps because I was raised by parents who came of age in the Depression. To this day I rarely borrow money. However, in those days we needed to borrow to make the small acquisitions of single stores and small chains that fueled our growth.
In the 1980s, the investment banking company Bear Stearns pitched my father, CEO Stanley Kaufelt, on going private. Mayfair would borrow money to buy back all the outstanding shares at a premium over the market price. He jumped at the idea. The notion was that interest paid on debt is tax-deductible and thus preferable to paying taxes on net profits.
The plan was later to go public again and magically, our market value would be much higher than it would have been had we done nothing. To me, then naive in the ways of Wall Street, that seemed a peculiar way to manage a business, as our debt was minimal and the business was profitable. The stock price had gone up 2500% in the 1980s. If interest rates were to rise, as they did, all that debt would be a drag on growth. That’s what happened, and the company was eventually sold to Ahold.
Over leveraged companies owned by private equity are often stripped of available cash and often suffer from an inevitable lack of funding in essential areas. The supermarket industry is capital, labor, real estate and labor-intensive. When management cuts capital expenditures and needs repairs to the bone, and raises prices, that maximizes cash flow in the short term but eventually destroys the business.
In my opinion, Albertsons is in a place where it needs a buyer. So, enter Kroger. Albertsons was also at risk of losing a controversial $4 billion payout, which the court eventually approved. Kroger, a better-managed company, seized the opportunity. The question then became, would this eliminate competition, hurt consumers already battered by inflation with rising prices on groceries, and eliminate jobs? That’s a hard sell in hard times.
Despite the threat posed to workers by robotic warehouses and other tech, it seems that people are still needed to run things, fix things, or oversee things, and that means finding, training, and most of all retaining workers in the tightest labor market in decades, with an unemployment rate under 4%. That’s partly a post-Covid, demographic problem, and there is no immigration proposal in sight to help solve the labor shortage.
Kroger CEO Rodney McMullen has gambled big on this idea, and if it works, he will surely be well rewarded. Some may say he already is. According to The New York Times, Kroger has one of the country’s starkest gaps between a chief executive’s compensation and that of the median employee — a ratio of 909 to 1. But then our system is based on great rewards for big risks.
Yet even if the merger succeeds, it’s not clear that sales per unit will increase, nor overall profitability, nor the stock price.
I like old-fashioned companies and brands myself. I’ve often wondered why companies that once ruled, like GE, looked down on appliances, or why Sears lost its incomparable catalog instead of moving online before Amazon took over. We can all name other favorite brands that new owners didn’t understand and let fail. The grocers I loved were Balducci’s and Dean & DeLuca – both gone now in my neighborhood – while the great Fairway still limps along.
But Kroger knows itself well, knows its brand identity, and is unlikely to soon forget what it stands for.
Part 2: Here’s why it helps Kroger for the deal to move forward
Kroger has an excellent case to make to the government as it seeks permission to merge with (acquire) Albertsons. And from where I stand, nothing would please me more than to watch Kroger bring good cheese coast to coast under the Murray’s brand. That was our mission at Murray’s long before our mom and pops were a gleam in Kroger’s eye.
I can see why it makes sense from Kroger’s perspective to go forward with the merger.
It will be an entity to rival the big guns in grocery. If the deal does indeed go through, the combined sales of the newly merged company will exceed $200 billion, making the new entity on par in sales with Walmart and Amazon — something no other supermarket company can claim outside of the warehouse giant Costco.
Though the anti-trust people warn that Kroger will dominate the markets where it competes with Albertsons, that’s not likely. The government will most likely require that many stores be divested in the most competitive markets, probably in areas like Southern California, the Pacific Northwest, East Texas, Chicago, Washington, D.C. and perhaps Denver and Phoenix.
But that also means that many of the buyers of the spun-off markets could present strong competition themselves.
In fact, I see Kroger being at a disadvantage from a branding point of view, compared to Walmart and Amazon (make it three if we include Costco), as the newly formed merger entity will most likely compete under many different names and brands —36 by my count (Jewel-Osco, Safeway, Shaw’s, etc..), while the big guys trade and market under a single brand.
The growth of online ordering is inevitable. Rolling out Ocado warehouses to fulfill online orders is key to Kroger’s growth, and is an advantage, not only for the company’s own operations, or even because of the competition it creates with Amazon’s distribution centers, but additionally, quite possibly as a new entity in food retailing itself. That is, an Ocado facility may eliminate the need for a conventional superstore at all. (For instance, there is currently a huge Ocado facility that supplies shoppers in Florida, but no actual Kroger stores.)
Someday most of our food may be delivered chiefly via these facilities, leaving only the mom and pops, small independent grocers, and farmers markets for those who prefer the old ways of food shopping.
Kroger’s stellar database will improve. Kroger has one of the best customer databases in the world. In grocery, data has been monetized in several ways, chiefly by selling advertising, and Kroger has also used it cleverly to build an exceptionally strong loyalty program. A manufacturer may well wish to spend advertising dollars on consumers who purchase goods at a market that:
- Already carries the items
- Has a good in-stock reputation
- Has a solid shelf position
- Invests in digital coupons
With its huge database, Kroger could compete for ad dollars not only against Amazon, but also Google, Meta, and other big online players.
Scale will enable Kroger to improve its supply chain. With 50-plus manufacturing facilities, Kroger will be able to scale its production and keep the pipelines full, enabling a stronger supply chain with vertical integration. That has huge value for Americans, especially with the memory of the pandemic and the fear of food shortages still fresh in our minds. Vertical integration is hot now. But the real strength in manufacturing growth comes with private label, now close to 20% of sales and growing, as customers seek in-house brands for their traditionally lower prices vis-à-vis national brands. Since the advent of “premium” private label, as I first saw with Loblaw’s President’s Choice in the 1980s, quality is improving too. A chain producing a good in-house product at a fair price might be doing the customer a big favor, and of course those margins are typically higher for the retailer.
Market capitalization is likely to grow. When considering annual revenues, the Kroger, Albertsons merger entity would come in at $200 billion, which is modest compared to Amazon’s approximately $500 billion annually and Walmart’s $570 billion.
Looking at market capitalization growth, over a five year period Kroger has grown around 73% (to $35 billion). By comparison, Walmart’s market cap of $389 billion looks huge compared to that Kroger cap of close to $35 billion, and that same Walmart market cap looks like small potatoes compared to Amazon’s at over a trillion dollars.
If the government is looking into those two companies (and whether they present a monopoly) I must have missed that news.
A larger company with a national presence might also spur the stock price, at least if the synergies are realized: elimination of duplicate management teams; consolidation of warehouses, manufacturing, marketing, IT, and all the rest. In truth, this never quite works out the way it’s promised, but it makes sense on paper. The store-level people are often the last to be fired, as they actually do all the work and take care of all the customers.
Kroger shows it can compete with a unionized labor force. As for the workers of the proposed merger giant —with some 700,000 employees, the new entity would still have less than half of the number Amazon employs (roughly 1.6 million as of 2021) and less than a third that of Walmart (around 2.1 million, globally). Neither of those behemoths is unionized (though we did see the first independent Amazon union at a Staten Island warehouse in 2022), unlike the majority of employees at both Kroger and Albertsons.
Most Giant stores, owned by Ahold Delhaize, are unionized too, and I see Ahold likely becoming a major competitor of Kroger if the merger succeeds. Typically, a non-union workforce gives a company a competitive advantage; i.e., they pay lower wages than a union shop. However, despite not being unionized, both Walmart and Amazon pay an hourly wage far above the federal minimum wage of $7.25. (Walmart is $15 dollars per hour and Amazon pays $17). In 2021, Kroger announced it was raising its average hourly wage to $16 per hour.
Nevertheless, despite Amazon and Walmart paying a decent hourly wage, Kroger still has strength in its assertion that the merger will offer secure employment in a stronger company with a unionized workforce (even if the United Food and Commercial Workers union does oppose the merger).
Given these considerations, Kroger has a strong case to take over Albertsons.
Part 3: Here’s who the deal doesn’t benefit
My take on the pros and cons of Kroger’s purchase of Albertsons is of course irrelevant. FTC Chair Lina Khan will have the final word. If the deal does succeed, it will be the first national grocery chain since the once-great, late A&P.
Instead let’s ask, “Cui bono?” Who benefits?
We can assume it’s a good deal for the principals, or they wouldn’t propose it. If the stock rises, it will be good for shareholders, and higher profits are generally good for the C-suite salaries if things work out.
We can assume it’s good for the banks and law firms who are paid handsomely to lend the money and advise both buyer and seller. The list of banks lending the money, and the law firms doing the deal (with a big breakup fee if it falls apart), are a “who’s who” of Wall Street.
However, credit ratings agency DBRS Morningstar determined that the purchase will have a “net negative effect on Kroger’s overall credit risk profile,” citing both the new debt and the risks of integration and execution.
The parties proposed selling 100 to 375 stores to head off antitrust concerns (that number may now be even higher, according to recent reports), but at the FTC, Khan has expressed prior qualms about divestitures as an antitrust remedy. As Reuters reported, “Khan has cited the failure of divestitures in a previous supermarket merger involving Albertsons and Safeway as a reason for the agency to be skeptical.”
To recap that debacle, in 2015 Albertsons bought Safeway for $9 billion, winning FTC clearance by selling 146 stores to Haggen for $300 million. Months later, Haggen filed for bankruptcy. Who bought dozens of those shops? Albertsons.
Six local United Food and Commercial Workers (UFCW) unions representing more than 100,000 Kroger and Albertsons workers oppose the deal. Citing the Safeway purchase, Judy Wood, a cake decorator at a California Albertsons, recalled, “We were told by the management team that there was nothing to worry about…I am now hearing the same message from management again.”
Produce groups who supply consumers with fruit, vegetables, and nuts are not only opposed, but sound sincerely worried for their livelihoods. “The buying power of the newly combined Kroger entity cannot be understated,” produce groups told the FTC. “Growers and shippers are ultimately price takers and are constantly struggling to achieve better than breakeven pricing from retailers.”
The produce groups also explained why shoppers, too, should care if the merger goes through: “Eliminating major competitors from the marketplace never leads to reduced prices for the consumer. Rather, food costs will only go up.”
As for me, it’s déjà vu.
In the 1980s, when the bankers at the now defunct investment bank Bear Stearns approached my father, Stanley Kaufelt, about taking his grocery business private, it seemed like a bad idea to both my brother, a Wall Street attorney, and me, the grocer. Mayfair Foodtown had strong sales, healthy profits, and a rising share price.
But Dad was sold on the idea and the deal went through. Instead of the fat return promised, Mayfair’s new debt crippled growth, and the company was eventually sold to Ahold.
If Kroger buys Albertsons, regional chains won’t be able to compete on price and will continue to be absorbed. What makes them special will disappear with them. Towns that lose competition between stores will see prices rise and people put out to pasture in a drive to cut costs. A giant company can punish towns that displease it — as Kroger did in California, showing local politicians what it thought of covid hazard pay.
Store employees will suffer most, in my opinion. A few years ago, on a family vacation in Colorado, we stopped for lunch at a Kroger King Soopers. The kids squealed when they saw the Murray’s Cheese colors and familiar treats. They pointed to the grainy 1925 sepia photo of the Kaufelt family in front of the old shop in Perth Amboy, New Jersey.
Then the manager, who had been to Red Jacket training in New York, came to me crying. Her hours had been so sharply cut that it was causing her serious financial distress. Could I do anything? Sadly no – I had already sold the business. I left in a funk.
According to a large survey of supermarket workers conducted by the Economic Roundtable, more than 75% of Kroger workers are food-insecure. “They run out of food before the end of the month, skip meals, and are hungry sometimes. Kroger workers’ exceptionally high rate of food insecurity is seven times greater than the U.S. average.”
Lest we forget, this is food. My last 30 years in grocery were spent in the world of farmers and chefs, but I also found plenty of quality foods produced at scale. Industrial food, by contrast, is based on the worst farming practices, the lowest prices to farmers, the thinnest margins for the distributors, and the cheapest ingredients.
According to the National Grocers Association, more than 60% of American grocery sales are concentrated in just five companies: Amazon, Walmart, Kroger, Albertsons, and Ahold Delhaize. If the merger goes through, Kroger and Walmart combined would control nearly half.
That would create what economists call an oligopoly (a few giant sellers) and an oligopsony (a few powerful buyers), which undermines fair prices for both consumers and producers, and drives down wages for workers. In many communities, there may be no competition for the only supermarket in town. Or worse — no store at all.
Disclaimer: The views & opinions expressed in this article are those of the author & do not necessarily reflect the views or positions of Supermarket News
https://www.supermarketnews.com/retail-financial/thoughts-kroger-albertsons-merger-part-1
https://www.supermarketnews.com/retail-financial/thoughts-kroger-albertsons-merger-part-2
https://www.supermarketnews.com/retail-financial/thoughts-kroger-albertsons-merger-part-3