©Reuters. FILE PHOTO: An undated photo shows a Kroger worker delivering groceries in the United States obtained by Reuters on June 15, 2022. Kroger/Handout via REUTERS ATTENTION EDITORS – THIS IMAGE HAS BEEN PROVIDED BY A THIRD PARTY./File Photo
By Siddharth Cavale and Jessica DiNapoli
NEW YORK (Reuters) – The Federal Trade Commission’s bid to block grocer Kroger’s (NYSE:) $25 billion acquisition of Albertsons (NYSE:) could benefit Walmart (NYSE:), a rival whose Close relationships with suppliers already give it a price advantage over other chains, investors, consultants and analysts said.
Overall, Walmart had a 24% share of the U.S. grocery market as of 2022, according to CFRA Research. Walmart plans to focus on keeping grocery prices as low as possible, a move that its executives said in an earnings call helps Walmart continue to attract shoppers to its 4,700 U.S. stores.
One factor in Walmart’s success has been its purchasing power with major food and household staples suppliers, such as Procter & Gamble (NYSE:) and Conagra. Walmart alone already accounts for 15% of P&G’s total annual sales to retailers and 28% of Conagra’s.
The FTC’s challenge to Kroger’s acquisition of Albertsons on antitrust grounds “only makes Walmart stronger,” said Burt Flickinger, managing director of retail consultancy Strategic Resource Group and an adviser to Kroger. If the deal collapses following the FTC challenge, companies that make consumer products such as Tide detergent and Huggies diapers will continue to be “indebted to Walmart,” Flickinger said.
“The government is effectively helping an entrenched competitor” — Walmart — “by not allowing others to get big enough to challenge it,” said Walmart investor David Klink, a senior research analyst at Huntington Private Bank, which also owns shares of Target and Amazon ( NASDAQ:).
Peter Cohan, associate professor of management practice at Babson College, said that “non-union grocery stores like Walmart and Amazon, as well as Aldi, will gain a competitive advantage” if the merger fails. “The FTC has noticed that food prices have increased significantly and wants the winners to be the grocery stores that offer good quality at lower prices,” he said.
According to one report, just 10 chains – Walmart, Kroger, Costco (NASDAQ:), Albertsons, Sam’s Club, Publix, Ahold-Delhaize, Dollar General (NYSE:), Target and Aldi – controlled 60% of the total US grocery market in 2021. Bernstein Research.
The National Grocers Association, a trade group representing thousands of small, independent food retailers and wholesalers, says four large food retailers – Walmart, Kroger, Costco and Albertsons – use market share to “box” suppliers, resulting in deals that move up prices on smaller stores.
The failure of the deal could be good for packaged food makers — if that happens — because they would have a larger pool of buyers, said Robert Klaber, portfolio manager at Parnassus Investments, which holds shares of P&G and Mondelez (NASDAQ: ).
PLAYING CATCH
Store count is another area where Walmart can gain an advantage. Walmart declined to comment. In general, Walmart tends to operate four Walmart Supercenters for every 25,000 to 30,000 people in a residential area. In California, Walmart has only one Supercenter per 100,000 people, indicating room for expansion there and in other states with similar store-to-customer ratios, Flickinger said.
Walmart announced plans to open 150 new stores over the next five years and renovate 650 more in 47 U.S. states and Puerto Rico this year. Walmart has not disclosed all the locations it will open and renovate.
The FTC lawsuit also represents a distraction, especially for Albertsons employees who face an uncertain future following a possible takeover by Kroger. “We’ve seen this a lot. When the acquirer and the target are in limbo, they lose a lot of talent,” DA Davidson analyst Michael Baker said.
Walmart’s price gap versus competitors and curbside pickup and delivery options are also attracting many more high-end customers post-pandemic. Kroger and Albertsons will have to “catch up,” she said.
Prolonged uncertainty surrounding the merger could also hinder Albertsons’ progress on growth initiatives as Walmart continues to demonstrate strong sales, according to Arun Sundaram, an analyst at CFRA Research. In its most recent quarterly performance, Kroger posted a 0.6% decline in U.S. comparable sales, while Albertsons posted a 2.9% increase and Walmart a 4% increase.
Kroger and Albertsons have warned that a blocked merger would give power to Amazon and Walmart.
“This (FTC) decision only strengthens larger, non-union retailers like Walmart, Costco and Amazon, allowing them to further increase their overwhelming and growing dominance in the grocery industry,” Kroger said in a statement Monday.