Kroger and Albertsons say Merger will Save Customers Money. How Much?

Article originally posted on AZ Central on May 23, 2023

How much money will shoppers save at the cash register if Kroger and Albertsons win regulatory approval to merge?

Likely knowing how controversial their proposed mega-deal might be, Kroger executives from the start stressed the takeover will save consumers money. They’ve given a big number to back it up: $500 million.

That outsize figure may prove persuasive as U.S. consumers struggle to adapt following nearly two years of the worst inflation the country has seen since the early 1980s. Also, the potential savings to consumers has also been one of the primary considerations of U.S. regulators at the Federal Trade Commission in evaluating large mergers for decades.

Announced last fall, the $25 billion proposal would be one of the largest retail mergers in history. The deal would give Kroger nearly 5,000 stores and 700,000 workers before an undetermined number of divestitures.

Consumer and union groups have opposed the deal, claiming it will hurt competition and ultimately raise prices and harm workers. Regulators have declined to comment as they decide whether to block it. Kroger executives have vowed to fight for the deal in court.

Meanwhile, the pain of higher grocery prices has been real at the supermarket: The overall cost of food bought in stores for eating at home has risen 23% since March 2020 when the COVID-19 pandemic hit America, according to the Bureau of Labor Statistics.

Any price relief would be welcome to shoppers, many of whom have been forced to cut back and change other habits.

A. William Aamon-Adebayo, a 55-year-old single father of two, said the soaring cost of groceries has forced his family to make changes.

“We’ve cut back on meat, gave up soda and sweets – except for grandma’s cake,” he said outside Kroger’s downtown supermarket in Cincinnati.

Still analysts and industry watchers caution that money won’t reset grocery prices to levels before the COVID-19 pandemic. Kroger’s big savings talk, like several other considerations in the deal, is more complicated than it seems.

Let’s break it down here:

Will Kroger shoppers save money – and how much?

Overall, yes. Kroger has promised to “invest” in savings – or charging less on groceries, which will be paid for by “synergies” the grocer will reap by merging with rival Albertsons.

It’s actually part of how Kroger competes. Like rival discounter Walmart, Kroger lowers prices to attract more customers, which allows them to make up sales on volume.

But how much will it impact the average shopper?

Half a billion dollars is a big number – it’s an eighth of the combined companies’ annual $3.7 billion in annual profits. It’s a real investment by executives back into operations to grow sales and the overall operations.

But relative to Kroger’s and Albertsons’ combined $226 billion in annual sales, it’s incremental: less than 0.25%.

Those proposed savings average to about 22 cents for every $100 shoppers spent last year.

Will all Kroger shoppers save something?

Kroger did not respond to questions about how it would implement the proposed lower prices. In a statement the company said past mergers with Harris Teeter and Roundy’s allowed it to cut prices by $130 million and $100 million, respectively.

“Since 2003, Kroger has made strategic investments to bring down prices for our customers. Our business model is built on providing more value to attract more customers,” the company said.

But analysts said the the results may vary.

Kroger is a high-low grocery store: Its business model is to always have several sales going on, which generates customer traffic and more shopping. So the retailer will always have sales and discounts in every store across its operations.

Analysts and marketing pros say Kroger will likely “invest” the $500 million in lower prices in selected markets – namely, more competitive regions where the grocer wants to grow or shore up market share.

“Some markets need more attention than others. Kroger does different things in different markets – it’s never ending,” Northcoast Research analyst Chuck Cerankosky told The Enquirer.

To grab the attention of the customers they want, Kroger will also likely cut prices on selected items rather than across the board. For example, lower prices on Tide detergent or Coca-Cola might lure more shoppers that end up buying the rest of their groceries at Kroger.

The strategy is discounted items will draw customers who do other shopping where the store makes up the difference, said Mark Bergen, the chair of marketing at the University of Minnesota’s Carlson School of Management.

“I may not make money on that (sale) item, but now you’re in my store buying my other items,” he said.

Will Kroger shoppers in Cincinnati save money? Where will Kroger offer the best deals?

Hard to say.

Kroger is not saying where it will lower prices, but analysts say the company will likely concentrate the savings where it wants to win more market share.

Kroger dominates the Greater Cincinnati and Northern Kentucky region, selling nearly half the groceries in the metro area, according to Tampa-based tracker Chain Store Guide. It sells more than twice the groceries of the region’s No. 2 grocer, Walmart. That would suggest Kroger might not have to try as hard to keep customers here.

And yet, Florida-based rival Publix Super Markets is said to be eyeing the region, which might force Kroger to guard its home turf with more competitive prices.

Patricia Parsley, 53, said she’d welcome any relief on her grocery bill even though her kids are grown and out of the house. She too has cut back.

“I gave up organic milk, soda and I’m not buying name brands,” she said, adding she reins in spending by shopping with a list.

What’s behind Kroger’s discount strategy?

Twenty years ago, Walmart won a price war with rival discounter Kmart, which filed bankruptcy and began a steep decline. Several supermarket chains also attempted to compete against Walmart on price and sputtered.

But Kroger chose a different strategy: It cut its prices enough to neutralize cost as the only factor for shoppers. Like Target in the discount sector, Kroger made itself thrifty enough while offering other advantages: more varieties of food and closer and better-staffed stores.

The strategy has worked. Kroger’s sales have nearly tripled from $52 billion in 2002 to $148 billion in 2022. Meanwhile, its gross margin shows its collecting less overall money for each dollar of groceries sold. The company’s gross margin was 27% of sales 20 years ago; last year it was 21.4%.

“Customers look to us to provide high-quality, affordable groceries − particularly today,” Kroger and Albertsons CEOs Rodney McMullen and Vivek Sankaran wrote in a recent letter defending their proposal. “At Kroger, our business strategy is to lower prices year over year.”

Where is Kroger getting the money for these promised discounts?

Kroger expects it can generate an additional $1 billion in lower costs and improved effiency each year after it closes the deal and operations are integrated.

“The companies expect to achieve synergies largely through improved sourcing, optimization of manufacturing and distribution networks, and technology investment,” Kroger and Albertsons said in the merger announcement.

Kroger’s plans for “improved sourcing” have drawn a lot of concern from smaller competitors. The National Grocers Association, a Washington, D.C.-based trade association representing 1,500 smaller independent grocer retailers and wholesalers, fears the Kroger deal could swamp small grocers’ communities with more stores offering cheaper goods, while their supply costs go up.

Michael Needler Jr., the CEO of Findlay-based Fresh Encounter Inc., which bought Northern Kentucky’s Remke Markets in 2017, testified about small grocer’s concerns about the proposal before a Senate committee last year. He said big grocers not only have more stores but use their size to demand low prices from suppliers that smaller operators can’t ever obtain even if they partner with other small grocers.

“The grocery sector is suffering from increasing concentration and unchecked buyer power by dominant retail chains who force suppliers to discriminate against independent grocers,” he said.

Needler warned whatever discounts shoppers enjoy could be short lived if Kroger-Albertsons merger proves anti-competitive, adding “When their independent competitors get driven out of business … They just increase their margins and charge higher prices.”

When will food prices return to pre-pandemic ‘normal?’

Likely never.

Grocers will continue to have sales and discounts but the overall price of food at supermarkets have risen and isn’t likely to retreat significantly. While inflation does flatten out and even go negative for periods, it generally goes up.