The first serious consolidation in years is underway in US retail, with two giant supermarket chains Kroger and Albertsons set to merge in a $24.6 billion deal including debt – a deal that will have many hurdles to cross before becoming reality.
Antitrust, fair trade and investment approvals will be needed at the federal level and in some key U.S. states, according to investment analysts who generally liked the idea of the merger.
Kroger will pay US$34.10 for each Albertsons share, a premium of about 33% over Wednesday’s closing price.
The deal includes $4.7 billion in debt. Albertsons will pay its shareholders a special cash dividend of approximately $6.85 per share worth approximately $4 billion, which will be deducted from the offer price.
The cash offer will also be reduced by shares Albertsons shareholders will receive in a spin-off company that will hold between 100 and 375 shares that the two companies believe they will need to dispose of to gain regulatory approval.
If approved, the combined company would become a formidable second in terms of market share behind Walmart, which has 20.9% of the U.S. grocery market. But Sam’s Club, a Costco rival, owns 4.7%, meaning the Walmart group owns nearly 26% of the US supermarket sector.
The combined company would have about 16.6% – Kroger is currently second with 9.9% then Costco in third with 7% and Albertsons in 4th with 5.7%.
Amazon is estimated to have a 1.6% share – that is, for its Whole Foods chain. There is no figure for grocery items sold through Amazon by third-party groups and itself.
The companies employ a total of 710,000 people in around 5,000 stores, so potential job losses in 2023 will be a growing concern and a potential public relations disaster.
Of course, the companies claimed high morals by claiming that the merger would create a bigger, more competitive company which would in turn help put downward pressure on prices and inflation.
Albertsons went up for sale in February and it appears Kroger was the only group really interested apart from the usual private equity and investment groups looking for a quick turnaround.
They didn’t want Albertsons because the seller was his private equity shareholder in Cerberus and real estate investors – private equity are very wary when one of their own has a major asset like Albertsons for sale.
To achieve efficiencies from the merger and secure regulatory approvals, there will need to be quite a few store closures to eliminate costly overlaps, while distribution centers and other logistics operations will also need to be scaled back. in the United States – which will raise concerns about jobs and number of stores, especially in low socio-economic areas.
Wells Fargo analysts said the Albertsons are expected to sell up to a quarter of their stores, and many of them will be on the US West Coast in California, Washington and Orgeon. Logistics facilities will also have to be reorganized on the west coast – all of which means considerable headaches for both chains, management and advisers.
Finding buyers for stores for sale will be especially difficult in a weak economy and high interest rate environment.
Some analysts question whether the merged companies can boost profits as the grocery industry, already known for low margins, faces higher costs and cost-conscious shoppers — and Walmart is a powerful and dominant competitor. and the merged chains would not be fully competitive for at least two years while they cut and rebuild the new company.
Kroger and Albertsons do, however, have a plan to try to counter the competition concerns. Albertsons will turn the unwanted stores into a stand-alone business for its investors before the offering closes, expected in early 2024. This brand new public company could have 375 stores. But it won’t have scale and investors won’t want to invest in it.
Shares of Albertsons rose 17.2% and Kroger 8.3% for the week. Win/win so far.
…………
While US retail sales were flat in September, the data clearly shows that consumer demand is stronger than the raw numbers suggest.
Families have cut back on purchases of automobiles and other big-ticket items like home electronics and personal devices in the face of stubbornly high inflation and rising interest rates – generally negative for consumer demand
But the US Commerce Department’s retail sales report showed stronger core retail sales last month with a 0.4% rise. Core retail sales which exclude automobiles, gasoline, building materials and food services which most closely match the consumer expenditure component of GDP
These so-called core retail sales were also stronger than those first reported in August, when they rose 0.3%.
Total retail sales in September were unchanged from August, when they rose 0.4%, revised upwards, from the 0.3% rise originally reported. That was weaker than expected for a 0.2% rise m/m.
Retail sales rose 8.2% year on year in September, the slowest annual growth rate in five months.
Retail sales are also slowing as spending shifts from goods to services. Sales at car dealerships fell 0.4% last month, while gas bills fell 1.4%.
Sales at furniture stores fell 0.7%, while sales at structural products and garden appliances sales fell 0.4%.
Sales at electronics and appliance stores fell 0.8%. There were also declines in sales at hobby, musical instrument and book stores, indicating that customers were falling back on discretionary costs.
However, sales from clothing and basic goods stores increased, as did those from online and mail-order sellers. Sales at bars and food establishments, the only service classification in the retail sales report, rose 0.5%.
Economists say September’s rise in core sales and August’s upward revision to core data suggest a 1% rise in the third quarter, down from the 2% growth seen in the June quarter. .
GDP should have actually rebounded in the last quarter after two quarters of contraction, as slowing domestic needs dampen imports and leave a stockpile of unsold goods in storage facilities.
A report from the US Department of Labor on Friday revealed the favorable impact of the soaring value of the dollar as import costs fell for a third consecutive month in September.
This eases the pressure on domestic inflation in the United States.
