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Kroger Says It's Working With Regulators on Integration Plans for Merger With Albertsons

Grocery Giant Says It’s Making Headway on the Pending Tie-Up Amid Questions From US Senators

Photo Courtesy of Dallas Morning News.

Kroger, the nation's largest grocery chain, said it's forging ahead with "integration planning" and working with regulators on its proposed $24.6 billion acquisition of rival Albertsons Cos.

Rodney McMullen, chairman and CEO of Cincinnati-based Kroger, offered a brief update on his company's pending merger with Albertsons, which is headquartered in Boise, Idaho, during a third-quarter earnings call on Thursday. The deal, announced in October, is being reviewed by the Federal Trade Commission. The tie-up would require FTC approval to move forward.

“We are making early progress on our integration planning as expected, and we continue to engage with all of our stakeholders and regulators," McMullen told Wall Street analysts. "We are advancing our road map to close the transaction in early 2024. We look forward to working with the regulators as they review the transaction and do not have a substantial update at this time.”

As it stands, the two grocers' combined real estate portfolio would includes 4,996 stores, 3,972 pharmacies, 2,015 fuel centers, 66 distribution centers and 52 manufacturing plants.

Earlier this week, McMullen and his counterpart at Albertsons, Vivek Sankaran, faced tough questioning when they testified about their plans before the Senate Subcommittee on Competition Policy, Antitrust and Consumer Rights in Washington. The hearing came in the wake of opposition from some elected officials, consumer and other advocacy groups, unions and independent grocers to the proposed deal. At least one retail analyst on Thursday said there is a risk in undertaking a complex merger of two large companies, despite the benefits it might ultimately provide.

At the Capitol, both McMullen and Sankaran defended the merger, saying it's necessary for them to compete against giants such as Walmart, Amazon and Costco and numerous new players. They also testified that they didn't plan to close any stores, and though they would divest some there would not be layoffs. Several lawmakers, including Sen. Amy Klobuchar, D-Minnesota, chairwoman of the subcommittee, and Sen. Mike Lee, R-Utah, expressed skepticism about those pledges.

'Lower Prices'

McMullen referenced his appearance at the congressional hearing on the earnings call.

“I shared with the senators that our merger will lower prices for customers starting Day One, continue investments in our associates and stores and customer experience, and do even more in our communities than either company can do alone," McMullen said. "We believe this merger will allow us to fulfill these commitments to our customers, our associates and our communities well into the future."

During the question-and-answer session on the conference call, JPMorgan analyst Ken Goldman asked about getting status reports on the proposed merger.

“Is there a plan ahead to sort of give updates to investors on a separate kind of forum, just because it’s obviously such a big part of this story from here?" he asked. "I think people don’t want a black hole or a vacuum of news.”

In response, McMullen said, "If there was something material we would share it between quarters. But in all likelihood in the foreseeable future the updates would be on a quarterly basis.”

Kroger raised its full-year 2022 guidance after posting results for the quarter that ended Nov. 5 exceeding estimates. Total sales were $34.2 billion, up from $31.9 billion in the same period last year. Excluding fuel, same-store sales increased roughly 7% compared with a year ago.

The company also said it had paused its share-repurchase program "to prioritize de-leveraging following the proposed merger with Albertsons."

Holding Onto Customers

Neil Saunders, managing director of GlobalData, in a note on Thursday was upbeat about Kroger's third-quarter results.

"Kroger continues to deliver strong top-line numbers with overall sales growth of 7.3%, and growth of 6.4% when fuel sales are excluded," Saunders said. "Pleasingly, there has been a progressive strengthening of the numbers as this fiscal year has progressed and while some of this is down to inflation and higher prices, it also underlines that Kroger is largely holding onto market and customer share in a much tougher market where consumers are shopping around more to save money."

He did voice reservations and concerns over the pending merger with Albertsons.

"As much as Kroger is working well as a standalone business, its desire to push ahead with the Albertsons' merger reflects a desire for increased scale in a market that remains very competitive," Saunders said. "The deal looks solid on paper, although there are many downside problems not least from political and regulatory concerns. We see logic in a larger, combined entity, especially from a cost and economies of scale point of view. However, there is a big risk in the distractions and complexities of merging two giant corporations."

Kroger reported its digital sales rose 10% in the third quarter. The grocer has been expanding its footprint, even into areas where it doesn't have actual stores, by creating a network of fulfillment centers that incorporates advanced robotics and automation to deliver food and household goods to customers. Kroger's partner in those facilities is Ocado Group, a technology company based in the United Kingdom.

"As much as Kroger is strong on the food it offers, it also has growing strength in how it sells those products thanks to its ongoing investments in digital," Saunders said. "This quarter, online sales grew by a solid 10% — the second period when growth has been positive after a hiatus when Kroger was lapping very elevated sales from the prior year that were driven by pandemic trends."

He added that "a lot of this [comes] down to Kroger’s proactivity in the digital space including its relatively new Boost fee-based membership program, which offers benefits such as free delivery. Sign-ups to the new scheme have been solid and there is a very good uplift in orders and spending from households who have joined. Availability of online services has also improved as the delivery network is expanded and more Ocado warehouses come on stream."

Source: 2022 CoStar News.

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