Pending regulatory approval, the U.S. grocery business is about to get a player able to compete head-to-head with Walmart Inc. – online and offline. Today The Kroger Co. agreed to buy Albertsons Cos. Inc. for $24.6 billion.

Building ecommerce prowess is a crucial motivation for the deal. The proposed merger of The Kroger Co. and Albertsons Cos. Inc. would create a giant to become a “premier omnichannel food retailer,” according to the Kroger statement.

“By bringing together Kroger and Albertsons Cos.’ technology, infrastructure and digital and delivery service providers into a single seamless ecosystem, the combined company will be able to offer customers a more personalized and convenient omnichannel experience including in-store shopping, enhanced pickup capabilities, faster delivery times, and more capabilities to serve the customer anything, anytime, anywhere with zero compromise on quality, selection and affordability,” the Kroger statement said.

Melissa Burdick, co-founder and president of Pacvue, an online marketing consulting firm called the deal “undeniably a flag planted in the ground of the grocery wars.”

“The consolidation of Kroger and Albertsons’ store footprint will give them, not only in-store market coverage, but also one of the largest pickup and delivery networks in the country,” Burdick said. “This will keep them competitive with other big box retailers leaning into curbside pickup and alternative fulfillment.”

Online and overall market shares

Walmart.com had 27.4% of the online grocery market in 2021, followed by Amazon. (No. 1 in the 2021 Digital Commerce 360 Top 1000) with 23.1% market share. Combined, Kroger (No. 8 in the 2021 Digital Commerce 360 Top 1000) and Albertsons (No. 26) online market share was 19.6%, according to our estimates, with Kroger at an 15.9% market share in 2021 and Albertsons at 3.7%. But in the overall grocery market, Kroger and Albertsons had a combined 15.5% share. Walmart, the leader had a 19.7% share while Amazon’s share was just 2.5%.

Kroger’s online operation

Kroger, which offers online ordering for pickup and home delivery, has been building a series of automated warehouses using technology from United Kingdom-based Ocado Group. The goal is to make online ordering and fulfillment more efficient – and enable Kroger to move into new markets more easily.

As an example of what the automation can do, Kroger entered the Florida market for the first time in May 2021. But it didn’t open stores there and has no plans to. Instead, Kroger launched in the state as an online, delivery-only retailer under its Kroger Delivery banner. Kroger Delivery operates from a 375,000-square-foot automated customer fulfillment center (CFC) “hub” in Groveland, Florida. There are also smaller “spoke” locations in Tampa Bay and Jacksonville. A Miami-area site opened in June.

Kroger opened its first Ocado-powered CFC in Monroe, Ohio, in April 2021, followed by the Groveland, Florida, center and another in Forest Park, Georgia.

As of May 2022, Kroger anticipated opening 17 new robotic facilities in the U.S., including hubs and spokes, within 24 months. In April 2022, Kroger announced plans to hire 200 workers to bring web-only Kroger Delivery service to South Florida over the summer of 2022.

At Kroger’s hub sites, more than 1,000 robots move across a giant, three-dimensional grid, controlled by a technology that Kroger compares to air-traffic control systems. The grid, which Kroger calls The Hive, contains totes with products the bots fill with customer orders packed for delivery. The spoke sites, which measure from 50,000 to 70,000 square feet, extend the range of Kroger’s same-day and next-day grocery delivery operations.

Digital Commerce 360 estimates Kroger’s online grocery sales decreased 3.2% in 2021 but grew 109% since 2019.

Albertsons’ online operation

In June 2022, grocery chain operator Albertsons Cos., which also offers online ordering for pickup and home delivery, added ratings and reviews to its websites. The new capability allows the retailer’s online customers to weigh in on products like breakfast cereal, bread and cheese.

At the time, Jill Pavlovich, senior vice president of digital customer experience at Albertsons, said adding product reviews will help customers. They’ll be able to make better buying decisions, and it will encourage them to try unfamiliar products. It also will provide the retailer with valuable consumer data.

“Industry research tells us shoppers are more likely to purchase a new grocery item online if it has been reviewed by other customers,” Pavlovich said.

She adds that the online feedback helps Albertsons understand better “what delights our customers and where we can improve.” Pavlovich said. Customer feedback helps inform decisions, including which kinds of private-label products to offer customers.

Digital Commerce 360 estimates Albertsons’ online grocery sales grew 5% in 2021 and 276% since 2019.

Geographic reach

Walmart (No. 2) is currently the only U.S. grocery retailer operating in 50 states. Kroger currently operates stores in 35 states, while Albertsons has stores in 34 states and the District of Columbia. Combined, the merged company would operate in 48 states and the District of Columbia.

Kroger operates grocery stores under banner names including Kroger, Ralphs, Dillons, Smith’s, King Soopers, Fry’s, QFC, City Market, Owen’s, Jay C, Pay Less, Baker’s, Gerbes, Harris Teeter, Pick ‘n Save, Metro Market and Mariano’s. Albertsons operates grocery stores under banner names including Albertsons, Safeway, Vons, Jewel-Osco, Shaw’s, Acme, Tom Thumb, Randalls, United Supermarkets, Pavilions, Star Market, Haggen, Carrs, Kings Food Markets and Balducci’s Food Lovers Market.

That increased geographic reach of the merged companies would make Kroger a more potent competitor with Walmart, said Ken Fenyo, president of research and advisory at Coresight Research, which specializes in retail and technology.

“This deal can make a lot of sense for Kroger. It creates a national footprint and scale — they currently haven’t got locations in Northern California, the Northeast and several other markets. Merging with Albertsons will better position Kroger to compete with Walmart and even [Amazon.com Inc.] on a national scale,” Fenyo said.

A merger could also generate cost savings, Fenyo said. He said the merger would eliminate overlaps in stores, tech investments, marketing spending and more.

“Perhaps the most important benefit would be the data. Kroger’s has a huge data set of national consumer behavior data, to which they apply analytics, personalization, and expertise to drive retail media, personalized marketing, and better internal decision-making. Data is the real gold in the deal,” Fenyo said.

From March 2006 to July 2008, Fenyo was corporate vice president of loyalty and digital at Kroger.

Deal details

This acquisition would create a U.S. grocery giant with almost 5,000 stores and annual revenue of about $200 billion.

The combination ranks among the retail industry’s biggest transactions in years. It evokes such deals as Amazon’s purchase of Whole Foods Market in 2017 for $13.7 billion and the $9.8 billion acquisition of Albertsons itself in 2006 by CVS Health Corp., Supervalu and an investment group led by Cerberus Capital Management. The New York-based private equity firm still owns almost 30% of Albertsons, according to data compiled by Bloomberg News.

Investors would receive $34.10 for each share in Albertsons, which includes a special dividend. That reflects a premium of about 33% to the closing price on Oct. 12, the day before Bloomberg first reported on the deal talks. The companies plan to sell as many as 375 stores through a spinoff.

The combined company would face a competitor of comparable size in terms of grocery sales: Walmart. During their most recent fiscal years, Kroger and Albertsons brought in a combined $209.8 billion in sales. Walmart’s U.S. stores generated $218.9 billion in groceries. That excludes sales at Sam’s Club, Walmart’s chain of warehouse stores.

“Kroger and Albertsons may be banking that this fact allows the proposed merger to proceed more smoothly than it otherwise would,” Bob Hoyler, senior consultant at Euromonitor International, said in an email to Bloomberg.

Cost savings

The companies said they would squeeze about $1 billion in “annual run-rate” cost savings within the first four years after the deal closes, net of divestitures. That would be thanks to improved purchasing, technology investment and optimized manufacturing and distribution networks. They will use $500 million of the savings to cut prices.

Excluding one-time costs, Kroger said the combination would boost earnings in the first year after closing and be “double-digit accretive to earnings by year four.” The transaction will generate total shareholder returns “well above” Kroger’s standalone model of 8% to 11%, according to the statement.

The retailer said it would plow $1.3 billion into improving Albertsons stores and invest $1 billion to continue raising employee wages and benefits. On a combined basis, the two companies currently have about 710,000 employees.

Kroger said it has $17.4 billion in fully committed bridge financing from Citigroup Inc. and Wells Fargo & Co. The companies said the deal includes the assumption of $4.7 billion in net debt. They expect the deal to close in early 2024. Kroger CEO Rodney McMullen would lead the combined company.

Bloomberg News contributed to this report.