The first serious consolidation for years is underway in American retailing, with two giant supermarket chains Kroger and Albertsons to merge in a $US24.6 billion deal, including debt – a deal that will have plenty of hurdles to jump before becoming fact.
Anti-trust, fair trade and investment approvals will be needed federally and in some key US states, according to investment analysts who generally liked the idea of the merger.
Kroger will pay $US34.10 for each Albertsons share, a premium of about 33% to the stock’s closing price on Wednesday.
The deal includes $US4.7 billion in debt. Albertsons will pay a special cash dividend of about $US6.85 a share worth around 4US4 billion to its shareholders that will be subtracted from the offer prices.
The cash offer will also be reduced by the shares Albertsons shareholders will receive in a spin off company that will hold between 100 and 375 shares the two companies think they will have to get rid off to get regulatory approval.
If approved, the merged company would become a more formidable second in market share behind Walmart which has 20.9% of the US grocery market. But Sam’s Club, a rival to Costco, has 4.7%, meaning the Walmart group has nearly 26% of the US supermarket sector.
The merged company would have around 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’s no figure for grocery items sold through Amazon by third party groups and itself.
The companies employ a combined 710,000 people across about 5,000 stores, so potential job losses in 2023 will be a growing concern and a potential PR disaster.
Of course, the companies claimed the high moral ground in arguing the merger would create a bigger, more competitive company that would in turn help put downward pressure on prices and inflation.
Albertsons put itself up for sale in February and it seems Kroger was the only group really interested apart from the usual tyre kicking private equity and investment groups that were looking for a quick turn.
They didn’t want Albertsons because the seller was its private equity shareholder in Cerberus and property investors – private equity are very wary when one of their kind has a major asset like Albertsons up for sale.
To get efficiencies from the merger and get regulatory approvals, there will have to be quite a few store closures to eliminate costly overlap while distribution centres and other logistics operations would also have to be slimmed down across the US – that will generate concern about jobs and store numbers, especially in lower socioeconomic areas.
Analysts at Wells Fargo said the Albertsons would have to sell up to a quarter of its stores, and that many of these would be on the US west coast in California, Washington and Orgeon. Logistics facilities will also have to be revamped as well on the West Coast – all this means considerable headaches for the two chains, managements and advisers.
Finding buyers for the stores to be sold will be especially hard in a weak economy and high interest rate environment.
Some analysts question whether the merged companies can increase profits since the grocery business, already known for thin margins, is facing higher costs and cost-conscious shoppers – and Walmart is a powerful, 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 though have a plan to try and counter competition concerns. Albertsons will spin off unwanted shops into a standalone company to its investors prior to the offer’s close, anticipated in early 2024. This brand-new public business could have up 375 shops. But it won’t have scale and that will see investors unwilling to invest in it.
Albertsons shares were up 17.2% and Kroger 8.3% for the week. A win/win for the moment.
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While US retail sales were flat in September there were clear signs from the data that consumer demand is more solid than the bare numbers suggest.
Families cut purchases of automobile and other big-ticket products like home electronics and personal devices in the face of stubbornly high inflation and rising interest rates – usually a negative for consumer demand
But the retail sales report from the US Commerce Department revealed stronger core retail sales last month with a rise of 0.4%. Core retail sales which exclude automobiles, gasoline, building materials and food services which correspond most closely with the consumer spending component of GDP
These so-called core retail sales were also stronger than first reported for August when they were reported as rising 0.3%.
Total retail sales in September were unchanged from August when they rose an upwardly revised 0.4% from the originally reported rise of 0.3%. That was weaker than forecasts for a rise of 0.2% month on month.
Retail sales increased 8.2% on a year-on-year basis in September, the slowest annual growth rate in five months.
Retail sales likewise are slowing as spending shifts back to services from goods. Sales at automobile car dealerships slipped 0.4% last month, while petrol bills dropped 1.4%.
Furnishings shop sales fell 0.7%, while those at structure product and garden devices sellers reduced 0.4%.
Sales through electronic devices and home appliance shops fell 0.8%. There were likewise reduces in sales at pastime, musical instrument and book shops, an indication that customers were drawing back on discretionary costs.
However, sales at clothes and basic product shops increased as did those of online and mail-order sellers. Sales at bars and dining establishments, the only services classification in the retail sales report, increased 0.5%.
Economists say that the rise core sales in September and the upward revision to August’s core data suggests a 1% rise in third quarter, down from the 2% growth seen in the June quarter.
GDP is anticipated to have actually rebounded last quarter after two quarters of contraction, as slowing domestic need curbs imports and leaves a stockpile of unsold product in storage facilities.
A US Labor Department report on Friday revealed the favourable impact from the soaring value of the dollar as import costs dropped for a 3rd straight month in September.
That’s taking some pressure off domestic inflation in the US.
