The impact of the deal is expected to resonate beyond retailers and manufacturers, with questions ranging from: why did the Kroger-Albertsons merger happen? Where will Kroger market share grow the most when adding Albertsons? Which shoppers will Kroger capture? What private label incrementality will the acquisition generate? How could eCommerce performance shift for the two retailers?
What will the merger do for Kroger & Albertsons market share?
Both Kroger and Albertsons’ retail performance has been mixed for the past three years. At the end of 2019, the two retailers maintained a CPG market share of 7.6% and 3.9% respectively. Market share reached highs of 7.8% for Kroger and 4.0% for Albertsons during the onset of COVID-19. However, the share gains between the two retailers diverged. Kroger market share has dropped to a three-year low of 6.7% at the end of September 2022, while Albertsons market share is at a three-year high of 4.1%.
Should the two retailers combine, market share will continue on the same path as Kroger’s overall share performance, but share loss will be reduced from 90bps to only 60bps (pre-divestiture). A second outcome of the merger is that Kroger’s current store footprint has predominantly stayed within the central and southeast part of the US. By acquiring Albertsons, which operates heavily in the west and New England region, Kroger will expand its store footprint beyond the central US. Kroger can expect upwards of 10 points of CPG market share gains within the West and Mountain regions through Albertsons from consumers who live in the region.
Overall, having ownership of Albertsons will help Kroger maintain market share competitiveness and gain a larger foothold across the US CPG marketplace.
Which shoppers will Kroger capture?
Should the deal successfully go through, Kroger will reach 2 in 3 shoppers in the US. Pre-acquisition, Kroger engages nearly 65 million shoppers, a number that will grow by over 21 million households post-acquisition.
The combined shopper base will impact the strategies of brands and competitive retailers. Three main themes help to define the new shoppers that Kroger has gained: ethnicity, urbanicity, sustainability.
The new consumers Kroger could gain include 14% Hispanic consumers and 13% Asian consumers– representing 3 million and 2.6 million new shoppers, respectively. Kroger will gain a more multicultural shopper base, given that Kroger’s shopper base currently breaks down as 12% Hispanic and 7% Asian. Brands and competitive retailers will need to consider how to offer these consumers assortments geared toward their ethnic heritage. In our recent consumer study, we found that 58% of Hispanic and 47% of Asian shoppers consider heritage important in deciding what to purchase.
The new shopper in Kroger’s portfolio is 25% more likely to live in an urban location. Urban households tend to make smaller baskets per visit, due in part to the fact they are more likely to be reliant on public transportation. For example, Kroger’s new shopper is 55% more likely to rely on trains or subways to commute to and from home than the average shopper. Brands will need to offer a more diverse range of product sizes to better suit Kroger’s diversified shopper base.
Finally, new Kroger shoppers value sustainability, with over 1 in 4 willing to pay a premium for a more sustainable product— nearly 20% more than the current Kroger shopper— driven by West Coast Albertsons shoppers. We could expect Kroger, as a whole, to focus more CSR initiatives and product offerings around sustainability to continue maintaining equity with this shopper.
How does private label interact with the two retailers?
Kroger’s private brands have seen consistent share losses within total CPG private label, while Albertsons’ brands have grown share over the past three months. Kroger private label brands are still growing sales year over year, driven by increased consumption, but Kroger’s growth has been stunted by consumers switching to other private brands. Albertsons’ private label is one of the top three private label brands Kroger shoppers are switching to, along with Walmart and Sam’s Club.
Albertsons’ private brand offerings have outperformed in the latest year, with sales growth seven times greater than Kroger. Majority of Albertsons’ brand growth is due to increased spending on the brand, driven both by increased trips and consumers spending more per unit. In the latest year ending 9/30/2022, consumers have spent 11.9% more per unit on Albertsons private label. Increased Albertsons private label unit spend has been driven most by their Signature, Open Nature, and Value Corner lines.
With Kroger acquiring Albertsons, Kroger may choose to rebrand either private label offering to further reduce interactivity and leverage Albertson’s successful pricing strategy to grow sales.
How could eCommerce change for Albertsons and Kroger?
Albertsons’ eCommerce strategy has seen successful growth in share– nearly tripling year over year for the latest 12 months ending 9/30/2022. Kroger’s eCommerce development has stayed flat, with negligible share changes year over year.
Albertsons’ eCommerce business growth has been driven by three trends: more net new households shopping online, existing customers converting to shop online more frequently, and a successful click & collect strategy. From a shopper standpoint, Albertsons’ eCommerce business saw development in both projected households and purchase frequency, which have nearly doubled– up +92% and +84%, respectively– compared to last year. These gains in households and trips showcases Albertsons’ ability to not only attract new customers to their digital platform but manage to retain and develop habitual shopping. The majority of the growth has been driven by shoppers buying online and picking-up in-store (BOPIS) through the DriveUp & Go offering.
DriveUp & Go has been a major investment thesis for Albertsons. Vivek Sankaran, CEO, stated in the Q4 2021 earnings call that Albertsons’ digital investments included, “the expansion of Drive Up & Go and additional micro-fulfillment centers.” Albertsons digital sales grew by 36% in the second quarter of fiscal 2022, proving those investments have been successful.
Kroger could leverage Albertsons’ successful digital strategy investments to help implement similar initiatives for their own online services.
How should brands and retailers think about the merger?
The deal is currently undergoing review by the FTC to determine whether the merger will ultimately benefit consumers, lessening the need to act on the news for most brands and competitive retailers. The two retailers will operate separately until the review is completed and the merger is approved. If the merger gets passed by the FTC, consolidation and change management would likely not be expected until 2024. However, there are a few considerations that brands and retailers can consider mapping out in the next year to prepare their teams should the merger be approved:
- Consider brand interactivity between the two retailers to determine total category growth for the combined retailer.
- Consolidate a total omnichannel view of market share for the merger given the importance and difference of eCommerce sales between the two retailers.
- Determine store performance between the two retailers within highly overlapped regions to identify potential store divestitures.
- Implement an audit of the total combined retail shopper for their brands and categories to understand whitespace and audience targeting opportunities during top-to-tops.