America’s two largest supermarket operators, Kroger (KR) and Albertsons (ACI) want to merge to create a grocery Goliath. To explain, Kroger plans to buy the Albertsons Companies Inc. (NYSE: ACI) for $24.6 billion.
Incredibly, a Kroger-Albertsons combination could operate 5,002 supermarkets. Additionally, the acquisition could give Kroger (NYSE: KR) control of 11.4% of the US grocery market, The Washington Post speculates.
Moreover, Kroger could operate in 48 states and the District of Columbia after the deal. Currently, Kroger operates in 35 US states.
However, Walmart Stores Inc. (NYSE: WMT) will still be America’s largest grocer with 17% of the US grocery market, The Washington Post estimates. Walmart operated 4,742 US stores on 31 January 2022, Statista estimates. Conversely, Albertsons-Kroger could operate more stores than Walmart (WMT).
Kroger vs. Albertsons
Statista estimates Kroger (KR) operated 2,726 US stores in January 2022. Kroger’s footprint includes 2,252 stores with pharmacies, 1,613 stores with fuel centers, and 2,257 locations with in-store pickup service.
Additionally, Kroger operates 35 food processing and manufacturing facilities and 170 fine jewelry stores under the names Fred Meyer and Littman Jewelers. In addition, Kroger operates 21 supermarket brands including King Soopers, Kroger, City Market, Ralph’s Fry’s, Fred Meyer, JayC Food Stores, Roundy’s, QFC, Pick ‘n Save, Ruler Foods, Smith’s, Mariano’s, Baker’s, Dillon’s, Food4Less, 451, Gerbes, PayLess, and Harris Teeter.
Beyond supermarkets, Kroger owns the vitamin retailer Vitacost, Kroger Finance, and The Little Clinic. Plus, Kroger and the Ocado Group PLC want to build 20 customer fulfillment centers (CFCs) in 11 states. In the CFCs, robots will pick and pull online grocery orders for delivery by Kroger or services such as Instacart.
The first CFC in Monroe Ohio, uses over 1,000 robots to pick and pull grocery orders, Singularity Hub reports. Ocado’s robots can pick a 50-item grocery order in under five minutes with 99% accuracy, Kroger claims. The CFC uses 400 temperature controlled vans to deliver orders.
A second CFC operates in Groveland, Florida, near Orlando, and a third in Atlanta. Kroger plans to open CFCs in Pleasant Prairie, Wisconsin, Romulus, Michigan, and Dallas, Texas, in 2022. A Kroger CFC is under construction in Lockbourne, Ohio, to serve Columbus, Supermarket News reports. Planned CFCs include Jacksonville, Tampa, Indianapolis, Louisville, Kentucky, Oklahoma City, Cleveland, and Birmingham, Alabama.
One goal of the CFCs is to penetrate areas of the countries where Kroger does not operate supermarkets. For example, the Northeast and Florida. Data shows the CFCs could be a smart investment for Kroger.
The Online grocery market was worth $7.8 billion in September 2022 down from $8 billion in September 2021, the Brick Meets Click/Mercatus Grocery Shopping Survey estimates. Click and collect (online orders of groceries customers pick up at stores) grew by 5.7% between August and September 2022.
Albertsons vs. Kroger
Albertsons (ACI) operated 2,276 US stores on 26 February 2022, Statista estimates. Supermarket News named Albertson’s as the second largest standalone grocer in the US in 2020.
Alberstons claimed to operate 2,273 stores, 22 distribution centers, and 19 food and beverage plants on 16 October 2022. Additionally, Albertsons operations include 402 fuel stations, and 1,720 in-store pharmacies in the first quarter of 2021.
Albertsons claimed to have serve over 34 million customers in 34 US states and the District of Columbia in the first quarter of 2022. Impressively, Albertsons claims to offer home delivery in 12 of the top 15 US grocery markets.
Plus, Albertsons claims its loyalty card programs had 31 million members at the end of the first quarter of 2022. Finally, Albertsons claims to own four billion dollar grocery brands; O Organics, Signature, Signature Cafe, and the Lucerne dairy products.
The Albertsons supermarket banners include Safeway, Albertsons, Vons, Pavilions, Jewel Osco, Balducci’s, Tom Thumb, Acme, Shaw’s, United Supermarkets, United Express, Randalls, Star, Kings, Market Street, Hagger Northwest Fresh, Carrs, Andronico’s Community Markets, Amigos, and Lucky.
Buying Albertson’s expands Kroger’s footprint to the Northeast and New England. Acme operates in New Jersey, Connecticut, New York State, and Pennsylvania. The Kings brand operates in New York State, New Jersey, and Connecticut. Star operates in Massachusetts. Shaw’s operates in Vermont, New Hampshire, Massachusetts, Maine, and Rhode Island. Balducci’s operates in New York State and Connecticut.
Is Kroger Making Money?
Value investors will wonder if losses or low margins are driving Kroger (KR) to buy Albertsons.
The Kroger Co (NYSE: KR) makes some money. Kroger reported a $7.246 billion quarterly gross profit, $34.638 billion in quarterly revenues, and a quarterly operating income of $954 million on 31 July 2022.
There is some growth at Kroger. The quarterly gross profit grew from $6.768 billion on 31 July 2021. The quarterly revenues grew from $31.682 billion on 31 July 2021, and the quarterly operating income rose from $839 million on 31 July 2021.
Stockrow estimates Kroger’s revenues grew by 8.72% in the quarter ending on 31 July 2022. The revenue growth has been higher it was 40.77% in the quarter ending on 30 April 2022. However, Kroger’s revenues shrank by -22.85% in the quarter ending on 31 October 2021.
How Much Cash is Kroger Generating?
Notably, Kroger (KR) is generating more cash. The quarterly operating cash flow rose from $867 million on 31 July 2021 to $1.325 billion on 31 July 2022. However, Kroger reported a quarterly ending cash flow of -$280 million on 31 July 2022. The quarterly ending cash flow fell from -$84 million 31 July 2021.
Kroger can generate cash, it reported a quarterly ending cash flow of $1.382 billion on 30 April 2022. However, Kroger has less cash. The cash and short-term investments fell from $3.28 billion on 31 July 2021 to $2.189 billion on 31 July 2022.
Impressively, Kroger has less debt. The total debts fell from $14.155 billion on 31 July 2021 to $13.277 billion on 31 July 2022. Kroger reported a quarterly financing cash flow of -$940 million on 31 July 2022.
What Value does Kroger Have?
Kroger (NYSE: KR) offers enormous value. It had $48.741 billion in Total Assets on 31 July 2022. The total assets rose from $48.461 billion on 31 July 2021.
Hence, Kroger offers enormous value for the $42.11 Mr. Market paid for it on 17 October 2022. The share price rose from $39.21 on 18 October 2021. Moreover, I think Albertsons could add enormous value to Kroger.
One attribute the Albertsons merger could change is Kroger’s dividend. Kroger had scheduled six 26₵ quarterly dividends between 1 December 2022 and 1 March 2024. Kroger shares offered a $1.04 forward dividend and a 2.47% forward dividend yield on 17 October 2022.
I think the merger could threaten the dividend but boost Kroger’s share value. Kroger had a $30.89 billion market capitalization on 14 October 2022. In comparison, Albertsons (ACI) had a $13.94 billion market cap on the same day.
Is Albertsons Making Money?
Albertsons (ACI) is making more money. The Albertsons quarterly gross profit grew from $6.184 billion on 30 June 2021 to $6.04 billion on 30 June 2022, for example. Conversely, Albertsons’ quarterly operating income grew from $485 million on 31 August 2021 to $760.10 million on 31 May 2022.
However, Albertsons is experiencing massive revenue growth. The quarterly revenues grew from $21.269 billion on 30 June 2021 to $23.310 billion on 30 June 2022. Interestingly, Albertson’s quarterly revenues fell to $16.505 billion on 30 September 2021.
Stockrow estimates Albertsons revenues grew by 41.22% in the quarter ending on 30 June 2022. However, the quarterly revenues fell by -21.35% in the quarter ending on 30 June 2021.
Albertsons can generate cash. It reported a quarterly operating cash flow of $1.11 billion on 30 June 2022. Yet the quarterly operating cash flow flow fell from $1.169 billion on 30 June 2021.
How Much Cash can Albertsons Generate?
Albertsons can generate enormous amounts of cash it reported a $3.264 billion quarterly ending cash flow on 31 May 2022.
Plus, Alberstons had $3.281 billion in cash and short-term investments on 30 June 2022. The cash and short-term investments grew from $2.236 billion on 30 June 2021. Hence Albertsons had more cash than Kroger in June 2022.
Notably, Albertson’s total debt fell from $16.034 billion on 30 June 2021 to $14.726 billion on 30 June 2022. Albertsons reported a quarterly financing cash flow of -$248 million on 30 June 2022. That means Albertsons paid $248 million in debt.
What Value can Albertsons Offer?
Albertsons (ACI) had $28.22 billion in Total Assets on 30 June 2022. The total assets grew from $26.782 billion on 30 June 2021.
Mr. Market paid $24.43 for Albertsons on 17 October 2022. The share price fell from $29.51 on 18 October 2021. Hence, Albertsons offers enormous value for a low share price.
Conversely, Albertsons pays no dividends. I think this makes Albertsons a weak value investment. To explain, Albertsons offers a lot of value for a low price but there’s no dividend.
Will Albertsons add Value To Kroger?
I think Albertsons can add enormous value to Kroger (NYSE: KR). However I think it will take several years for Kroger to absorb Albertsons.
Kroger-Albertsons faces several problems beginning with antitrust law. Under US antitrust law the Federal Trade Commission (FTC) could force Albertsons-Kroger to divest of up to 650 stores.
The two companies are offering a 375-store divestiture plan to appease the FTC, Bloomberg Law reports. Under the plan, Kroger and Albertsons could sell or spin-off up to 375 stores. An Albertsons subsidiary with the unimaginative name of SpinCo will take ownership of those stores.
The FTC can use to stop the merger leading to costly lawsuits. However, conservative federal judges are siding with companies against antitrust regulators. For example, a federal judge killed the US Justice Department’s efforts to block UnitedHealthGroups’ acquisition of Change Healthcare.
Other problems the companies face will be unions, combining brands, unifying distribution systems, and eliminating duplication of supply chain. Kroger-Alberstons could create immense value by combining the points programs which can generate data it can sell to Big Data.
Hence, I predict the Albertsons-Kroger merger will go forward. However, it could be a long time before Kroger-Albertsons makes money.
Investors need to watch Kroger and Albertsons because this new company could change the American grocery business beyond recognition and generate enormous value.