Why Kroger, Albertsons need to merge immediately to compete with Walmart

Walmart (WMT) has upended the grocery business and is widening its lead as the industry’s most dominant player.

The retail behemoth expanded its market share during the second quarter, noting "high single-digit growth" in its quarterly results. And as the leadership gap widens and Walmart’s power and influence over the industry grows stronger, competitors have little choice but to join forces.

The grocery business is going through a "revolution," and Walmart is "unstoppable," Burt Flickinger, managing director of consulting firm Strategic Resource Group, told Yahoo Finance.

This week’s move by Aldi to acquire Winn-Dixie and Harveys comes amid wider consolidation across the sector that has reshaped the grocery landscape. Last October, Kroger (KR) announced its acquisition of Albertsons (ACI) for $24.6 billion, an agreement that will combine two of the largest supermarket operators in the US. The deal will create a grocery chain with nearly 5,000 locations, a move that some experts say is necessary to fend off big box rivals.

"Kroger’s acquisition of Albertsons is the last, best, and final chance to level the playing field," added Flickinger, who has worked with and covered the grocery industry for more than three decades.

Up until the rise of supercenters and supermarkets, most Americans shopped at local or regional grocery stores. Now, the top five grocery chains account for nearly half of the market, and Walmart alone controls nearly a quarter of the overall market share.

Growth of supercenters like Walmart, along with club stores like BJ’s (BJ) and Costco (COST), could be the biggest "long-run story" in the food and grocery industry, Eric Fruits, senior scholar at the International Center for Law & Economics, told Yahoo Finance. Fruits also highlighted Amazon’s (AMZN) purchase of Whole Foods for $13.7 billion as another deal that further intensified competition within the industry.

Consolidation among chains has largely contributed to the recent decline in grocery stores across the country. A report by advocacy group Food & Water Watch found that the number of US grocers fell by roughly 30% from 1993 to 2019, while a study by the US Department of Agriculture showed that from 2005 to 2015 the market share held by independent grocers fell in 41% of the counties across the US.

The uptick in M&A activity comes as scale within the industry becomes more important. Larger companies have more leverage than their smaller rivals, giving them more power to negotiate lower prices with suppliers, something that advocacy groups say will put more pressure on smaller grocers and independent businesses.

"Our biggest concern is that when you have large consolidation and only a handful of firms touching so many Americans, it makes it all more difficult for the independent segment of the marketplace," Chris Jones of the National Grocers Association told Yahoo Finance. "Consumers are left with higher prices, less choice, and less convenience."

The megadeal between Kroger and Albertsons faces fierce opposition not only from trade associations but from several state officials as well. In a letter to the Federal Trade Commission (FTC) on Wednesday, officials from seven states urged the commission to "stop this corporate consolidation that is draining Americans of their hard-earned wages and livelihoods."

The California attorney general's office is also investigating whether the merger will create more "pharmacy deserts" in the state, in which lower-income areas have limited access to medicines, according to a Reuters report.

Food deserts — areas where people have limited options for healthy and affordable foods — are another concern for industry insiders. "The deal will very likely create food deserts, which we don't need," the CEO of a very large supermarket chain told Yahoo Finance.

Despite some lawmakers and advocacy groups expressing concern, Flickinger says the Kroger-Albertsons tie-up is "pro-consumer, pro-worker, pro-supplier, pro-community" and will "help stabilize the supermarket sector, which has been in a free fall since Walmart and Costco’s entrance."

In a statement to Yahoo Finance, a Kroger spokesperson wrote, "The only parties who would benefit if this merger is not completed are large, non-unionized competitors such as Walmart and Amazon."

While hurdles remain for the proposed supermarket merger of Kroger and Albertsons, one thing is clear: Walmart has revolutionized the grocery business through its growing dominance and will likely reshape the industry for decades to come.

Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.

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