One year ago when Kroger announced its plan to acquire Albertsons, the company gave numerous reasons for pursuing the mega-merger. It wanted to accelerate digital, improve efficiency, achieve national scale and bring together two storied grocery chains.

But really, the merger is about one thing: Staying competitive with the industry’s non-supermarket heavyweights.

The $24.6 billion deal would help Kroger not just chase after Walmart and Amazon, but go toe to toe with them on operational efficiencies, tech innovation and more. The tie-up would also fortify Kroger against the rising threat that discount and alternative formats like Costco, Aldi and dollar stores pose to its business.

Over the past year, we’ve seen supermarkets come under increasing pressure from Walmart and company, underlining Kroger’s case for building scale. Walmart leveraged its everyday low prices in grocery to draw shoppers during last year’s inflationary period, and it has kept gaining market share as people continue to carefully watch their spending. The company accounts for more than a quarter of all grocery spending, according to data released by Numerator this summer.

Walmart has siphoned spending away from supermarket chains with higher prices. Just look at what it’s done to Giant Eagle. Earlier this year, the Pittsburgh Post-Gazette reported that Walmart was the grocery market share leader in Pittsburgh, Giant Eagle’s hometown. The supermarket chain ousted its CEO back in March and just recently named a new chief executive, along with a slate of other leadership promotions.

Looking at Numerator’s market share data shows that Walmart and Costco have gained over the past two years while supermarket chains have mostly treaded water or lost share. Kroger’s share dropped from 12.1% in 2021 to 10.7% this year.

Fast-growing Aldi showed us late this summer just how aggressive and flexible its expansion strategy can be when it announced plans to snap up Winn-Dixie and Harveys Supermarket. Dollar operators like Dollar General and Dollar Tree are also building out their grocery assortments to include fresh and frozen items along with new private brands.

Supermarkets like Kroger and Albertsons have struggled for years to compete with discount retailers on price — and they’re finding they have to increasingly compete with these retailers on quality and value, too. 

Amazon, meanwhile, hasn’t had a very good year in grocery. But the company is playing the long game in the industry and is determined to win. Although its Fresh stores have been a flop so far, it is carefully probing and iterating as only a deep-pocketed, tech-forward company can and recently rolled out Amazon Fresh 2.0 in the Chicago area. 

Even if Fresh doesn’t live up to its name in the near term, Amazon still has in its arsenal Whole Foods Market, which continues to run cutting-edge stores and has been quietly growing at a steady clip, as well as its online Fresh business, which has gotten some key updates this year. I also wouldn’t be surprised to see Amazon make a growing play as a service provider for grocers. In the U.K., it now lists several grocery chains on its marketplace and provides delivery services for those companies, too. U.S. grocers have been hesitant to join hands with Amazon in the past, but the new realities of digital retail have made “frenemy” partnerships more palatable — and necessary.

Margins are deteriorating for supermarkets as competition has increased and as technology, labor and other costs pile up. During a recent presentation at the Groceryshop conference in Las Vegas, Scott Moses, partner and head of the grocery, pharmacy and restaurants investment banking group at Solomon Partners, said supermarket earnings margins before interest, taxes and other costs have fallen from 7.5% to 5.5% over the past 20 years.

The best way these companies can stay ahead is to build scale — and that’s what the Kroger-Albertsons deal provides.

Regulators and the court of public opinion

However, just because the business case for a combined Kroger and Albertsons has come into sharper focus doesn’t mean regulators and consumers are buying in.

As we reported last month, two Wall Street analysts put the odds of the merger getting the blessing of the Federal Trade Commission at around 50/50 — and that prediction came after the divestiture announcement that proposed offloading as many as 650 locations to wholesaler C&S. An Axios report from a few weeks ago cited a former FTC official in stating the deal will likely get challenged.  

Indeed, while Kroger and Albertsons may have a compelling case for staying competitive in the new era of grocery retailing, experts say the FTC is focused on the impact the merger would have on smaller grocers, suppliers and consumers. A Reuters report from August noted the agency has investigated “whether suppliers will be squeezed in a way that hurts small grocery chains.” The former FTC official cited in the Axios report, David Balto, recently told Supermarket News that the agency has taken an increasingly “skeptical” view of any purported benefits that buying power provides for consumers.

As the FTC has soldiered on with its review process, consumers, lawmakers and labor unions have kept up a steady drumbeat of opposition to the deal. State attorneys general, consumer advocacy groups, the Teamsters and local chapters of the United Food and Commercial Workers unions are among the groups that have hit back. In August, top officials from seven states sent a letter to FTC Chair Lina Khan urging the agency to oppose the Kroger-Albertsons merger.

“Kroger-Albertsons will have no competitive incentive to bring down prices and — despite what Kroger-Albertsons’ claims — consumers will be powerless to hold the company accountable to promises of keeping prices low,” the state officials wrote.

To be fair, mega-mergers typically don’t generate large fan clubs outside of the companies involved. But the Kroger-Albertsons deal feels understandably personal for many people, given how it could impact their weekly trips to the grocery store and the fact that it came during a period when prices on everything from eggs to cereal remained stubbornly high. Albertsons’ rotten deal with Haggen as part of its Safeway acquisition in 2015 also hasn’t fostered much trust with consumers or lawmakers.

To combat this skepticism, Kroger CEO Rodney McMullen and Albertsons CEO Vivek Sankaran have waged a charm offensive in recent months. In April, the two penned an op-ed in the Cincinnati Enquirer aimed at debunking “myths” about the merger. In ensuing interviews, social media posts and trade show presentations, McMullen has promised the merger won’t impact union contracts, result in store closures or push workers out of their jobs, noting that it will instead lower prices for shoppers.

The public appeals, which all seem to cover the same talking points again and again, are meant to reassure consumers and the rest of the industry. But the need to make them only underscores the fierce resistance to the tie-up. 

I certainly don’t know better than industry analysts and other experts how the story of this mega-merger will end. But I do know this: Kroger-Albertsons is a symptom of a rapidly changing industry where scale, tech prowess, cross-channel shopping and alternative revenue streams will be required to win. Growing and evolving toward this complex future can happen gradually over time — or it can happen with a bang.