By Anirban Sen and Abigail Summerville
(Reuters) - U.S. grocery company Kroger (NYSE:KR) Co is in talks to merge with smaller rival Albertsons Companies Inc in a tie-up that would create a supermarket titan, people familiar with the matter said.
The merger of the nation’s No. 1 and 2 standalone grocers, if reached, could provide the retailers with a leg up in negotiations with consumer-product makers such as Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL) at a time of steep price hikes.
A deal could be announced as soon as this week if the talks do not fall apart, said the sources, who requested anonymity as the discussions are confidential.
Major consumer products companies across the world have announced plans to boost prices at a faster pace as they seek to curb the impact of soaring raw materials costs on their margins.
Some critics noted that a supermarket merger would lessen competition among U.S. grocery chains and potentially lead to higher prices for American shoppers. A deal would create a combined company with a market valuation of about $47 billion, representing one of the biggest mergers in recent years in the retail space.
Neither Kroger nor Albertsons immediately responded to requests for comment. The news was first reported by Bloomberg.
Consultant Burt Flickinger, who holds shares of both Kroger and Albertsons, said a merger would give the two supermarket operators more buying power, making it easier for them to compete with Walmart (NYSE:WMT) Inc.
Groceries constitute roughly 55% of Walmart's annual sales. Walmart traditionally has used its clout to demand the lowest possible prices from packaged-food and beverage companies, leaving rivals at a disadvantage in their own negotiations with suppliers.
Roughly 25% of all dollars spent on groceries in the United States are spent at Walmart, according to data provided by Euromonitor. Kroger and Albertsons have roughly 8% and 5% of the U.S. grocery market, respectively, according to Euromonitor.
COMPETING POWER
The specter of Amazon (NASDAQ:AMZN) may have contributed to the merger talks as well. Michael Pachter, an analyst at Wedbush Securities, estimated the online retailer has taken about $4 billion in market share from Kroger and Albertsons in the past two years -- small relative to an $800 billion grocery market but a threat nonetheless. "Amazon scares the bejeezus out of the conventional retailers," he said.
The Seattle-based technology company is betting that the cashierless and contactless payment systems it is adding to stores, including at its subsidiary Whole Foods Market, will win it customers in the long run.
Shares of Albertsons were up 11% on Thursday afternoon, while Kroger's stock slipped 1.4%. Shares of British online supermarket and technology group Ocado (LON:OCDO) Group Plc were up over 10% in late London trade. Kroger is Ocado's biggest client.
Kroger houses supermarket chains such as Fred Meyer, Ralphs and King Soopers. Boise, Idaho-based Albertsons includes the Safeway banner.
The razor-thin margins of standalone U.S. supermarket chains have been squeezed from soaring costs and supply-chain disruptions after a boom at the height of the pandemic.
Sarah Miller, executive director of the American Economic Liberties Project, an anti-monopoly nonprofit, said the deal would "squeeze consumers already struggling to afford food."
"This merger is a cut and dried case of monopoly power, and enforcers should block it,” Miller said.
A deal could be reached as soon as this week, Bloomberg reported, adding that no final decision has been taken and talks could still be delayed or falter.