Scale

The merger takes two big names at the top of the grocery market and puts them together. According to Numerator data cited by CNBC, Kroger and Albertsons are #2 and #4 in US share of grocery, and have about 15.5% of the market combined. Walmart is #1 with 20.9%. In ecommerce, Kroger and Albertsons are ranked third and fourth behind Walmart and Amazon, according to Insider Intelligence.

The merger could make the combined company a more formidable presence at a time when nationwide reach is becoming increasingly valuable in grocery. Walmart is building more capabilities through in-store fulfillment, delivery and distribution centers, while Amazon is ramping up expansion of its Fresh stores and in-store technology. Costco, which is the #3 grocer overall, already has a wide reach to 46 states and has been porting its loyalty and pricing advantages into ecommerce.

Kroger and Albertsons said their new footprint will span 48 states and DC, employing 710,000 associates. It will span nearly 5,000 stores, 66 distribution centers, 52 manufacturing plants, 3,972 pharmacies and 2,015 fuel centers.

One question is how much the companies will have to give up to create this giant. The deal adds a presence in the Northeast and west for Kroger, but their stores have some overlap. Kantar North America also points out that there is some overlap in shoppers: Citing ShopperScape, it shared that 30% of Kroger shoppers are also Albertsons shoppers, while 33% of Albertsons shoppers go to Kroger locations.

Bringing together leading players with some shared geographic footprint means the deal could face regulatory scrutiny. This could lead the companies to exit some stores in a bid to curb that concentration in some regions. In a pre-emptive move, Korger and Albertsons have already said they plan to divest some stores, especially in geographic areas where they overlap. They also said they are prepared to establish an Albertsons subsidiary, called SpinCo, that would be the parent company of 100-375 stores.

Whether this move will satisfy regulators is one of the big open questions going forward.

Fulfillment and delivery

Grocery ecommerce is proving to be one of the stickiest pandemic behaviors, setting the stage for grocers to continue to level up capabilities that they put in place to meet a spike in demand during lockdowns. As such, Kroger has put a priority on growing in delivery, opening a growing number of fulfillment centers in partnership with Ocado. Intriguingly, this has helped the grocer stand up delivery operations in areas where it doesn't have a walk-in store. In Florida, it has expanded through Orlando, Jacksonville and South Florida without opening any brick-and-mortar locations. These operations are anchored by automated fulfillment centers that are outfitted with robots that retrieve orders and picking processes orchestrated by algorithms.

Albertsons, in turn, has mostly worked with ecommerce services like Instacart and DoorDash, which deliver directly from stores, Grocery Dive points out. It also has existing grocery stores in areas where Kroger doesn't. Now, there could be potential for the companies to connect these pieces. With Kroger's model for hub and spoke ecommerce fulfillment in place, the scale offered by adding stores and locales becomes a huge advantage, and stands to help profitability of ecommerce operations in the process.

Retail media

As grocers' websites become ecommerce stores, they are proving to be some of the most compelling retail media networks. These are ad networks on a retailer's website that harness the first-party data available from consumer purchases. In the case of groceries, these purchases are weekly, and on big baskets of items, which only ups the point-of-purchase data available. Both Kroger and Albertsons have such networks. Kroger has 84.51°, while Albertsons was a “late mover” in launching the Albertsons Media Collective last year. Adding scale will only grow this "alternative profit business," as Kroger calls it.

Membership

The first-party data available will not only benefit advertising, but it will also enable the companies to improve the online shopper experience. Together, Kroger and Albertsons would have a combined customer base of more than 85 million households. With this, the companies said they can leverage data science capabilities from 84.51° to create more recommendations and promotions that are relevant to shoppers.

It's worth noting that both companies already have membership programs. Kroger's Boost offers free grocery delivery, gas and food savings. Albertsons for U is more centered on savings and rewards. By combining data assets, the companies said they can “develop an even more compelling retail loyalty program.”

Amazon first talked about a flywheel, and Walmart has in recent years. Now Kroger has a flywheel, and adding more data is going to help it turn faster. The news release announcing the deal describes the flywheel like this:

"The addition of Albertsons Cos.' portfolio expands Kroger's core supermarket, fuel, and pharmacy businesses, bolstering the combined company's ability to drive additional traffic into stores and digital channels. The increase in customer traffic and data will in turn power the combined company's higher-growth, higher-margin alternative profit businesses to support continued reinvestment in the business."

Closing thoughts

This is not a done deal yet, and the details will be important going forward. Alongside regulatory scrutiny, the companies will have to integrate two massive operations. The differences in their current approaches in each of the areas above point to the complexity of the task. Labor unions have already voiced opposition to the deal, as well. At the same time, the companies will have to maintain the loyalty of many existing customers, each of whom have particular reasons they stick with a Kroger or Albertsons property. But there are signs that the companies are building for a future where the supply chain is more customer-facing, and data has increasing value. It’s also one where the ability to be everywhere becomes just as important as presence in a community. The companies felt it was the best move to build for this future together.