17 October 2022
Kroger-Albertsons merger: The digital and delivery implications
Data, supply chain and loyalty are big factors in the $24.6 billion grocery megadeal.
Data, supply chain and loyalty are big factors in the $24.6 billion grocery megadeal.
Two of the nation's largest grocers are set to pool data, loyalty and technology.
In a grocery megamerger, Kroger has agreed to acquire Albertsons, which also owns Safeway, Acme, Jewel Osco, Vons and other regional supermarkets. The deal, which is expected to close in 2024, is valued at $24.6 billion.
Coming after Albertsons conducted a monthslong strategic review, the acquisition has many layers of implications for the companies’ margins, buying power and how much groceries cost for consumers. But it may be just as much about where the businesses are heading. As they seek to compete in a changing grocery landscape, the companies are building digital capabilities that are reshaping grocery shopping, and the operations that get food to doorstep.
Here’s a look at what the deal will bring together in ecommerce:
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.
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.
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.
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."
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.
The quick commerce marketplace is partnering with Rokt to expand beyond CPG advertising.
In some ways, retail media campaigns function like promotions in a brick-and-mortar store.
With retail media, brands can reach customers with advertising on the websites where shopping is taking place. This proximity to the point of sale provides an opportunity for brands who are already selling within a marketplace to take advantage of opportunities to elevate their position in search results, and stand out from a crowd of listings. This is the same goal that many brands have when they purchase highly-trafficked space in a store. But instead of checkout aisle and endcap placements, there are now sponsored products in search results.
But that’s not the end of the story.
The fact that retail media is internet-based and powered by first-party data collected at the purchase level is poised to open up new opportunities to reach consumers that go beyond today’s norms.
One such example is the introduction of non-endemic advertising. This allows brands that aren’t directly selling a product within a marketplace to purchase ad space.
Why would a brand want to advertise in a place where they can’t make a direct sale? The thinking goes like this: The marketplaces have the audience, and the data on them that allows for precise targeting. They can be places to learn about a new product, just as much as they can be a place to buy.
One early example of the recognition of the opportunity in non-endemic advertising arrived this month. The quick delivery marketplace Gopuff partnered with ecommerce technology company Rokt to enable brands outside the CPG category to advertise on Gopuff’s app.
Under the hood, the companies are combining machine learning technology from Rokt that is designed to present relevant offers to customers with a Gopuff audience that is made up of Gen Zers and millennials, engaged and curious about trying new brands.
The partnership will enable advertisers to target customer segments by demographic and location. Customers will also receive offers to try new brands, such as Hulu, AdoreMe and Noom.
What sets this advertising approach apart will be the consumer categories where it is focused. Typically, ads on Gopuff are focused around the convenience store items already available on the app. Now, shoppers will see other kinds of products in the mix, and they will click through to checkout pages that are outside Gopuff if they are interested in buying. This also has the potential to change how advertisers approach media spend. It means everyone from a sporting goods brand to a car company can now consider Gopuff as they plan. They must also consider how these channels work together as a whole.
"We are thrilled to partner with Gopuff and enhance its ad business, helping it move beyond the CPG category," said Elizabeth Buchanan, CCO of Rokt, in a statement. "By delivering relevant offers to Gopuff users, Rokt will help Gopuff Ads' brand partners across all categories create more meaningful customer connections and drive incremental sales."
The partnership underscores how retail media networks have three key building blocks for digital advertising: They’re a destination that people visit with an intent to shop, they have the audience that brands want to reach and they have data that can help to reach the right consumers.
It points to how ecommerce marketplaces can not only become the new store, but also emerge as ad networks like Facebook and Google before them. It’s a big reason why retail media networks have exploded over the last year, and why growth is forecast to continue to accelerate.