CINCINNATI — The Kroger Co. touts the proposed acquisition of Albertsons Companies Inc. as a chance to reduce costs, boost wages and lower prices.
Its critics claim the $24.6 billion merger will enrich shareholders, eliminate jobs and give Kroger enough market power to squeeze painful concessions from suppliers.
But there’s another way to look at this deal that hasn’t gotten much attention: National launch of a new media empire.
“Long term, the biggest accelerator for profit growth for Kroger is not grocery. It’s actually retail media and advertising,” said Dean Rosenblum, senior research analyst for AllianceBernstein. “And this deal takes Kroger from 40% reach of population in the U.S. to 70%. It solidifies them as the heir apparent to this pretty huge revenue stream that will accrue to the grocers, once somebody figures out how to execute it.”
Kroger has been talking since 2018 about the potential for using its data-analytics capabilities to help consumer-product companies target the shoppers most likely to buy their products. Those capabilities generated a $1.2 billion in operating profit for the company in 2022, CEO Rodney McMullen told shareholders in March.
“Kroger Precision Marketing is one of our fastest-growing businesses and is well-positioned to win within the U.S. retail media landscape, which is projected to be a $55 billion industry by 2024,” McMullen said. “What makes our retail media business special is our ability to help brands achieve a greater return on their media investment.”
Here is a Kroger Precision Marketing promotional video:
Kroger and Amazon ranked at the top among 13 retail media networks, in a survey of marketing executives by the Path to Purchase Institute, a Chicago-based trade association. While Kroger received more excellent ratings in categories like “targeting effectiveness” and “return on investment,” Amazon had fewer ratings of fair/poor. Albertsons ranked at the bottom of that list, with more than half respondents rating it fair/poor in five of seven categories.
Rosenblum thinks Kroger is further along than most in the retail-media landscape and says its growth could go into hyperdrive if it adds densely populated cities on the east and west coast to its geographic footprint.
“It’s the next generation for digital advertising for consumer products,” he said. “The increase in population reach to 70% of the U.S. is really a game changer for this long-term profit accelerator.”
But that game won’t change if the Albertsons deal is rejected. And both companies’ use of customer data is among the issues likely to be explored in the Federal Trade Commission’s review of the merger.
“Should consumers be worried about encroachments on their privacy, and should advertisers be worried about higher prices?” Utah Republican Mike Lee asked McMullen in a U.S. Senate subcommittee hearing on the merger last November.
McMullen said Kroger would face plenty of competition for its media services from Google, Facebook, Amazon and Walmart. And he added that Kroger doesn’t make personal information available to advertisers.
Xavier University Marketing Professor Scott Beck said Kroger will have to prove to the FTC that it handles customer data responsibly. But he thinks it’s up to the challenge, based on his experience when he worked for Kroger’s data-analytics unit.
“It’s just a lot of information to have in one house,” Beck said. “And whoever is the steward of that better be responsible. They are. We looked at every single offer to make sure it was a customer-centric offer and was relevant and wouldn’t embarrass anybody.”
Rosenblum agrees that Kroger will survive FTC scrutiny on its use of customer data. And he thinks the agency will ultimately approve the merger without demanding concessions on controversial issues like the $4 billion dividend that several state attorneys general sued to prevent, but Albertsons paid in January.
In a May 1 report, Rosenblum argued the FTC will ultimately approve Kroger’s plan to sell off stores in cities where both companies now compete against each other. The trick will be convincing regulators those stores won’t go out of business after a new buyer takes over.
Rosenblum identified ten cities as “problematic,” including Phoenix, Dallas, Houston, Tuscon, Portland, Seattle, Denver, Las Vegas and Chicago.
“In each of those markets there is a player who has enough local scale that bolting these stores on might make sense,” he said. Regional players like Raleys, Winco, Pyramid Foods and Grocery Outlet are “big enough nationally that they could actually acquire these stores and not choke to death on them.”
Another option would be to sell the stores to Amazon, which recently told shareholders that it’s working to develop “a broader physical store footprint” for its grocery business.
“What the FTC is going to be looking for here is, ‘Are these stores going to remain open?’ And not just open but viable and rigorously competitive relative to this new, combined Kroger-Albertsons entity,” Rosenblum said.
