Earlier this year Kroger Co. ($140 billion annual revenue) and Albertsons Inc. ($80 billion annual revenue), the nation’s two largest conventional supermarket operators, announced they would merge, creating one mega-grocer under the ownership and management of Kroger.
Mergers and acquisitions are common in grocery retailing but nothing of this scale (combined, Kroger and Albertsons will have nearly 5,000 stores and 700,000 employees) has been seen in recent times, if ever in history. The retailers said they were doing it because they need to create greater scale in order to compete with non-supermarket grocery retailers like Walmart, Costco and Amazon. The merger, if approved as is by the FTC (Federal Trade Commission) would make Kroger the second largest food retailer in America, right behind number one Walmart.
According to the trade magazine Progressive Grocer, which tracks such things, Walmart is currently and after the merger would remain the largest food retailer in America, followed by Amazon and Costco. Kroger is number four on the list and Albertsons is the ninth-largest.
Walmart accounts for about 24% of all the groceries sold in the U.S. In California and other states it’s less of a factor though. For example, Safeway, which is owned by Albertsons and will become owned by Kroger, if the merger is approved, is the leading grocery retailer in Northern California. Ralphs, already owned by Kroger, is the leader in Southern California. Therefore, with the merger, Kroger would become the leading food retailer in the Golden State. Safeway and Ralphs are the two leading buyers of California-grown produce in the state. In many ways they set the tone for specialty crop farming in California because they’re such huge buyers of many of the crops grown in the state.
The grocers have said they expect the merger to be approved by early 2024 and have offered to sell hundreds of stores and other assets to a grocery wholesaler C&S Wholesale Grocers in order to gain federal government approval.
Linda M. Khan, chair of the Federal Trade Commission (FTC) says “not so fast though.” She and the regulatory board she helms has yet to approve the mega-merger and I suspect she might oppose it, requiring Kroger and Albertsons to divest of many more stores, and to other food grocery chains that compete with the both retailers, rather than to C&S Wholesale Grocers alone. I also think compliance with such a move by the FTC will then allow the retailers to have the merger approved. We’ll see if I’m right or wrong about this before the end of 2023.
What interests me this November though is how this mega-merger and the consolidation it brings is going to play out for farmers and the fresh produce industry in California, which is the leading fresh produce state in the nation.
Grocery store produce departments and California-grown are synonymous because so much of the fresh fruits, vegetables and nuts on the shelves and in the bins are grown in the Golden State.
Most big grocery chains buy produce directly from growers too, using brokers. Smaller chains and independent grocery stores buy from wholesalers because they don’t have enough sales volume to buy direct. And as noted earlier, the merger will make Kroger the leading seller of groceries, including fresh produce, in California.
Overall I don’t think the mega-merger will be deleterious to growers and the fresh produce industry in California because there still remains enough competition in U.S. grocery retailing to prevent the mega-chains from exerting control over things like price-setting (the mega-chains do negotiate rather strongly though). The merger will make produce sellers and growers more reliant on fewer buyers though. Albertsons Safeway chain is the number one food retailer in Northern California and Kroger’s Ralphs chain is the leader in Southern California. The merger would make one grocer, Kroger, number one in the entire state of California, which would give it vast power in terms of negotiating prices for fresh produce (specialty crops grown by farmers) in California.
As such, the increased consolidation from the Kroger-Albertsons merger and in the food retailing industry in general does put growers and sellers at a bit of a disadvantage nationally as well as in California because the competitive pie would become a bit smaller. For example, with the merger, the top five grocery retailers in the U.S. will control about 40% of the market. It was half that less than two decades ago. This means that growers have fewer options, which can mean added pressure on getting the needed price for the produce they grow.
The good news here though is that fresh produce, unlike the packaged food products you see in the center of the store, is more limited in supply, perishable, and in most cases appears to be in fast-growing consumer demand. Also, grocers can’t really grow their own, in contrast to the fact that they do create their own brands (called store brands or private label) of packaged groceries. Both Kroger and Albertsons do billions of dollars annually in sales of their own products. They do put their brand names on some types of packaged fresh produce but still rely on growers to grow it.
Some California mega-agribusiness companies like berry-giant Driscoll’s, for example, in that the consolidation of Kroger and Albertsons could end-up save them money in sales, shipping and other areas because they will be dealing with one company, Kroger, and a single supply chain, rather than two. Driscoll’s berries are a high-demand fresh produce product because they control a high percentage of berry crops in the state and have built a strong brand for sales at retail stores. Consumers throughout the U.S. and elsewhere look for the Driscoll’s brand, and will even pay a premium for it, when buying berries in grocery stores. Driscoll’ though is more the exception that it is the norm when it comes to fresh produce.
I worry a bit overall about consolidation in the grocery retailing industry because it’s a penny-profit business and if we get to the point like it is in places like the United Kingdom where the five largest chains control nearly 90% of the market, agriculture will get squeezed.
Growers and produce companies should keep their eyes on the Kroger-Albertsons merger because it and the consolidation in grocery retail directly impacts their business. From the farm to the grocery store remains the norm in the U.S. Fewer retailers equals less competition which means potentially fewer options when it comes to selling produce for a profitable price. Walmart, for example, has become such a dominant force in dairy – particularly fluid milk – that it commands considerably lower prices for the milk it buys than do its competitors. This has frustrated many in the dairy industry.
California-grown produce remains in demand from retailers large and small despite all the imports from Mexico and elsewhere. Keeping our eyes on what’s going on in the grocery retail industry, which has a symbiotic relationship with agriculture, is vital in order to keep growers and shippers financially healthy.
My Job Depends on Ag Magazine columnist and contributing editor Victor Martino is an agrifood industry consultant, entrepreneur and writer. One of his passions and current projects is working with farmers who want to develop their own branded food products. You can contact him at: victormartino415@gmail.com.
