What's Next for Kroger and Albertsons

After two years of legal review, federal and state antitrust enforcers blocked Kroger’s proposed takeover of Albertsons. Albertsons promptly sued Kroger for allegedly botching their merger defense and divestiture proposal. 

Albertsons’s CEO quickly stated that the company would “start this next chapter in strong financial condition” and Kroger said it is confident in its “value creation model to drive sustainable growth.” Both grocers then announced billions in stock buybacks and dividends to assuage investors.

This confidence contradicts months of warnings from Kroger and Albertsons that they needed to merge to compete with the likes of Walmart, Costco, and Amazon. Albertsons’s CEO went so far as to testify that it may have to lay off workers and close stores if it could not merge.

By the numbers, Albertsons and Kroger’s market positions were never as dire as their merger campaign implied. Each chain holds the first or second position in many regional markets. Their profits also remain high since the pandemic prompted more at-home meals. Albertsons’s annual earnings before interest, taxes, depreciation, and amortization (or EBITDA, a measure of profitability) grew from $2.5 billion in 2019 to $4.5 billion last year. Their annual net income increased nearly ten-fold over the same five-year period, rising from $131 million to almost $1.3 billion. Kroger’s EBITDA profits increased from just under $5.1 billion in 2019 to $6.8 billion in 2024 and its net income went from $1.6 billion in 2020 to $2.1 billion last year. 

To be sure, these large traditional grocers do face some threats. Kroger and Albertsons have lost market share to Walmart, Costco, and discounters such as Aldi and Lidl over the last few years, and a distracting, costly merger battle didn’t help. Amanda Lai, director of food industry practice for McMillan Doolittle, says grocers like Kroger and Albertsons also face competition from specialty organic chains.

“Discounters are doing quite well in the current economic landscape and on the other end, natural and organic concepts are doing well,” Lai says. “It’s those in the middle that are really feeling the squeeze from both ends.” Lai says that Kroger and Albertsons are looking for ways to optimize and automate to cut costs as well as ways to differentiate themselves with unique store brands, loyalty perks, and tech investments.

Of the two chains, more analysts worry that Albertsons is behind Kroger in terms of competitive pricing and modernizing its stores and e-commerce. Albertsons has been deeply burdened by debts and asset-stripping following nearly 10 years of private equity ownership.

Albertsons has promised to cut $1.5 billion in costs over the next three years and started by laying off over 370 white-collar corporate workers. Lai suspects that some stores slated for divestiture will close.

However, the chain is not in dire straits. Albertsons is the largest grocer in California and much of the mountain west. Albertsons sales are also growing faster than Kroger’s. Plus, many private equity investors sold their shares during the prolonged merger review and now only control 30% of the company, which could redirect priorities towards internal investment over cash grabs, like selling the real estate under stores.

“I don’t buy the sad violin music, I still think Albertsons is a dominant operator with significant cost advantages over competitors with a lot of really strong stores and a strong supplier base,” said Errol Schweizer, former vice president of grocery for Whole Foods. Schweizer noted that Albertsons’s regional purchasing lowers barriers for local brands to get on shelves and improves product variety.  

By contrast, the more dominant Kroger is slowing down. John Marshall, capital strategies director for the United Food and Commercial Workers Local 3000, argues that Kroger’s growth lags because the company has invested in costly and labor-intensive e-commerce ventures and cut back on labor hours. With fewer workers taking on more work to pack online orders, key customer services fall through the cracks; wait times increase, restocking falls behind, and floors don’t get cleaned. Meanwhile, e-commerce sales are still not profitable due to their tech and labor costs. Even Walmart loses money on e-commerce. These losses put more pressure on Kroger to cut labor costs or raise prices.

Despite these challenges, Kroger announced $7.5 billion in stock buybacks to boost its stock value after the merger failed. “Kroger effectively told investors, forget what we said about the existential threats of Walmart and Costco, here is $7.5 billion that we have nothing else to do with,” says Marshall. “That money could have renovated more stores than they have, built new stores to increase market share, or added 15 more full-time employees per store for three years. That would be transformative for customer service and sales growth.”

Albertsons similarly dedicated $2 billion to buy back its stock and increase dividends to investors. Schweizer and Marshall both think short-term pandering to shareholders will hurt the companies’ competitive position in the long term and also hurt consumers and workers.

“Any of these publicly traded companies, they’ve got the quarterly guillotine from Wall Street, in terms of their earnings, so they’ve always got to be focused on the next 90 days,” says Schweizer. “I think Kroger and Albertsons should be more circumspect and conservative in terms of shareholder buybacks and dividends, their stock should go up through better financial performance and better actual retailing.”