Howdy folks, and welcome back to Houston Historic Retail. Today we’ll be discussing the Kroger and Albertsons merger/buyout announced last week and what it could mean for Houston. So I’m not accused of burying the lead here, the short answer is we don’t know the exact impact yet. The long answer, however, is we know enough that we can make some predictions. For those out of the loop, Kroger has officially agreed to acquire Albertsons for $24.6 Billion. In Houston, Albertsons is represented by Randall’s, which was acquired along with the rest of Safeway back in 2015. Kroger, on the other hand, has had a presence in Houston since 1955 after buying out a local chain, Henke & Pillot. Since then, the company has usually come in second in terms of market share. Although more recently, Kroger seems to be stuck in third, behind HEB and Walmart. Albertsons, on the other hand, has been on a decline in Houston, after closing Randall’s corporate offices and their distribution center, the remaining stores, were put under the care of Tom Thumb, which has since been reorganized under Albertsons Southern Division. Since this decision, Randall’s locations have closed left and right, with Albertsons allowing El Rancho (of which Albertsons owns 45%) to snipe prime Randall’s spots for their stores. Leaving behind essentially a skeleton of the original operations, more stores have continued to close, more recently without finding replacement tenants. At this time, Randall’s is down to 15 locations in the Houston area and exists basically as a nameplate for Tom Thumb.
There is the possibility that the entire merger stalls out or is quickly nixed on anti-competitive grounds. If this occurs, it will likely have a large impact on both chains, likely in areas with overlap. While this potential merger has yet to disclose specific plans for dealing with overlapping competition, some broad strokes have been revealed. Interestingly industry analysts have identified DFW and Houston as two cities that have a measurable overlap between Kroger and Albertsons. To help this merger win regulatory approval, Kroger has already indicated plans to divest between 100 to 375 stores during the merger. Outside of Texas, the Albertsons-Kroger overlap is also relatively prominent in the Western states, where Albertsons and Safeway previously sold off 168 locations as a part of their merger. During this previous sell-off, 12 Albertsons locations in DFW were offered to former Dallas grocer Minyard’s, who only ran the stores for about two years before splitting up the remaining sites between Fiesta and HEB. While I am not an expert in this field, I would think that this previous disposal of Albertsons locations is a possibility of what we may expect to see in Texas. From my perspective, there are a few different paths this could take. Krogerstons (a term coined a year ago on HHR) could decide to convert stores to the surviving name, which at the moment seems to be Kroger. However, the major existing overlap makes this an issue in both markets. To combat this, Kroger and Albertsons announced plans to spin off hundreds of locations.
Map shows Randall’s locations and their nearest Kroger
Using a temporary name from the “Fast Eddie Playbook” the newly dubbed ‘Spinco’ will be comprised of stores selected by the two companies to spin off. The establishment of Spinco will be completed prior to finalizing the merger, and the company will be owned by Albertsons stockholders. Randall’s and Tom Thumb stores could potentially end up under the Spinco umbrella. With increasing pressure from HEB in both Houston and now Dallas, it’s not impossible that slinging the stores off on their own may help the merger’s cause. Another possibility is that the stores are divested altogether. While this certainly seems more likely for Houston as opposed to Dallas, it’s still somewhat unlikely for both. Houston is a tough expansion market for an unknown grocer, and HEB’s coverage is ever-increasing making it unattractive to potential buyers. I personally think the most likely outcome is a mix of conversions and spin-offs. I think that Kroger may cherry-pick a few stores, like those in Katy and possibly the store at Westheimer and Gessner, as it’s much newer than the nearby Kroger and directly on the corner, and convert them into Kroger locations. The remaining stores will be divested of, most likely through Spinco, and possibly keep the Randall’s/Tom Thumb name. What actually happens, though, we’ll only see with time.
I think there is a good chance the FTC will block this merger. Cost of living has become a political football here lately and I suspect it will be throughout 2023 as well so allowing a deal that will reduce competition in many states will be contentious. I suspect labor unions will generally oppose this merger as well and that could have some influence on the political end of things. Even here in Houston, there must be some questions about what will happen to Randall’s employees if some Randall’s stores become Kroger stores or, at the very least, if Randall’s becomes a banner of Kroger. Will Randall’s stores become unionized like Kroger stores?
Aside from regulatory problems, it’s really hard to say what will happen to the Houston, Austin, and Dallas area Albertsons stores. DFW is the biggest question mark in my mind because Kroger and Albertsons have a pretty large chunk of the grocery market especially given the Market Street stores on top of Kroger, Tom Thumb, Albertsons, and El Rancho stores in DFW. Some of those stores will probably close or be divested to SpinCo. HEB has to love the potential for their biggest competitors in DFW to downsize their presence. HEB might well buy closed store locations. Perhaps they’ll operate stores out of them, but they could just as well buy them to sit on them to ensure no other grocer moves into those buildings. Then, when HEB is ready, they’ll move into the area. HEB has their own anti-competitive actions which are largely ignored since HEB isn’t seen as being a price gouger.
Even if the Krogertsons merger doesn’t happen for whatever reason, there will be changes with these companies. I suspect Albertsons might well have to sell themselves to another grocer, perhaps one like Ahold where there would be fewer regulatory hurdles, and/or Albertsons might have to sell some divisions off to create financial flexibility. Even with the merger and SpinCo, there might well be a splitting of Albertsons like there was in the mid-2000s. Granted, that mostly happened without Houstonians knowing about it since Albertsons was not in Houston at the time, but this time that might be different.
While Kroger still does some things very well, I think one of the biggest problems with this merger is that Kroger’s executives will be the ones leading the proposed merged company. On the business side of things, it seems that Albertsons’ current leaders have done more with less relative to Kroger’s leadership. On the store side of things, Albertsons’ stores seem to be getting better user reviews in recent years after some real struggles around the time of the Albertsons-Safeway merger. On the other hand, Kroger’s user reviews seem to sliding backwards. While Albertsons seems committed to keeping small town stores open out west, including United stores in west Texas, Kroger has recently closed a lot of their small town stores.
There are some other issues with Kroger in recent times as well such as shoddy remodels in recent years and over-reliance on self-checkouts and general understaffing. Houston might not be the best example of how Albertsons has managed to keep operations smoother than Kroger given that Randall’s is only a minnow in the market and seems to target an affluent group of customers, but there are some large markets out west where Albertsons seems to be pulling away from Kroger in the eyes of customers as a whole.
There actually used to be a Kroger on Gessner and Westheimer. It was closed down when they opened the Kroger Signature Store about two blocks west at Westheimer and Elmside around 1999 or 2000. We were living in an apartment behind it when that occurred. It is now a Big Lots.