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Why a Kroger-Albertsons Merger Would be Mostly Positive for Retail Landlords

The potential merger between grocery giants Kroger and Albertsons has drawn attention from retail analysts, but the people paying the most attention are anti-trust regulators. A Kroger and Albertsons hybrid would create a massive nationwide supermarket chain that could compete with Walmart and Amazon’s Whole Foods. The merged company would obtain distribution efficiencies, gain greater leverage with suppliers, and give a significant advantage in growth areas like e-commerce. A merger of this size in the grocery market could also have significant implications for retail center landlords.

Kroger and Albertsons’ CEOs are assuring lawmakers and customers that the $24.6 billion merger would lower prices, but not many are buying that. The companies’ two CEOs were recently grilled on Capitol Hill at a Senate subcommittee hearing. The companies will have to convince the Federal Trade Commission that the deal will have all the positive effects they’re saying it will have. Kroger is the second-largest grocery chain by market share in America (behind only Walmart), and Albertsons is fourth, behind Costco. The merger, in which Kroger would acquire Albertsons, would expand customer reach and improve proximity to deliver food to about 85 million U.S. households in 48 states. If the deal is approved by regulators, it’s expected to close in 2024, leading to the companies’ controlling 13 percent of the U.S. grocery market. This would ultimately lead to 60 percent of the U.S. grocery market being concentrated among five national chains. In theory, these companies could lower prices, but that type of consolidation typically leads to the opposite.

For all the problems a Kroger-Albertsons merger could pose for American consumers and grocery workers, the deal will affect retail landlords in varying ways, likely positively. Despite the expansion of e-commerce in recent years, grocery-anchored shopping centers are doing remarkably well. The largest share of sales for any retail property type in 2021 was for U.S. grocery-anchored retail, with 733 assets traded and a combined value of $13 billion. The increased costs of capital have somewhat slowed deals, but investor demand for grocery-anchored shopping centers is the highest it has been since the mid-2000s.

Kroger and Albertsons have more than 5,000 stores combined, and some speculate there will be store closings because of the merger. Kroger is on the record saying the merger won’t result in store closings, including comments made in CEO Rodney McMullen’s written testimony to Congress. A Kroger spokesperson offered this statement regarding store closures, saying, “Kroger will not close any stores, distribution centers, or manufacturing facilities as a result of this merger, including stores that may need to be divested to obtain regulatory approval. The company will work with the Federal Trade Commission to develop a thoughtful divesture plan – either through divesting stores to strong buyers or by creating a standalone independent company. Kroger intends to position any store that is not part of the combined company for success going forward.”

Nevertheless, one of the potential merger’s biggest impacts on retail landlords will be what happens to the many Kroger and Albertsons locations affected. The FTC will closely scrutinize store divestitures, a tactic commonly used in big mergers where the company spins off stores under a new subsidiary to appease regulators. The divestiture process could mean Albertsons establishes a separate company called SpinCo controlled by Albertsons shareholders. If the merger is completed, about 175 to 300 stores could be spun off into the SpinCo brand. The FTC won’t allow the companies to just close weak stores, they’ll be forced to sell both the good and bad stores to competitors, including the Spinco subsidiary.

Kroger will likely not sell stores to strong competitors like Walmart or Whole Foods, even if they are the highest bidders. And that’s something that could cause issues. Kroger may ultimately want to sell the weaker stores to the least competitive grocery chains, causing undercapitalized buyers to use borrowed funds at a high-interest rate, which one supermarket analyst called a “recipe for disaster.” If these lesser competitors don’t survive, including the separate SpinCo company, it could leave behind empty real estate.

But in some cases, the divestitures may work to retail landlords’ advantage. Grocery store operators tend to control their properties for decades, so closing the store could free it from below-market rents and other restrictions. For example, a shopping center landlord could be stuck in a lease at $4 per square foot with a grocery tenant in a $12 per square foot market. Grocery stores are usually anchor tenants, and they command much leverage in negotiations in shopping centers, so unlocking the real estate from a Kroger or Albertsons and getting a fresh start with a new tenant could be a positive for landlords.

Due to the merger, a leaner, more powerful Kroger could also be a boon for retail landlords. The merger validates the physical nature of grocery stores in a time of growing e-commerce and gives Kroger new operational opportunities in different parts of the country. Many shopping center landlords may welcome the merger because Kroger has better credit than Albertsons, making their assets more valuable. Kroger as the ultimate lease guarantor decreases landlords’ risk, lowers the cap rate, and creates more long-term security. Kroger likely won’t expand following the merger, instead waiting 18 to 24 months to see how the dust in the market settles. But because Kroger would gain operational efficiencies from the merger, it would allow them to enhance their brand through investments in better data collection and services, ultimately setting themselves further apart in the market and becoming a more valuable tenant.

The general consensus in the real estate industry is that the merger highlights the strength of grocery-anchored retail centers. For retail center owners and REITs with grocery-anchored retail portfolios, the grocery market has proven profitable despite being a low-margin business. However, grocery industry consolidation can still be a headache for REITs. Shopping center REITs have diversified their portfolios to withstand any risks from a single tenant, but so much consolidation in the industry doesn’t help matters.

As consumers increasingly shift to e-commerce, many retailers are still figuring out how to capitalize on new technology that drives growth while also delivering profitability. The growth of grocery e-commerce sales surged to $122.4 billion in 2021 from a pre-pandemic level of $66.5 billion. JLL’s latest Grocery Tracker report predicts grocery e-commerce sales to expand massively to more than $240 billion by the end of 2025. The expansion of e-commerce has led to some trepidation among grocery chains, but it has not so far diminished the demand for brick-and-mortar grocery-anchored shopping centers. 

Chains like Kroger and H-E-B are adapting to the impact of e-commerce by partnering with tech firms and investing in digitization to improve in-store experiences, such as improved self-checkout lines and the ability of customers to build online grocery lists. The role of the brick-and-mortar store continues to be significant, for now, and that’s reflected in the sales of grocery-anchored retail properties. Grocery-anchored retail had the largest share of retail property acquisitions in 2021, with sales totaling $13.3 billion. And 2021 also saw a record number of grocery-anchored retail property transactions with 735 trades.

The Kroger-Albertsons merger will affect many things, including consumers and grocery workers, and anti-trust regulators at the FTC will examine the deal closely. But the potential merger could also significantly affect retail landlords who have relied on big grocery chains. The impact on retail real estate of the merger would be mostly positive, as the deal reinforces the appeal of brick-and-mortar grocery stores. If the deal does get approved, it likely won’t be finalized until early 2024. In the meantime, retail landlords can strategize how to best take advantage of it.

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