Pasco, WA Albertsons rebrands to Safeway

[pseudo3d]

I've said it before, that although the Federal case right now should only deliver a yes/no judgment on the call for immediate injunction, the fact is that the attached justification will wind up creating the deal. The judge can't just say "Nope, I don't like it, it's a no go for me, adios!". They have to write a legal explanation for their findings, and within that is the remedy. This is why I show up to respond to every absoluteist response.

Having said that, the court could attach a finding that is so unpleasant that they call off the deal. If for example the judge found that the merger plan must call for every single store everywhere the FTC mentioned in the hearings must be divested to overturn the need for a preliminary injunction (I think that was 1350+) obviously they're not going to fight that and will have to walk. But if they said "injunction issued because we see 900 unacceptable overlaps listed in exhibit X and the merger plan only divests 600 of them" that is in effect a "yes" judgment even though it sounds like a no since it explains how they can remedy the situation, and then maybe they can whittle that down to 800 or something and gain approval.

Kroger gave a number, I think it was 650, that if they reached that number, they'd cut it off. Kroger would cut the whole merger rather than 800 stores get divested.

[ClownLoach]

I've said it before, that although the Federal case right now should only deliver a yes/no judgment on the call for immediate injunction, the fact is that the attached justification will wind up creating the deal. The judge can't just say "Nope, I don't like it, it's a no go for me, adios!". They have to write a legal explanation for their findings, and within that is the remedy. This is why I show up to respond to every absoluteist response.

Having said that, the court could attach a finding that is so unpleasant that they call off the deal. If for example the judge found that the merger plan must call for every single store everywhere the FTC mentioned in the hearings must be divested to overturn the need for a preliminary injunction (I think that was 1350+) obviously they're not going to fight that and will have to walk. But if they said "injunction issued because we see 900 unacceptable overlaps listed in exhibit X and the merger plan only divests 600 of them" that is in effect a "yes" judgment even though it sounds like a no since it explains how they can remedy the situation, and then maybe they can whittle that down to 800 or something and gain approval.

Kroger gave a number, I think it was 650, that if they reached that number, they'd cut it off. Kroger would cut the whole merger rather than 800 stores get divested.

That number is merely the contract maximum. All it means is that after that point the contract for the merger has to be rewritten. They would obviously demand a much lower price per store. Basically they're selling divests for less than half of what they pay per store they get right now. So the more they divest cheap, the higher the payment for each store bought (since the divest payment is credited towards the purchase price). There is no guarantee that they walk if the divest count has to go over the top. If anything, Kroger would likely use the opportunity to both lower their offer to reflect the currently lowered stock price and also rescind "guarantees" of no closures, no layoffs etc. Buying Albertsons for less means more profit opportunities as long as they can still scale up and expand into new markets, meaning they're actually very likely to approve a revised deal. Thus Kroger actually wins up to a certain point with more divests. Although there is also no guarantee Albertsons shareholders have to agree to a revised contract.

I think the problem for Kroger is the lack of quality buyers as the count goes up. I think C&S is probably fine with what they're getting now but not one more store, they need to sell someone else additional divests to reduce "all the eggs in one basket" risk and I don't think there's any other buyer unless every part of the divest list is redone and split differently for multiple qualified parties. The questions around C&S I feel have been addressed for the amount of stores they're getting now and people in charge but I stop it there. Furthermore I feel like the entire C&S negativity is deliberate spin from Kroger PR to turn attention away from what they're going to do with the Albertsons stores once they get them...

Simplest way I can put it. Albertsons brings in $80B per year. Kroger says Albertsons prices are 10% higher than their prices. Kroger says they'll lower prices by $1B. That means to me Albertsons will operate the Albertsons stores with collectively higher prices than Kroger stores, as lowering prices 10% to match Kroger would mean a $8B price cut. Kroger wants you to worry about what C&S will do, and not what they will do, which will be removing a competitor and failing to resolve the problems they state are present with Albertsons pricing. Since they obviously are telling us they won't fix Albertsons pricing once you do the math, that means they probably won't keep their other promises either. They're already telling us they're lying.

This probably all belongs in the merger discussion instead of here.

[storewanderer]

I am HIGHLY concerned about Kroger and pricing with this merger.

In my market the price difference between Safeway (using NorCal pricing) and Smiths (using Utah pricing) is DRASTIC.

For example I was looking at some drug items.
3.3oz Colgate Total Toothpaste- Safeway wants 8.99 for this item. Smiths is priced at 4.49 but has sales going on in the 3.49-3.99 range constantly (last week had it on a buy 3 save $5 promotion).
Garnier Shampoo- Safeway wants 7.79 for this item. Smiths is priced at 4.99 but has sales going on at the 3.99-4.49 range constantly. Again that also had a buy 3 save $5 promotion last week.

Meat pricing continues to be a huge problem at Safeway and gets worse and worse. The 10.99/lb 80/20 ground beef remains, along with the 12.99/lb cubed steak, the 9.99/lb pork chops, the 20.00+/lb steaks... it is absurd.

Similar differences across the store.

My concern is Kroger decides to gift the local Smiths to NorCal Safeway who will undoubtedly shift the stores over to the Safeway price scale...

[ClownLoach]

I am HIGHLY concerned about Kroger and pricing with this merger.

In my market the price difference between Safeway (using NorCal pricing) and Smiths (using Utah pricing) is DRASTIC.

For example I was looking at some drug items.
3.3oz Colgate Total Toothpaste- Safeway wants 8.99 for this item. Smiths is priced at 4.49 but has sales going on in the 3.49-3.99 range constantly (last week had it on a buy 3 save $5 promotion).
Garnier Shampoo- Safeway wants 7.79 for this item. Smiths is priced at 4.99 but has sales going on at the 3.99-4.49 range constantly. Again that also had a buy 3 save $5 promotion last week.

Meat pricing continues to be a huge problem at Safeway and gets worse and worse. The 10.99/lb 80/20 ground beef remains, along with the 12.99/lb cubed steak, the 9.99/lb pork chops, the 20.00+/lb steaks... it is absurd.

Similar differences across the store.

My concern is Kroger decides to gift the local Smiths to NorCal Safeway who will undoubtedly shift the stores over to the Safeway price scale...

It doesn't add up. Like I said, their statement is the prices are 10% higher, maybe that's across the board. Maybe my math is slightly off since I didn't factor in the divests which are going to be a $20B business for C&S. You still have the same problem with the remainder, a $60B business that needs to come down 10% per Kroger or $6B but they promise only $1B in savings. Meanwhile they pay $20B or so for the company and put their balance sheet in debt far deeper than the Albertsons balance sheet they claim causes the high prices.

They're cleverly lying by using the words price cut while their numbers explain an overall massive price hike to pay for the Albertsons asset. And as I've said before, they're paying so much per store that it is not something they can easily close and consolidate their way out of to improve margins. The Albertsons sites are contributing less than $2M in EBITDA per unit annually, so they make money but they are buying them for about 7X that amount based on the last calculation I did. So when you factor in interest, planned decrease in price/margin, etc you're talking about ten years before break even as the best possible scenario.

That's too much to smother with closures and consolidations especially on the West Coast where outside of Fred Meyer size units their existing stores lack the capacity to absorb the sales of another without deleveraging labor expenses and such. Especially the Ralphs division where we've already seen too many small sized, overloaded stores. The high margin, lower volume, larger footprint Albertsons concepts are much cheaper to run at this point, very efficient, and as discussed are safely profitable. They're not requiring mid-day shelf stocking labor and such in significant amounts like a overloaded urban Ralphs that lacks the shelf holding power of a real Kroger store, Walmart etc with multiple facings and deeper gondolas for the most productive SKUs. They operate these much like a Trader Joe's, having to constantly keep labor on the floor restocking, but without the supporting high margins of an all private label business. And remember that it seems around half of Ralphs sites are these high volume boxes, the other half are more comparable to an Albertsons business where they too run skeleton crews and bring in minimal revenue as a convenience only shop. This is how they operate outside of the most urban areas and they've been unable to balance the chain which is stuck with either very high or very low volumes.

I don't think spreading the same prices and assortment evenly across key markets like SoCal will necessarily fix the issue either and rebalance the customer traffic into different stores (like for example shift 30% of the traffic from overloaded and labor intensive Ralphs store A into lower volume and low labor Ralphs store B that is a rebranded Albertsons). It would run the risk that the customer who likes the Kroger "experience" (I use that term lightly) doesn't enjoy the Albertsons store and won't move over even though it's now called a Ralphs, and vice versa plus fully remodeling to change the actual format just extends the time period for break even. Since the conclusion we all can reach is that West Coast shoppers go to multiple stores for food anyway, it seems more and more like their primary shops are at Costco, Walmart, Sam's, Target, etc. and then they pick one of the conventionals as a "fill in" or "catch all" and only go to that one based on its convenience, experience, location, or other personal preference since they're obviously not shopping it based on having the best prices.

In short, it's a mess.

By the way, outside of ad prices I should mention that Stater Bros pricing is getting absurdly high as well. They are great run operators, but center store is just getting crazy and produce is in the stratosphere. That was never the case before as their center store always was better priced than the other conventionals. I am not sure I can say that now. $2.50/lb and up loose apples. $6.99 for a bag of green beans that was less than 2 pounds. Also SB brand packaging has disappeared from produce and is now Basket & Bushel from Topco. Why? It seems like the remodeled large format stores where they reduced the size of all produce displays was part of a plan to lower the volume of the department with higher prices and a shift to more prepacked Topco products? They clearly are moving to a strong loss leader ad process, offset by sky high prices outside of the ad. That is going to backfire.

[storewanderer]

What exactly is the Kroger "experience?"

I struggle to even define it. And I am in their stores a lot.

Albertsons has with Safeway gotten it to an experience of clean, orderly stores usually... Center stores are almost always stocked well and neatly arranged. That is a lot more than I could say before Albertsons took over.