The case for a smaller, better Albertsons
What is the path forward for the storied grocer Albertsons? Notwithstanding its ongoing court battle with Kroger, the company is fighting for its future in the open market. I thought we’d take a look at the battlefield, consider where things stand and, perhaps, ideate a path forward for Albertsons.
Albertsons’ court case continues in Delaware as it seeks to hold Kroger responsible for the failed merger between the two companies. As part of its argument, Albertsons believes Kroger owes it another $8 billion in damages. Whether it will actually receive anything close to that remains to be seen.
Ultimately, I suspect the outcome will come down to the specific language – or lack of it – in their merger agreement regarding each party’s responsibilities, including whether Kroger was justified in holding back certain preferred store locations unless specifically directed by the courts to divest them.
There is a lot of gray here, and neither side’s position is necessarily black and white. The resolution will depend on what the companies contractually agreed to, in writing. As spectators, we simply don’t have enough information to determine who has the stronger argument.
But we can speculate…
Let’s say Albertsons receives its $600 million breakup fee but doesn’t get the additional damages it is seeking. What then?
Well, it’s no secret that Albertsons needs capital. It needs to aggressively update stores, improve operations and, perhaps most importantly, figure out its USP – that’s ‘unique selling proposition’ for those of us who aren’t into the latest acronyms.
Kroger wants to be America’s grocery store, and it has the scale to pursue that ambition. Walmart, Aldi and Costco are playing the value game, competing aggressively on price.
Traditional grocery retailers – the so-called “mushy middle” – have arguably been hurt the most by the current economic environment. They’re not the cheapest option, nor are they consistently offering the differentiated experience or premium positioning that can justify higher prices. Albertsons finds itself squarely in that territory.
So, is there a way out?
One of the biggest questions I had about the proposed Kroger-Albertsons merger was why it made strategic sense in the first place. Beyond the ambition of creating a larger national grocery company, was there a compelling financial case for a transaction of this size?
Both companies already had substantial buying power, sophisticated supply chains, national reach and significant workforces. Would combining them produce meaningfully better pricing or operating efficiencies? Perhaps, but I was never convinced the benefits would justify the enormous complexity.
Combining brands, stores, systems and customer habits would have been a multiyear undertaking, costing millions, potentially billions, of dollars. For what ultimate return?
I think one of Albertsons’ biggest problems was that its plan for the future appeared to depend heavily on being acquired and allowing someone else to figure out the next chapter. I recognize that’s a harsh assessment, but we’ve also seen positive movement at the board and executive levels since the merger collapsed. Albertsons is actively working to assemble the leadership team needed to address its challenges and we applaud that.
So let’s spend less time debating what went wrong and more time discussing what could go right.
The Path Forward for Albertsons
I think it’s important to approach this geographically first.
The Northeast is one of the toughest grocery corridors in the country for a variety of reasons. Albertsons’ banners here – Safeway, Shaw’s, Acme, Kings, Star Market, Balducci’s and others – represent a mixed portfolio of brands, market positions and customer perceptions.
The bigger issue, in my view, is that Albertsons’ corporate scale doesn’t necessarily translate into consumer recognition or loyalty in these markets. Customers aren’t walking into their local Acme or Shaw’s thinking about how the purchasing power of the parent company helps their wallet. They’re evaluating the individual store and its brand against the competition around it.
Albertsons may have significant scale, but that advantage isn’t necessarily visible to the customer. So let’s fix that.
Exit the Northeast
My first suggestion would be to seriously consider divesting the entire Northeast portfolio.
There are enough retail and wholesale competitors in this region that would likely be interested in acquiring stores to strengthen or fill in their existing markets. Some banners could continue operating independently, such as Balducci’s, while others could be converted to competing regional brands and integrated into existing operations.
The Northeast is valuable. Good grocery locations remain at a premium, and many of these markets represent mature, established businesses. Albertsons could potentially realize significant value by selling the portfolio, either as a collection of regional businesses or through individual market transactions. Doing it piecemeal wouldn’t draw the ire of regulators either.
Those proceeds could be reinvested in store renovations, operational improvements and opportunities in markets where Albertsons has a stronger geographic advantage. It would be a difficult decision, particularly given the history of these banners. But sometimes the best way to strengthen a company is to recognize where it doesn’t need to be.
(Re)Focus on the West
With the exception of Jewel-Osco, I would seriously consider concentrating Albertsons’ footprint west of the Mississippi.
A more geographically focused company could improve operational efficiency, simplify distribution and allow management to concentrate its resources on markets where it already has meaningful scale. The days of shipping products and managing operations across an unnecessarily expansive footprint would become less of an issue.
Kansas and Missouri are notable gaps in Albertsons’ broader western footprint. Perhaps there are opportunities to acquire stores or regional operators that could fill in those markets and make its existing supply chain more efficient.
I’m not suggesting an acquisition spree for the sake of drawing a more complete map. But strategic infill opportunities could make sense if they improve distribution economics and strengthen market share. Operational efficiency has to be paramount here.
Brand Build, Brand Build, Brand Build
There are good reasons to preserve a locally loved grocery brand. Customer loyalty, regional heritage and community recognition are valuable assets. But there are just as many reasons to have a plan for consolidating disparate brands under a stronger national identity. I think there’s too much deference attached to banners, and companies need to pick and choose which ones offer meaningful differentiation; and which ones should get merged.
That doesn’t necessarily mean eliminating every regional banner overnight. It does mean establishing a consistent brand promise and making sure the parent company’s scale translates into something meaningful at the store level.
Within five years, customers should have a better understanding of the company behind their local store and what that company stands for. That means a clear transition growing the prominence of the new brand while minimizing the old.
Perhaps Albertsons remains the corporate name while Safeway becomes the primary consumer-facing brand. Or perhaps another banner is better positioned to carry that vanguard responsibility.
The point is to pick a direction and commit to it. Find a brand identity that customers can recognize, trust and connect with. Then brand the heck out of it.
Premium Experience
Create an exceptional experience for customers. I don’t think you can go wrong by offering consumers a little more than they expect, particularly when you can do it at a reasonable price. Starbucks built an enormous business around the idea that people are willing to pay for an experience, not just a product.
Albertsons doesn’t need to compete exclusively on price. It needs to compete on quality, service and the overall experience of shopping in its stores.
Chick-fil-A took what I would consider a fairly ordinary chicken sandwich and built a remarkable business around it through customer service, a well-executed dining experience and attention to families. Target, for years, successfully positioned itself as a more enjoyable shopping experience even when its prices were higher than Walmart’s.
The lesson is that customers will pay for an experience when they believe they’re getting something better in return.
For grocery, that could be as simple as having additional associates available to help customers carry groceries to their cars, or as ambitious as investing in significantly upgraded stores, better prepared foods and more engaging departments.
It doesn’t have to be extravagant – and it can be service. Affordable luxury has a place in just about every economic environment.
Make Customers Feel Rich
In today’s economic environment, consumers are struggling. If you get out and talk to people, you can get a real sense of how difficult things have become for many households. So give consumers a taste of living well, even when they’re on a budget.
That might mean steak-night promotions, grill-master specials, charcuterie boards or game-day luxuries. Hosting company is an occasion where people splurge and try to show off. Give customers affordable ways to enjoy the things they associate with a better lifestyle. More importantly, give them reasons to make your store part of those occasions.
When their economic circumstances improve, you want them to remember the retailer that helped them enjoy a little more along the way.
There’s a frequently repeated line, often mis-quoted from John Steinbeck, about Americans seeing themselves not as an exploited working class but as temporarily embarrassed millionaires. The quote is questionable, but the underlying observation is accurate: People aspire to a better lifestyle, even when their current circumstances don’t allow them to fully enjoy it. Grocery retailers should understand that aspiration and find ways to participate in it.
Lean In on Private Label
Look at some of the best grocers in our markets and you’ll see that their private label programs are magnificent. We’ve talked about this often, but private label shouldn’t simply be viewed as the cheapest item on the shelf. It can be. But, it is also an opportunity to build a product relationship with customers and create loyalty – to both the retailer and its own brands.
Scale is one of the ultimate advantages in private label, and Aldi has demonstrated just how powerful that can be. I’d suggest developing two clearly differentiated tiers: a deep-discount assortment that delivers on price and a premium assortment that competes on quality, uniqueness and margin.
We’ve seen retailers demonstrate that their private brands can command a premium when the products deliver something customers genuinely value. And consumers, ala Costco, are more open to the concept that store brands can be just as good, if not better than national brands.
Maximize the supply chain, build distinctive products and use private label to give customers affordable luxury. It can be both a margin opportunity and a reason for shoppers to keep coming back.
Reality Checks
Our industry is at a real pivot point. Technology, economic constraints and changing consumer expectations are forcing retailers to reconsider how they operate and where they invest.
Notice I didn’t say “use more AI” or “automate everything.” Technology has an important role in increasing productivity, but some of the biggest challenges facing grocery retailers are more fundamental. The shifting global business landscape is making it increasingly difficult to keep up, even for some of the largest and most established players.
We recognize the challenges our readership faces – And we are ardent supporters of this industry and the people who make it work. At a time when too many commentators seem eager to portray grocery retailers and the broader food industry as the bad guys, I want to be clear about where we stand…
Me and my colleagues are among the industry’s biggest cheerleaders.
That doesn’t mean we won’t challenge its decisions or point out where things need to change. In fact, we believe that’s part of our responsibility. We want the best for our readers, our industry and the companies that put food on America’s tables.
Albertsons is an important part of that industry. I’d miss having its banners in the Northeast, particularly the local history and character that some of them represent. But if a smaller, more geographically focused and financially stronger Albertsons emerges from this period, I’d be all for it.
Sometimes moving forward means recognizing that the company you were yesterday isn’t necessarily the company you need to be tomorrow. And Albertsons has some important decisions to make.