The proposed merger between supermarket chains Kroger and Albertsons has become the latest sign of a reshuffle in the ranks of anchor grocery tenants, creating a new reality for mall owners.
Last week, reports emerged that the nation’s second-largest grocery chain, Kroger, had agreed to buy Albertsons in a deal valued at $24.6 billion. Together, Albertsons and Kroger currently operate a total of 4,996 stores under various brands, 66 distribution centers, 52 manufacturing plants, 3,972 pharmacies and 2,015 fuel centers in 48 states and the District of Columbia. Kroger has 2,723 stores in 35 states under brands such as Ralphs, Fred Meyer, Smith’s and King Soopers. Albertsons has 2,273 in 34 states and the District of Columbia, including Safeway, Tom Thumb, Vons, Pavilion, Jewel-Osco and Acme.
The deal is expected to close in early 2024 subject to regulatory approval on antitrust matters by the Federal Trade Commission and the Department of Justice. The U.S. Senate has already warned it plans to hold a hearing regarding competition concerns stemming from the merger, which would give the combined company 19% of the nation’s grocery market, reports Forbes. Kroger and Albertsons announced plans to proceed with store divestitures, and Albertsons said it was ready to form a SpinCo subsidiary.
This would be spun off before the merger closes and would operate as a stand-alone public company that could use a variety of strategies ranging from operating properties, selling them or closing stores, and real estate valuation. The two grocers will work together to determine which stores would include SpinCo., which is expected to include between 100 and 375 stores.
“If you just take a look at the cards that show their wallets and match that with historical transactions of a similar nature, so they pass the FTC as well as their own internal analysis, you’re definitely going to end up with a number of assets that will be excluded from the transaction,” said Daniel Taub, senior vice president/national director, retail, of real estate services firm Marcus & Millichap.
The combined companies would have a high concentration and overlap in the Mid-Atlantic, Midwest, Southwest and Pacific Northwest markets, Taub said. Some stores in these markets may be closed as it might be cheaper to pay rent for unused property than to stock the store, employ staff and continue to run unprofitable operations.
Sales per square foot will be one of the most important factors in deciding which stores to close, but decisions will also hinge on concerns about giving up market share to a competitor across the street, says Margaret Caldwell, Investment Broker at Northmarq. , a provider of capital markets services to the real estate industry. Caldwell notes that there are Kroger and Albertsons stores in close proximity to each other on the West Coast.
Nationally, Kroger is currently ranked second in market share at 10.2%, notes Caldwell. Walmart ranks first and controls a 21.3% market share. Costco is ranked third with a 7.0% market share and Albertsons fourth with a 5.8% market share.
Kroger tends to have a weaker presence in parts of Texas, parts of the Midwest, northern California and the Philadelphia-to-Boston corridor where Albertsons exist, but there are few Kroger stores, Taub says. Typically, Kroger’s sales per square foot are 10-20% higher than Albertson’s. Kroger will want to improve that and closing underperforming stores is one way, says supermarket analyst David Livingston. The problem is that grocery store leases in malls typically last up to 20 years and if a store closes, grocers still have to pay the rent.
“The FTC doesn’t allow businesses to close or sell weak stores,” says Livingston. “They have to sell both the good and the bad store to competitors. When they sell the overlapping stores, sales from the remaining stores will increase as loyal shoppers move to other locations.
Kroger will likely refrain from selling stores to strong competitors like Walmart Market and Whole Foods, even if they are the highest bidders, predicts Livingston. The company will want to sell the stores to the least competitive grocers in the market and to weak, undercapitalized buyers using borrowed funds at a high interest rate “is a recipe for disaster,” Livingston notes.
He worries about what will happen if hundreds of stores are sold, as he expects, to smaller competitors. Many of them may not survive a year after the transaction, leaving empty real estate behind.
Plus, “I’ve read how they’re creating a new company called Spinco that will buy up surplus stores, have capital and good management to compete,” Livingston notes. “Yes indeed. Create your own competitor. The fox will build a chicken coop and make sure it is fox proof.
Spence Mehl, principal at RCS Real Estate Advisors, disagrees with Livingston’s concerns. “The FTC makes these divestiture decisions and if they look in the market and see four to five particular Albertsons-Kroger stores in a particular market and want competition, they will tell them to sell that store as a supermarket,” said Mehl. “While there is a huge amount of overlap, 48% of Albertsons stores [are] less than three miles from a Krogers. There will be a lot of assignments here. I hear numbers ranging from 300 to 450. But I don’t think there will be mass closures in this situation. There could be, but I think it will be de minimis.
Leases for the current stores would likely go to another grocer, according to Mehl.
Kimco Realty, North America’s largest shopping center REIT, released a statement praising the merger. According to Conor Flynn, CEO of Kimco, the sale “provides a significant source of capital at a time when capital is at a premium for the industry. It will also provide an additional source of capital to fund new investments and unique opportunities.
According to Taub, another unlisted shopping center REIT, Phillips Edison & Co., has more potential exposure to the merger because it operates in secondary and tertiary markets, whereas Kimco over the years has continued to markets at stronger growth and more primary. and leading secondary markets.
“The reason this is important is that when you get into the secondary and tertiary markets, there are only a few grocery dollars that can flow and not a lot of growth in those markets,” says Tab. “It’s not like Florida, Atlanta or Charlotte with growth that can support more grocery dollars. If you are in a secondary or tertiary market in the Midwest or in a slow growing market and your grocer is closing, it is very unlikely that you will be able to replace that grocer with another brand name grocer.
On the other hand, since grocery store operators tend to control their properties for decades, an operator closing the store could mean freedom from below-market rents and other restrictions, according to
Marc Menick, president of NAI KLNB, part of NAI Global, a New York-based commercial real estate services company.
“For good real estate, this could be a tremendous opportunity to unlock a lot of these things,” Menick says. “If I have a mall encumbered by one of these leases at $4 per square foot rent in a $12 per square foot market and there’s good activity, I’m happy to pick it up. Grocery stores are anchors and know they are anchors and hold a pretty heavy hand and will dictate what happens with this mall, such as no-build zones, restrictions on certain types of uses like a bakery or a pharmacy . Unlocking all of this on real estate that is good and marketable is very valuable.
The overall outlook for the transaction is positive for commercial real estate, Taub said. This “validates the physical nature of grocery stores” as Kroger sees operational opportunities in new geographic corridors. Also, many malls will welcome the merger because Kroger has better credit than Albertsons, and will make their assets more valuableTaub adds.
“You lower your risk, improve your credit and increase the value of Kroger being the ultimate lease guarantor. It lowers the cap rate and creates more long-term security not just with the anchor, but with small [shops]. The composition of the portfolio is improved.
