By Evie Liu
Kroger’s earnings report set for Thursday comes at a time when the largest grocery operator in the U.S. is trying to further consolidate its market share to compete with Walmart and Costco Wholesale.
For the fourth quarter ended Feb. 3, Wall Street expects sales to grow by 6.4% from a year ago to $37 billion, according to analysts polled by FactSet. Earnings are estimated at $1.13 per share, up 14% from the year-ago period.
Prior to the fourth quarter of 2023, sales were lower than a year ago for two consecutive quarters, even though prices of most goods in grocery stores have gone up.
Grocers are facing a tough environment. Consumers are dialing back spending amid inflation, while big-box chains like Walmart and Costco have been gaining market share in food retail as they leverage their size for cheaper prices.
Meanwhile, e-commerce competitors like Amazon.com have disrupted the bricks-and-mortar business, making store pickup and home delivery nearly a necessity for grocers to stay competitive.
In 2022, Kroger announced plans to acquire rival Albertsons for $25 billion. The two grocers say that coming together would allow them to compete more effectively, offer lower prices, and pay higher wages to workers.
Kroger currently has more than 2,700 stores across the nation under a dozen banners like Ralphs and Food 4 Less. A merger with Albertson would create a significantly larger company with nearly 5,000 stores and more than 700,000 workers — though still smaller than Walmart.
But the Federal Trade Commission sued to block the merger last month, citing concerns about reduced competition in some markets that could lead to higher consumer prices, fewer product offerings, and lower worker wages.
The FTC identified 85 local markets in 17 states where Kroger and Albertsons are the dominant grocery sellers, which means the risk of monopolist control is high. California, Washington, Colorado, and Oregon have the most markets on the list.
Traditional supermarkets aren’t the only competitors for Kroger and Albertsons, since many other retailers also sell grocery items. Still, the FTC argues that even if the non-supermarket retailers are included, the merger is still presumptively unlawful in most of the identified markets.
If the combined Kroger-Albertsons jack up prices or reduce the quality of their product and service offering, consumers won’t be able shift enough of their purchases to non-supermarket retailers because the latter provide a very differentiated customer experience, the agency says.
Club stores like Costco and Sam’s Club, for example, require membership fees and offer larger package sizes but far fewer grocery options. Discount grocers like Aldi and Lidl often sell private labels as opposed to national brands, and don’t have services like deli, butcher, bakery, and prepared food.
Kroger said it’s ready to litigate the FTC’s action in court. The stock has largely stayed range bound since the announcement of the pending merger, trading 8.5% higher than it was a year ago. Shares jumped 1.9% in Wednesday trading ahead of the earnings report.
Write to Evie Liu at evie.liu@barrons.com