A deal could be the industry’s largest in years and would almost certainly invite antitrust scrutiny from regulators.
The grocery giants Albertsons and Kroger are in talks to combine in a deal that would be one of the industry’s largest in years, creating a colossal food retailer aimed at taking on Walmart, four people with knowledge of the plans said.
The deal could be announced as soon as Friday, said the people, who requested anonymity because the talks were confidential.
A merger would combine the two largest grocery chains in the United States, which together generate annual revenue of $209 billion and have more than 5,000 stores across the country. That would put them more in the running against big-box operators like Walmart, Amazon and Costco. Last year, groceries made up $218 billion, or 55 percent, of Walmart’s U.S. sales.
A deal would almost certainly invite antitrust scrutiny from regulators, who have been zeroing in on the potential power of large companies to affect prices as inflation drives up the cost of food and other commodities. Kroger and Albertsons would most likely include a proposal to address any antitrust concerns by selling off certain stores. Lina Khan, who leads the Federal Trade Commission, which is likely to review any deal, has expressed skepticism that such solutions are sufficient.
“They’re going to face a level of scrutiny that grocery mergers have not in the past,” said William Kovacic, a former F.T.C. chairman.
Kroger and Albertsons did not immediately respond to a request for comment on the potential merger, which was reported earlier by Bloomberg.
Kroger, based in Cincinnati, operates 2,750 grocery stores across the United States under banners that include Ralphs, Dillons and Harris Teeter and has a market capitalization of about $32 billion. Albertsons, based in Boise, Idaho, runs 2,200 supermarkets under names like Albertsons, Safeway and Vons and has a market capitalization of roughly $15 billion.
Albertsons was acquired in 2006 by the private equity firm Cerberus and a consortium of investors, which merged it with Safeway in a $9 billion deal in 2015. Since then, it had contemplated a number of ultimately aborted deals, including a merger with Rite Aid in 2018 as well as Whole Foods Market and Sprouts Farmer Market the year before. The grocer announced in February that it was exploring options, including a sale of the company.
Some industry analysts said a merger was necessary for Albertsons and Kroger to compete against the big-box stores. In California, for example, supermarkets had 95 percent of the retail food market 25 years ago, said Burt Flickinger III, the managing director of Strategic Resource Group, which works with the supermarket industry. Today, he said, that share is down to 35 percent.
“These two companies can combine their skills and scale and improve their buying or procurement power relative to Amazon, Costco or Walmart,” Mr. Flickinger said. “You really need the combination to lower the operating costs and, at the same time, give them more leverage to decisively lower prices to shoppers.”
While grocery stores rode high during the pandemic as homebound consumers stocked up on food, they have more recently faced pressure amid supply chain challenges and the rapidly increasing costs of food. Grocery chains must balance their relationships with consumer brands that sell products via their stores and shoppers who are squeezed by inflation and looking to save money, a formula for razor-thin profit margins.
The latest Consumer Price Index, released on Thursday, showed that inflation remained stubbornly high over the year through September, with food prices continuing to rise.
Still, mergers in the industry have a rocky track record. The two biggest food distribution companies, Sysco and US Food, called off their $3.5 billion deal in 2015 after the F.T.C. sued to block the deal. That same year, the F.T.C. required Albertsons and Safeway to sell more than 100 stores before their deal got clearance. The grocer that bought those stores, Haggen, later filed for bankruptcy.
Regulators are likely to scrutinize and require divestment of stores in cities and other areas where there is significant overlap between Kroger and Albertsons, said an investment banker who is not involved in the deal and who asked his name not be used. Key cities that the F.T.C. is likely to look at include Chicago, Denver and Seattle, he said.
The possible deal had already raised flags to consumer protection groups by Thursday afternoon. The American Economic Liberties Project, a nonprofit that promotes antitrust legislation, criticized the possible merger as a “bad deal for consumers, workers and communities.”
“A Kroger-Albertsons deal would squeeze consumers already struggling to afford food, crush workers fighting for fair wages and destroy independent, community stores,” Sarah Miller, the group’s executive director, said in a statement. “This merger is a cut-and-dry case of monopoly power, and enforcers should block it.”