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Jewel, Marianos may merge in a possible mega-merger

Kroger, the largest traditional grocery chain in the nation, is reportedly in talks to buy Albertsons, creating a supermarket with nearly 5,000 stores and more than $200 billion in annual sales.

The potential supermarket mega-merger is also likely to draw regulatory scrutiny in markets like Chicago, where rival chains Jewel and Mariano’s could end up in the same corporate basket.

Cincinnati-based Kroger has 2,750 supermarkets in 35 states, including more than 40 Mariano̵[ads1]7;s stores in the Chicago area. Albertsons, which is based in Boise, Idaho, has more than 2,200 supermarkets in 34 states, including 188 Jewel stores in the Chicago area.

How many of the overlapping stores may have to be sold to other merchants, or closed, remains to be seen, according to industry analysts.

“The regulatory side of this is a very real issue,” said Zain Akbari, an equity analyst who covers the grocery industry for Chicago-based Morningstar. “In Chicago, both Albertsons and Kroger maintain significant presences through both Jewel and Marianos. And that history is repeated in many other markets across the country.”

Jewel, Marianos may merge in a possible mega-merger

Neither Kroger nor Albertsons responded to requests for comment Thursday. Bloomberg reported Thursday morning that a deal could be reached this week, citing people familiar with the matter.

Kroger and Albertsons largely bought their way into the competitive Chicago market through acquisitions over the past decade. But thin margins and the emergence of Walmart and Amazon as major players — both with brick-and-mortar locations and the growing online segment — may be behind the urge to merge for Kroger and Albertsons, Akbari said.

“Scale is an advantage in the grocery landscape, especially in local markets,” Akbari said. “The grocery industry has very, very tight margins, and any savings you can get is beneficial just because the industry is as price competitive as it’s always been.”

A potential merger would bring together one of Chicago’s oldest grocery chains and its primary challenger in the new millennium.

Founded in 1899 as Jewel Tea, a horse-drawn delivery service selling tea and coffee, Jewel grew into the largest grocery chain in Chicago, with 188 stores in the city and suburbs. In 2013, Jewel was sold to Cerberus Capital Management as part of a $3.3 billion acquisition that also included the now publicly traded grocery chain Albertsons.

Mariano’s was launched in 2010 by former Dominick’s CEO Bob Mariano. The chain grew rapidly in the wake of the 2013 death of Dominick’s, a venerable Chicago grocer, which was shuttered by parent company Safeway. In 2015, supermarket giant Kroger bought Mariano’s parent company, Milwaukee-based Roundy’s, for $800 million.

Last year, Mariano’s opened the first of its new downsized fresh grocery stores, Dom’s Kitchen & Market, in Lincoln Park, with another slated to open in Old Town next month. Meanwhile, his namesake remains a big part of the Chicago grocery landscape under Kroger.

Founded in 1883, Kroger exited the Chicago market in 1970, selling its stores to Dominick’s. But it found its way back with the 1998 acquisition of California-based Food 4 Less, a mid-sized discount chain. It now has 104 stores in Illinois under the Kroger, Mariano’s and Food 4 Less banners.

Kroger is projected to generate nearly $150 billion in revenue this fiscal year and has a market value of nearly $33 billion, Akbari said. Albertsons is projected to generate $76 billion in revenue by 2022, and has a market capitalization of nearly $14 billion.

Albertsons’ share price rose 11.5% on Thursday following the merger speculation, while Kroger was up around 1%.

Akbari said Kroger stands “well above” other traditional grocers with analytics, its private label offerings and digital capabilities. He said Albertsons is “a step behind” on all fronts. For Kroger, the deal would expand its footprint, digital capabilities and help it leverage costs.

The backers of Albertsons, including Cerberus Capital, which remains the largest shareholder with a 28.5% stake, have been shopping the grocery chain this year and wanted to cash out, Akbari said.

Kroger will potentially add thousands of brick-and-mortar grocery stores, but the merger’s primary focus may be on the growing digital market.

The pandemic has driven a major shift to online grocery shopping, with sales at retailers nationwide growing 55.6% in 2020, and another 11.3% last year, topping $121 billion, according to research firm Insider Intelligence. Online grocery sales are projected to grow 15.8% in 2022 to around $140 billion.

By 2025, online sales are projected to reach about $212 billion, or nearly 14% of the $1.5 trillion U.S. grocery market, according to Insider Intelligence.

Walmart has leveraged its massive retail footprint to become the largest player in online grocery sales at nearly 28%, followed by Amazon, which has a 21% share through its Fresh and Whole Foods stores, according to Insider Intelligence.

Kroger has about 10% and Albertsons less than 4% of the online grocery market, but Blake Droesch, an analyst who covers retail and e-commerce at Insider Intelligence, said they could increase their online share through the merger.

“Kroger has been investing in digital for a long time, while Albertsons has been pretty late to the game,” Droesch said. “Kroger can continue to grow digitally by leveraging Albertsons locations as fulfillment centers to drive sales, while for Albertsons, they’re going to have access to this delivery infrastructure that they’ve never had.”

Chicago customers could see some other changes if the merger is approved.

Kroger’s private label brands, including Private Selection, Kroger and Simple Truth, which are spread at Mariano’s, will likely hit the shelves at Jewel after the merger, Akbari said.

It remains to be seen whether the stores will adopt a common name or continue to operate under separate banners. But even if regulators don’t require divestitures, Akbari expects there will be some downsizing of the Chicago portfolio — if Jewel and Mariano share the same owner.

“At the end of the day, regulators aside, there’s probably a decent case for getting rid of some of the stores in this area,” Akbari said. “Add Jewel to Mariano’s and you’re probably a little too close.”

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