The Mega-Merge of Grocery-Anchored Tenants
What We Know About the Merge
The impending Kroger and Albertsons merger will enormously impact the real estate market in 2024. Not only is their real estate sought-after, but they have incredible strength within the grocer space and are an anchor tenant for many shopping centers. However, this merger brings uncertainty into the ownership of these assets. Regulatory clearance for this merger will require store divestitures, so the question is not whether store divestitures will happen but which stores will be selected. As it stands, a majority of experts believe that Kroger-Albertsons will divest 200-350 stores, possibly going as high as 650 stores. Deciding which stores will be sold, spun off into a new company, or permanently closed is going to be determined throughout the merger process. It will be critical for investors to get in touch with industry specialists to determine their asset’s risk profile. Store overlap analysis shows that approximately 48% of current Albertsons stores are within 3 miles of a Kroger store. When you extend the radius to 5 miles, the overlap is even greater, bringing the number to 56.5% of stores. This store overlap is going to cause cannibalization concerns for Kroger Co. if the merger does go through.
Not only will regulatory requirements force divestitures but possible cannibalization within a market could also.
What Does This Mean As a Landlord of a Kroger or Albertsons Store?
First, it means that the landlord has significant risk with this ownership. The asset’s value for a single tenant, Kroger or Albertsons store, is primarily based upon that lease and lease guarantee. If Kroger or Albertsons vacates the property, the market value is going to drop expeditiously. The best-case scenario following this is backfilling the store with another grocer. But what grocery chain will want to come in and compete with Kroger 3 miles away? And not only compete, but be able to do better than the Kroger that was previously there? Grocery-anchored centers are better protected if the Kroger or Albertsons tenant vacates or is spun off due to revenue from other tenants in the center. However, how prepared is the landlord to re-tenant the anchor space of the center with an anchor that is just as strong and can drive as much foot traffic?
Vacant big box developers and aggressive value add buyers are chomping at the bit for this merger to go through. Matthews agents have met with numerous groups that pursue vacant big box deals that are already preparing to swallow up these closed grocery stores following the merger. One big box redevelopment group told Matthews, “we’ve already circled stores in major markets like Seattle and Los Angeles to go after if they are closed.” Major MSAs are the likely locations for store divestitures due to their high overlap of stores. In a recent article, Winsight Grocery Business named Southern California, Pacific Northwest, Phoenix, and Chicago the most likely markets to have divestitures.
The big question on everyone’s mind is how do I assess if my store will be a possible divesture choice? There are going to be several factors that determine if a store is going to be a likely divesture store. The first factor is going to be store performance. Does the store report sales? If so, are they strong sales numbers on a per-square-foot basis? The second factor is how close the next nearest Kroger or Albertsons store is. If they are close together, which store is performing better? Which location is paying less in rent? The third factor is the ownership of the next nearest Kroger or Albertsons store. Is the real estate owned by Kroger or Albertsons? The Kroger Co. and Albertsons both like to own their real estate for their stores. If Kroger Co. or Albertsons owns the nearest store to your property, it makes more fiscal sense for them to divest that store versus their own because of their added investment in buying the real estate.
What’s Next For These Landlords?
For these landlords, answering the questions above and building a risk profile for the grocery store property or grocery-anchored center will be crucial in the next few months. Overall, the merger will create a new powerhouse in the grocery industry. The Kroger Co. and Albertsons merger is valued at $24.60 billion. The nearly 5,000 stores between the two companies are projected to generate $220 billion in store sales a year for the company. This merger will move Kroger Co. to the #2 grocery retailer with an 11.80% market share behind Walmart with 17.10%. Kroger believes the merger will allow them to improve their digital technology for -e-commerce and online sales and reduce the cost of groceries through more significant resources.
If you own one of these assets, it has never been a more critical time to contact a market specialist to help you analyze your risk and determine the best plan forward. While the merger may or may not go through, waiting until 2024 or until the merger is finalized to assess your risk profile is not only failing to plan but planning to fail. Please contact a Matthews specialized agent to receive a risk profile on your store.