Is Kroger Buying Growth...or Buying Time? | Fast Five Shorts
This Omni Talk Retail Fast Five segment examines Kroger's $1.65 billion acquisition of Giant Eagle and what it signals about the future of the grocery industry.
Chris Walton and Ben Miller debate whether Kroger is making a smart strategic acquisition or simply doubling down on a business facing mounting competitive pressure from Walmart, Amazon, Aldi, and Sprouts. They also discuss why a successful family-owned grocer like Giant Eagle may have chosen to sell now, whether the acquisition creates meaningful long-term value, and what it says about the next wave of grocery consolidation.
Tune in for the full episode here: https://youtu.be/-pwAnA4c7Co
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Transcript
The deal is comprised of $1.25 billion in cash, plus the assumption of roughly $400 million in outstanding liabilities.
Speaker A:Giant Eagle is family owned, generates about $9 billion in annual sales and operates roughly 197 supermarkets and 11 standalone pharmacies across northern Ohio, western Pennsylvania, West Virginia, Maryland and Indiana.
Speaker A:Giant Eagle will keep its name, its Cranberry Township, Pennsylvania headquarters and its MyParks loyalty program.
Speaker A: deal is expected to close in: Speaker A:Ben, does Kroger's acquisition of Giant Eagle say more about Kroger or more about the state of the grocery industry itself?
Speaker B:Oh, wow.
Speaker B:What a great place to start.
Speaker B:The state of US Grocery.
Speaker B:Love it.
Speaker B:Look, I think for me there's two perspectives.
Speaker B:There is.
Speaker B:One, is it a good deal?
Speaker B:And then the second is should they do it anyway?
Speaker B:Okay, first, good look, Giant Eagle is a solid business.
Speaker B:Yeah, it's got and it's got some really excellent regional market positions in places where Kroger doesn't.
Speaker B:So it is a good on the whole, a good geographic fit.
Speaker B:Look, there'll need to be some selective store divestments to hit antitrust, but I they should be manageable.
Speaker B:Second, can they get value from it?
Speaker B:So look, they are spending a billion and a half to get another 9 billion in revenue.
Speaker B:So that's better economies of scale, that's better buying, that's deeper.
Speaker B:With CPG partners, you've got to assume the Kroger is buying better than Giant Eagle was.
Speaker B:There's retail media opportunities through Kroger precision marketing.
Speaker B:So that definitely route to add value.
Speaker B:They can absolutely add value to Giant Eagle's econ business.
Speaker B:So Giant Eagle, look, he's got a good curbside game but there is work to do in home delivery that as we know is the fastest growing bit of US grocery E. Com right now.
Speaker B:So there's some strong kind of synergistic rationale there.
Speaker B:The Giant Eagle's private so it's hard to get a really clear read on the financials.
Speaker B:I think the price feels okay, but having a feeling about an acquisition isn't great.
Speaker A:It feels okay.
Speaker A:Yeah, right.
Speaker B:It's not where you'd want to be.
Speaker B:We're taking a view on it.
Speaker B:But look, for everything I know about Giant Eagle they should be Making ebitda of about 250 million a year.
Speaker B:So Giant Eagle spending 1.6 to get another 250 profit.
Speaker B:That's okay.
Speaker B:It's a multiple of what, 6 to 7?
Speaker B:Which feels okay for a big grocery acquisition.
Speaker B:So that's fairly okay.
Speaker B:It's now the should okay.
Speaker B:And the should's difficult because we don't know the background.
Speaker B:We don't know why Giant Eagle are selling.
Speaker B:I mean it could be a point that this is just an offer that's come up that's too good to say no to.
Speaker B:You know, if you're Kroger and this is offered to you at this price, it's hard to know why you would decline.
Speaker B:So look, that's where due diligence is so important.
Speaker B:Why are they selling?
Speaker B:Why now?
Speaker B:It may just be actually a really, a relatively Kroger's 150/billion business.
Speaker B:So it's a relatively small acquisition to buy a good business with good market positions.
Speaker B:They've got new, new leadership so they can put the Albertson thing behind them.
Speaker B:Greg Foreign could say new broom.
Speaker B:Come with me.
Speaker B:You know, there is absolute distraction, risk and, but maybe he needs to do something like this to prove that he can balance everything he needs to do.
Speaker B:But Chris, does it excite me?
Speaker A:Yeah.
Speaker B:Is this, is this the thing that is going to supercharge Kroger?
Speaker B:It's, it's a very Kroger thing to do.
Speaker B:And I'm right and I, I can understand it, it's got rationale, but I, but I'm not sure what they're getting that's new.
Speaker B:You know, both, both these businesses are slowly losing market share to Amazon and Walmart and Sprouts and, and Aldi.
Speaker B:I don't see anything in this is going to help with that.
Speaker B:Now if leadership team can prove that they can bring this acquisition, get this extra scale, drive the value as well as giving us this something new that's exciting.
Speaker B:I buy into that.
Speaker B:But I'd love to see that new and exciting as well, Chris.
Speaker B:I really would.
Speaker A:So, so Ben.
Speaker A:So net net.
Speaker A:You're kind of like eh, meh on this acquisition.
Speaker A:That's how I'd kind of sum it up.
Speaker A:Meh.
Speaker A:You're kind of meh.
Speaker A:Like, you're like okay, I'll take it.
Speaker A:That's fine.
Speaker B:Unless, unless you discover any skeleton in the closet when you're doing due diligence.
Speaker B:It's probably too good an offer to say no to.
Speaker B:But it doesn't wake me up excited in the morning.
Speaker B:Chris.
Speaker A:And it just feels like for you, just like another, it's just like Kroger being Kroger.
Speaker A:That's kind of how you'd sum it up.
Speaker B:It's CRO.
Speaker B:It's Kroger being Kroger.
Speaker A:Kroger being Kroger.
Speaker A:Yeah, and I think I agree with that too.
Speaker A:I mean the other points I'd bring up is I, you know, I think, I think the story and the reason I asked that question is I think it says a lot about the grocery industry too because you know, groceries in a tough spot, it's only going to get worse.
Speaker A:As I've talked about on this show many, many times with you and with others.
Speaker A:And you know, when I look at it from Giant Eagle's perspective, I have to look, you know, I think it's important to think about the motivations here too.
Speaker A:You have a very successfully run family organization in Giant Eagle.
Speaker A: Even remember at FMI back in: Speaker A:I heard her speak and she was talking about the, the, the family owned nature of the business was very palpable in what she's saying.
Speaker A:So basically you have a nine billion dollar family run organization crying uncle on what lies ahead.
Speaker A:That's essentially what's happening here.
Speaker A:So I read this as Giant Eagles leadership and shareholders are saying it's time to harvest and get out.
Speaker A:And if Giant Eagle is doing it because they're one of the more successful players at making a go of it, you can expect a lot more of where this came from down the road here as we look out the next five, 10 years.
Speaker A:Because the latest reports are.
Speaker A:You said it already, Ben, Walmart has 40% of the online US market.
Speaker A:One hour delivery, one hour or less delivery is actually now making up 18% of all grocery orders.
Speaker A:Thank you Amazon.
Speaker A:So Giant Eagle executives may be the smartest executives of the entire bunch here saying we see the writing on the wall, we're getting the hell out.
Speaker A:And Kroger, you're going to be the one left holding the bag on what is potentially a depreciating asset.
Speaker A:I mean, why else would a family owned business sell out?
Speaker A:That's just my take here, Ben, but I don't know.
Speaker A:You get the last word.
Speaker B:I agree with all you've said.
Speaker B:However, if you're sat in Kroger and Giant Eagle comes off on the table to potentially buy for 9 billion.
Speaker B:Do you say no and walk away from that?
Speaker B:Personally, I think you don't.
Speaker B:I think you buy it.
Speaker A:Yeah, that, that brings up the, I don't know what the analogy is, but that means, like, when you're the only, like the only guy or girl at the prom or what are on the dance floor, do you take the dance?
Speaker A:I don't, I don't know what.
Speaker A:But you guys know what, I'm totally screwing up this analogy.
Speaker A:But like, that's what it is.
Speaker A:Like if you're the only suitor, that's you, you know, that is available.
Speaker A:Like, should you be the one signing up for the deal?
Speaker A:I don't know.
Speaker A:I don't know that I, I, I,.
Speaker B:I don't, I, I, I don't think it's that bad.
Speaker B:But we will see.
Speaker B:We will see.
Speaker A:Especially, especially too bend, though.
Speaker A:Like, the other point of this too, which we didn't really talk about is foreign has said 60 of his store base is not where he needs it to be.
Speaker A:And now he's got the distraction of an acquisition and bringing them into the fold.
Speaker A:So like, I don't know, like, it just gets real dicey real quick.
