Why Kroger, Albertsons need to merge immediately to compete with Walmart

Walmart (WMT) has upended the grocery business and is widening its lead as the industry’s most dominant player.

The retail behemoth expanded its market share during the second quarter, noting "high single-digit growth" in its quarterly results. And as the leadership gap widens and Walmart’s power and influence over the industry grows stronger, competitors have little choice but to join forces.

The grocery business is going through a "revolution," and Walmart is "unstoppable," Burt Flickinger, managing director of consulting firm Strategic Resource Group, told Yahoo Finance.

This week’s move by Aldi to acquire Winn-Dixie and Harveys comes amid wider consolidation across the sector that has reshaped the grocery landscape. Last October, Kroger (KR) announced its acquisition of Albertsons (ACI) for $24.6 billion, an agreement that will combine two of the largest supermarket operators in the US. The deal will create a grocery chain with nearly 5,000 locations, a move that some experts say is necessary to fend off big box rivals.

"Kroger’s acquisition of Albertsons is the last, best, and final chance to level the playing field," added Flickinger, who has worked with and covered the grocery industry for more than three decades.

Up until the rise of supercenters and supermarkets, most Americans shopped at local or regional grocery stores. Now, the top five grocery chains account for nearly half of the market, and Walmart alone controls nearly a quarter of the overall market share.

Growth of supercenters like Walmart, along with club stores like BJ’s (BJ) and Costco (COST), could be the biggest "long-run story" in the food and grocery industry, Eric Fruits, senior scholar at the International Center for Law & Economics, told Yahoo Finance. Fruits also highlighted Amazon’s (AMZN) purchase of Whole Foods for $13.7 billion as another deal that further intensified competition within the industry.

A customer removes her purchases at a Kroger grocery store in Flowood, Miss., Wednesday, June 26, 2019.
A customer removes her purchases at a Kroger grocery store in Flowood, Miss., Wednesday, June 26, 2019. (Rogelio V. Solis/AP Photo, File) · AP

Consolidation among chains has largely contributed to the recent decline in grocery stores across the country. A report by advocacy group Food & Water Watch found that the number of US grocers fell by roughly 30% from 1993 to 2019, while a study by the US Department of Agriculture showed that from 2005 to 2015 the market share held by independent grocers fell in 41% of the counties across the US.

The uptick in M&A activity comes as scale within the industry becomes more important. Larger companies have more leverage than their smaller rivals, giving them more power to negotiate lower prices with suppliers, something that advocacy groups say will put more pressure on smaller grocers and independent businesses.