By Evie Liu
Albertsons might have a harder path ahead after the attempted merger with Kroger failed last week.
The difference between the consumer price index and the producer price index for food tends to be a decent proxy for grocery profit margins. According to data released last week, the spread decreased to just 0.24 percentage point in November from 0.32 percentage point in October. That's also well below the historical average of roughly 0.32 percentage point, wrote Jefferies analyst Corey Tarlowe in a Tuesday note.
While consumer prices for food ticked up 1.6% in November, producer prices jumped by 6.9% from the previous month. The PPI went higher in November largely due to a spike in the cost of eggs, as a new wave of bird flu infections in American chickens severely reduced the number of laying hens and, consequently, the number of eggs produced. Producer prices for fruits, vegetables, and processed poultry also trended higher in November.
All this means potentially tighter profit margins for grocery stores that sell fresh produce. That's bad news for supermarket chains such as Albertsons, which called off its agreement to be bought by rival Kroger last week after two U.S. district courts granted the Federal Trade Commission's requests to block the deal.
Albertsons is suing Kroger, alleging that the latter didn't make the best efforts -- such as refusing to further divest assets -- to quell regulators' antitrust concerns and secure approval of the proposed merger.
Albertsons said its investors not only didn't get the multibillion-dollar premium that Kroger agreed to pay but also suffered a decrease in shareholder value as the firm was unable to pursue other business opportunities while the deal was pending for more than two years.
Kroger denied those allegations, saying the claims are "baseless and without merit."
Compared with Kroger, Albertsons is in a worse spot after the deal's termination. In the first three quarters of this year, revenue from its core grocery business was flat from a year ago, lagging behind Kroger's 2.3% growth. Now that the two are not combining, they'll be rivals again, which means accelerating competition, especially given the continuing legal dispute.
The supermarket chains are also facing mighty rivals such as Walmart, Costco, and Amazon, which have taken up more market share in grocery sales. The main rationale for the two firms to join hands was to scale up and better compete with the giants. Those threats are not going anywhere.
Last week, Albertsons re-emphasized its commitment to accelerating growth. The long-term plan is to grow comparable sales by more than 2% every year, but it remains to be seen whether that can be achieved.
To boost stock prices, Albertsons' board authorized a share-repurchase program of up to $2 billion and intends to raise its quarterly dividend by 25%. Those decisions won't come without challenges. More than a dozen local unions said last week that they want the company to invest its extra cash in store operations and staff wages.
"Now is not the time to waste billions on share buybacks or expanded dividends to Wall Street investors," the unions said in a statement.
Write to Evie Liu at evie.liu@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 17, 2024 15:04 ET (20:04 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments