Kroger Stock Is an ESG Nightmare

It’s been more than three months since Kroger (KR) announced that it would acquire Albertsons Companies (ACI) for nearly $25 billion, including the assumption of debt.

“As a combined company, we will build on our similar values to create a culture that embraces diversity, equity and inclusion and fosters a best-in-class associate experience by enabling, supporting and empowering our associates to unlock their full potential,” CEO Rodney McMullen stated in Kroger’s press release announcing the deal.

The deal's first hurdle was the $4 billion special dividend Albertsons would pay its shareholders. Washington State tried to block the payment, arguing it would make Albertsons less competitive during the regulatory review process, which is expected to be extended. 

They lost. The dividend was paid to eligible shareholders on Jan. 20. 

Regardless of the setback, the road to approval isn’t paved with gold. It will be a bumpy one. If you’re concerned about environmental, social, and governance (ESG) issues, you do not want to own Kroger stock, with or without the pending combination.

Here’s why.

Is It Really Better for Consumers?

In Kroger’s October press release, the two companies argue that their combination will provide consumers with higher quality and better value. 

“The combined company's innovation capabilities, increased manufacturing footprint and expanded national reach will drive improved quality and efficiency allowing its Our Brands portfolio to accelerate growth and profitability while remaining affordable and accessible to customers,” the press release stated. 

Currently, Kroger is the second-largest grocery store chain in the U.S., while Albertsons is the fourth-largest. Together, the company will control 11.8% of the U.S. grocery business, behind only Walmart (WMT), with a commanding lead at 17.1%. 

Were the Federal Trade Commission (FTC) to allow the merger to proceed without any changes, Kroger would have 4,996 stores, 66 distribution centers, 52 manufacturing plants, 3,972 pharmacies, and 2,015 gas stations. 

The third-largest grocery chain after Walmart and the “new” Kroger? Costco (COST) at 5.7%. So, the drop from 1st to 2nd spot is 530 basis points, while the fall from 2nd to 3rd is even more significant at 610 basis points. 

On the one hand, a bulked-up Kroger would provide Walmart with some competition. On the other, the two companies would control nearly a third of U.S. food retail. 

I live in Canada, where three grocery store chains: Loblaw Companies (LBLCF), Empire Company (EMLAF), and Metro (MTRAF), control approximately 60% of grocery retail. Costco and Walmart are in fourth and fifth spots at 9% and 8%, respectively. 

The Canadian consumer has been quick to blame these three grocery store chains for price gouging, leading to record profits at a time when consumers can least afford it. 

In my experience, except for Walmart and Costco, bigger is not better when it comes to prices. 

What About Employees?

CEOs make big splashy acquisitions because they’re considered good legacy makers. However, the data demonstrate that most purchases destroy shareholder value rather than add to it. In addition, almost 90% fail to achieve the objectives in the transaction’s original announcement.

Yet acquisitions continue to happen.

In December, The Guardian published an article suggesting Kroger and Albertsons employees are worried about mass layoffs. So when McMullen talks about harnessing innovation, he’s just saying we’ll be able to do more with less.

Unions oppose the merger because it will result in lost jobs, both from stores divested to meet regulatory requirements and the efficiencies achieved from a larger operation. 

The Guardian points out that the merger in Jan. 2015 between Albertsons and Safeway was a fiasco. Now, some Albertsons employees will do it again for the second time in eight years. 

“It was a fiasco, and heart-wrenching, because some people with more seniority than myself didn’t get their jobs back,” said Naomi Oligario, a long-time employee of the Port Orchard, Washington, Albertsons store. “It’s nerve-racking to think that we might have to go through that whole fiasco again.”

Kroger says it will spend $1 billion post-merger to increase employee wages and benefits. They also say they won’t close any stores. Although there is said to be little overlap between the two chains, I find this claim to be laughable. 

That’s especially true when considering how much wage theft Kroger allegedly committed in 2022. 

Popular Information, a publication that tends to get its facts straight, published an article on Jan. 31 highlighting the wage theft happening due to Kroger’s implementation of its My Time payroll system. 

“On January 19, a group of Kroger associates from Virginia and West Virginia filed a lawsuit against the grocery store arguing that ‘their employer has engaged in a widespread wage theft resulting from repeated and ongoing problems with payroll,’” Popular Information contributor Tesnim Zekeria wrote. 

"The lawsuit asserts that workers have had to deal with missing or late paychecks, paychecks for amounts less than they are owed, and unauthorized and/or incorrect deductions or withholdings.” 

Kroger says that the majority of the issues have been fixed. However, Kroger employees from coast to coast don’t see it that way.

I would be worried about my job if I worked at Kroger or Albertsons. 

Just Buy Costco Stock and Call It a Day

Kroger’s “hero bonus” of an extra $2 an hour lasted 47 days between April and May 2020. 

 “Our associates have displayed the true actions of a hero, working tirelessly on the frontlines to ensure everyone has access to affordable, fresh food and essentials during this national emergency,” McMullen said on March 31, 2020.

The retailer defended the ending of the bonus, saying that it already paid the average employee $20 an hour, including benefits. Of course, a true hero would be worth more than that to the company, but I digress. 

The merger between Kroger and Albertsons has disaster written all over it. It might make it bigger, but the data shows it won’t make it better. The only ones who win in this situation are Albertsons shareholders. 

Be smart. Don’t be Rodney McMullen’s patsy. Instead, buy COST stock and call it a day.

 

More Food & Beverage News from Barchart

• Wheats Red for Tuesday
• Turnaround Tuesday for Soy Futures
• Red Corn Board into Day Session
• Wheat Markets Close Monday in Black

On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.