WHAT'S NEXT FOR KROGER?

Kroger is licking its wounds now that the merger with Albertsons has been blocked. In my opinion, Kroger is to blame for the merger failing. Kroger paid hundreds of millions of dollars to field a team of lawyers and so-called industry "experts" who failed miserably to provide a coherent argument for why the merger should be approved. The team selected by Kroger was made up of too many amateurs who lacked the required skills and judgement. I will debate anyone involved in the merger from Kroger on CNBC, CNN, or any other network to discuss the merger and Kroger's lack of preparedness.

The merger failed because of Kroger. Period.

Kroger CEO Rodney McMullen is asking the question: Now what? The brutal truth is that Kroger is in a mess of their making. Kroger lacks the executive talent to take the company to the next level. That's a fact. Kroger wasted hundreds of millions of dollar on the failed merger with Albertsons. That's also a fact. Morale within Kroger is severely depressed.

McMullen is on the record as stating that Kroger may not pursue any more acquisitions. According to McMullen:

“If you look at the balance sheet capacity that we have, there's probably nothing else that would be transformational that would use the balance sheet capacity that we would have, so I don't know that we would be out there trying to find what's the next Albertsons. We've always made sure that we don't need to do mergers to make our business successful, and that was one of the reasons that we've always been proud of what Kroger has done.”

McMullen added that if the merger fails, Kroger will continue to explore ways to grow the business. Acquisition is one of those methods of growing the business, he said, “but we try to make sure that we only do a merger when it makes sense, and we're not chasing something and we won't get in a position where we are having to chase something.”  

The Ocado Option

There is a merger hiding in plain sight of McMullen and Kroger -- the Ocado Group . Ocado leverages robotics and a smart logistics platform to fulfill online groceries and other retail products via automated warehouses.

You can learn more about Ocado by clicking here.

Ocado and Kroger entered into an agreement in May 2018, whereby Kroger agreed to buy a 5% stake in Ocado. I was working as a consultant at Kroger during this time. I had recommended to Kroger to acquire the entire company but Kroger declined.

I also recommended to Kroger to replace the existing Kroger IT systems (which are incredibly bad based on discussions with consultants trying to improve the systems) and replace them with the end-to-end Ocado Smart Logistics Platform and retail front end. The Ocado partners that are using Ocado's end-to-end platform are performing very well. Kroger chose to maintain their antiquated IT systems.

Kroger contracted Ocado to open up to 20 automated warehouses. However, only eight have been opened. Kroger paused opening more CFCs to ensure they "have a clear path on the ones that they have," according to McMullen.

Walmart , Amazon , and other grocery retailers have embraced the use of automation for fulfilling groceries. Kroger can't afford to wait when it comes to automation. The brutal truth is that Kroger has fallen behind Walmart when it comes to groceries. Kroger has also fallen behind the Texas-based grocery retailer H-E-B who has installed eight automated micro-fulfillment systems from AutoStore™ inside strategically located stores.

In my professional opinion, Kroger must make a big move related to technology. Kroger must do the following: Acquire Ocado.

Rodney McMullen was named CEO in 2014. McMullen has worked at Kroger since 1978. The time has come to replace McMullen. In my opinion, there isn't a single executive at Kroger who has the skills and vision to be the CEO of Kroger, and take the company to the next level. Not one.

I believe that Kroger should name Ocado's founder and CEO, Tim Steiner, to be the next CEO of Kroger. I believe this should happen even if Kroger doesn't acquire Ocado. Kroger's shareholders should insist that Tim be named CEO. Tim will bring a completely different mindset that will accelerate Kroger's growth and performance. In addition, Steiner will insist on converting Kroger to the full suite of Ocado's platform significantly reducing costs and complexity at Kroger, while greatly improving the customer experience. Steiner will also accelerate Kroger's use of AI.

Tony Hoggett should also be considered for the CEO role at Kroger. Hoggett would also be an interesting replacement for Steiner at Ocado.

Opportunities and Wild Cards

Kroger should invest in or acquire JackBe . It's one of the most unique grocery concepts operating today. JackBe is a startup but they have tremendous potential for growth.

I disagree with McMullen that there aren't any large opportunities beyond Albertsons for Kroger to consider. An interesting option for Kroger is to partner with a PE firm to explore an acquisition of Seven & i Holdings , the owner of 7-Eleven. An acquisition of Casey's should be explored. Another option is approaching Publix Super Markets about an acquisition. Note: Even though Publix is an ESOP company, they can be acquired if they choose to support an acquisition. Casey's has a similar corporate ownership structure. Hy-Vee, Inc. would make an interesting acquisition.

There is also what I call "Wild Card" options for Kroger to consider. For example, a merger with Target. (Target and Kroger have discussed a merger in the past.) However, at the top of the list is Kroger approaching PepsiCo to acquire Kroger. I presented this option to Vivek Sankaran when he was President of PepsiCo; Vivek was "very intrigued by the idea" as were the other PepsiCo executives in the room. PepsiCo acquiring Kroger would introduce exciting possibilities for both companies.

Some may be asking: What about an acquisition of Walgreens Boots Alliance or just Walgreens ? Let's assume Walgreens Boots Alliance wants to divest only Walgreens.

Walgreens would be 1/3rd the price of Albertsons, with more revenue and a higher chance of Federal Trade Commission approval. Kroger can afford to acquire Walgreens. Kroger could greatly expand their Retail Media Network possibly adding several billion dollars to the bottom line. Kroger could leverage their company 84.51˚ for data monetization that could also generate $1B or more in revenue. Kroger's pending partnership with 345 Global led by CEO Mark Edwards , will greatly improve macro and micro store planning, shopper insights, and shopper engagement at Walgreens. Kroger made a brilliant decision to partner with 345 Global.

Acquiring Walgreens would make Kroger the largest pharmacy operator in the USA, and open Kroger up to exciting possibilities in pharma. Kroger can reengineer Walgreens 8,500 stores (Kroger will probably need to divest 2,000 or more stores) and create a much better and affordable retail shopping experience. Kroger can potentially use the stores as micro-fulfillment centers, and Ocado can provide the fulfillment automation.

What I just listed is the good news.

The bad news in my opinion is that Walgreens is a disaster of a company. Kroger will have to fire most if not all of the executive team at Walgreens. Kroger will have to end Walgreen's use of DEI which has caused a decrease in performance across the company. If Kroger doesn't assign a highly qualified team to manage the acquisition and turnaround, Kroger will find themselves bogged down in a quagmire. Stated another way, acquiring Walgreens will become Kroger's Vietnam War.

What's Next for Albertsons?

First and foremost, Albertsons is going to insist that Kroger pay Albertsons $600m which is part of the agreement. I anticipate that Kroger may try and negotiate a lower breakup fee.

I believe Albertsons must replace their CEO, Vivek Sankaran. Tony Hoggett should be at the top of the list.

I continue to believe that the best long-term option for Albertsons is to pursue a merger with Ahold Delhaize USA in 2025 or 2026. Will the merger be approved? I believe it has a higher chance of being approved now that Trump is in office.

It's possible that Amazon or Aldi could approach Albertsons about an acquisition, but I believe the odds are low of this happening. I'd rather see Amazon acquire Costco Wholesale , Publix Super Markets , or Target . Amazon is going to open a Supercenter in 2025 or early 2026. The Supercenter will contain a Whole Foods Market and an Amazon Fresh store. I don't anticipate Amazon will make any acquisitions related to groceries until they figure out their strategy.

I truly wish everyone at Kroger the best.