Kroger-Albertsons Merger Would Create a Big Player in Retail Advertising

October 15, 2022

View the original story on The Wall Street Journal written by Patrick Coffee.

The combined supermarket chains’ ad networks for marketers could benefit from increased reach and consumer data.

The proposed merger of Kroger Co. and Albertsons Cos. would reshape the U.S. supermarket industry by combining its two largest operators. It also would create a big player in so-called retail media, one of advertising’s fastest-growing sectors.

Retail businesses from Walmart Inc. to Uber Technologies Inc. -owned alcohol delivery service Drizly have been developing advertising networks that use their websites, apps and even outside properties to show brands’ messages, often targeted by the data that retailers collect directly from their own customers. Kroger and Albertsons entered the retail advertising market in 2015 and 2021, respectively.

Total revenue from retail ad sales in the U.S. will increase 31% this year to $40.81 billion, which is more than three times its 2019 total, according to market-research firm Insider Intelligence Inc.

The growing business won’t only help large retailers build a new revenue stream, but it also will prove increasingly attractive to advertisers as an industrywide focus on data privacy makes targeting potential customers more difficult, some experts said.

“The strongest rationale is that it’s about building a retail media juggernaut,” said Andrew Lipsman, principal analyst for retail and e-commerce at Insider Intelligence, regarding the Kroger-Albertsons merger. “These digital ad businesses are completely transforming economics, and you get disproportionate gains from scale. It’s a case where 1+1 is going to equal 3, or maybe 4.”

A key point for Kroger and other retailers is that digital advertising is a faster-growing and more profitable business than grocery sales.

Walmart reported $2.1 billion in ad revenue for fiscal year 2021, which ended Jan. 31, and said its ad business grew nearly 30% year-over-year in the second quarter of 2022, while total revenue grew 8.4%.

“I can’t remember a business with the margin structure of the advertising business here at Walmart,” said John Furner, Walmart U.S. president and CEO, on the company’s most recent earnings call.

Kroger and Albertsons don’t break out the ad revenue generated by their Kroger Precision Marketing and Albertsons Media Collective divisions.

Walmart, Amazon.com Inc. and Instacart Inc. dominate the retail ad space with 25.5%, 22% and 20.6% market share, respectively, as of August 2022, according to Insider Intelligence. The merger of Kroger and Albertsons would create a fourth market leader at more than 13% market share, Mr. Lipsman said.

For marketers, that would help simplify the retail ad market for consumer-goods brands and other advertisers who currently confront a rapidly increasing number of offerings.

The merger would also strengthen Kroger’s geographic reach and its pool of invaluable so-called first-party consumer data, granting the company greater leverage with marketers, the experts said.

“As everybody walls off their gardens more and more and targeting becomes less precise, you can get a pretty clear picture of a household by what they’re buying at Kroger,” said David Mahaffey, senior director of ad operations at agency Arm Candy, whose clients place ads with both Kroger and Albertsons.

The popularity of Kroger’s loyalty card among its customers already makes the data it can provide to advertisers comparable to Amazon’s, said Elizabeth Marsten, group director of marketplace strategic services at digital ad agency Tinuiti.

One key question that will shape the future of this emerging market, however, is which retail company can first make a direct connection between online ads and in-store sales on a large scale, some said. At the moment, ad buyers have little choice but to trust retailers’ claims about such conversion rates.

“The concern is that a lot of the retail networks are grading their own homework,” said Mr. Mahaffey. “If [Kroger] can actually make the connection from online to offline and have it be verifiable by a third party, that would be a game-changer for them.”

Kroger was one of the first retailers to expand its advertising business beyond its own properties by letting brands use its consumer data to target users on third-party publishers’ sites and apps. It later expanded that service to connected TV through partnerships with companies like streaming platform Roku Inc. and Microsoft Corp. ad-tech firm Xandr.

Spokespeople for Kroger and Albertsons declined to comment beyond the press releases announcing the proposed merger, which implied an enterprise value of $24.6 billion for Albertsons.