Keeping the merger talk alive:
What a Target-Kroger Merger Mean for Rivals By Shoshanna Delventhal | March 26, 2018 — 12:42 PM EDT
On Friday, news broke that retail chain Target Corp. (TGT) and grocery giant Kroger Co. (KR) were discussing a possible merger, as first reported by Fast Company, citing several people with knowledge of the matter. While sources later told CNBC that the information was false and the talks were instead about a Shipt partnership, a tie up could make sense for the two traditional brick-and-mortar retailers as they scramble to compete against e-commerce and cloud computing giant Amazon.com Inc. (AMZN)
As Seattle-based retail behemoth Amazon demonstrates that no industry is safe from its disruption, including grocery, apparel, health care and entertainment, its new rivals are being pressured to scale up and drive down prices. Amazon, with its deep pocks, massive scale and global customer reach, deals with investors that are less critical of short-term numbers, allowing the company to incur an initial loss if it means an opportunity for a long-term leadership position in a new market. In June, the company's $13.7 billion Whole Foods acquisition sent grocery stocks plummeting as it offered Amazon its first physical retail stores.
"From a high level, both Kroger and Target have deficiencies that make competing in this new world harder," said Wolfe Research analyst Scott Mushkin, as quoted in a story published Monday by The Street. In the "new world" of retail, big box retailers such as Target and Walmart Inc are doubling down on their omnichannel strategies, beefing up online businesses, improving the in-store experience and launching new lines of branded products across segments such as home goods and apparel.
Deal Would Boost Target's Grocery Business
The conversations between the two companies, which reportedly started last summer and have continued into this year, would work to bolster Target's grocery business, while offering Kroger customers more access to merchandise and online retail. In 2017, their combined annual revenue amounted to $195 billion, versus Walmart's $485.9 billion and Amazon's $177.9 billion.
Investors have sold-off Kroger's stock in the recent months, worried about its underinvestment in its online strategy. The grocery chain reportedly attempted to buy wholesale e-commerce brand Boxed, but the deal dissolved after Kroger offered less than its $470 valuation. A tie up with Target would integrate Kroger with on-demand grocery delivery service Shipt, which it also failed to solidify a deal with and was instead purchased by Target for $550 million.
The partnership would give the firms a greater hedge against Walmart, the world's largest retailer, with the largest share of the $800 billion U.S. grocery market. The Bentonville, Arkansas-based company has teamed up with Alphabet Inc.'s (GOOG) Google Home for voice-activated home shopping, competing against Amazon's Alexa, while it doubles down on its delivery services and plans to launch a Millennial-focused grocery brand on its online platform Jet.com.
Overall, a merger between Target and Kroger would expand the market opportunity for both companies, offering Kroger the infrastructure it needs for a new digital grocery landscape, while enhancing Target's grocery business with greater quality and scale. (See also: Amazon Tops Alphabet, Is Now No. 2 in Market Cap.)
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