Safeway and Albertsons announced Thursday that the two supermarket chains will merge to create a massive nationwide grocery network that both companies hope will help them compete against big-box retailers, convenience stores and niche grocers.
The merger comes as part of a $9 billion deal with Cerberus Capital Management, the New York private equity firm that owns Albertsons and by the end of this year will also own Safeway.
Combined, the two supermarket companies will have about 2,400 stores, almost double the size of Safeway today, and just a slightly smaller footprint than rival Kroger’s 2,641 stores. The deal marks one of the largest supermarket buyouts and promises to further transform an industry that has been upended by an onslaught of competition.
Executives said on a call with media Thursday that the additional stores and expanded products allow them to give consumers the choice they have come to expect in the modern grocery business.
“The way people have shopped for groceries has fundamentally changed,” said Albertsons Chief Executive Officer Bob Miller, who will become executive chairman of the new supermarket conglomerate. “As our customers need change, we have to adapt (to) a world where they have more options than ever.”
The sale could mark a disquieting change for Pleasanton, Calif., which has been Safeway’s home for decades. After the merger is completed in the fourth quarter of this year, the combined company headquarters will be in Boise, where Albertsons has its corporate offices.
Executives said there are no plans to close any Safeway or Albertsons stores. Together, the new supermarket chain will have about a quarter-million employees, 27 distribution centers and 20 manufacturing plants.
Miller said conventional grocers had been squeezed by dollar stores, big-box supercenters and convenience stores – last year 7-Eleven ranked ninth among the top U.S. food retailers, according to industry publication Supermarket News. Online grocery shopping and delivery has grown, too, including Amazon Fresh.
Executives said the merger will help both companies cut costs by combining operations such as distribution.
“These are real savings that we’ll be able to pass along to our customers,” Miller said.
He added that, despite its large scale, the company will also focus on customizing each store to cater to local shoppers’ tastes – which some industry experts say Safeway hasn’t done well because stores were so heavily managed by corporate.
“We plan to empower our regional managers and stores to operate in a way that makes the most sense for the customer base there,” Miller said.
In 1987, Safeway was the leading food retailer in the U.S. In 2007, it had slipped to third, behind Wal-Mart and Kroger, according to research by the Food Marketing Institute. In 2013, it fell to fifth, with Target and Costco adding themselves to the top ranks.
Safeway officials announced last month they were in talks to sell the company, although rumors of a Cerberus buyout started circulating in October. Cerberus also owns Jewel-Osco, Shaw’s, Star Market and other grocery chains, which it took over last year when the firm acquired parent company Supervalu in a $3.3 billion deal. It also bought up Albertsons stores in that deal, and others in a previous deal in 2006.
Some news reports have stated that Kroger was also interested in buying portions of Safeway. Several industry analysts have said Kroger is too big to buy Safeway, and such a deal would create a company too unwieldy to operate.
But Cerberus also owns a healthy corner of the grocery market, which creates antitrust issues that the company will have to work out with federal and state authorities.
“We’ll engage with the Federal Trade Commission very quickly,” Miller said.
Safeway shareholders will get a healthy payday out of the deal. The company will return shares to investors of about $40 each, which marks a 72 percent increase over a year ago and 52 percent from six months ago.