Could Price Chopper be Albertsons’ Missing Link?

In the wake of Reuters’ report earlier this week indicating that Albertsons Cos. Inc. is in “advanced talks” to acquire Northeastern supermarket chain Price Chopper, observers have been split over how advantageous such a deal would be for both the Boise, Idaho-based grocery giant and the Schenectady, N.Y.-based regional retailer.

Some experts find the deal dubious. For instance, while Price Chopper’s stores would provide Albertsons with a significant advantage in much of New York State, its thin coverage in the metropolitan New York City market could be a drawback, as Albertsons, too, has limited presence there, notes Kurt Jetta, CEO and founder of Shelton, Conn.-based firm TABS Analytics.

“The key to success in grocery retail is geographic concentration, particularly [in an area] such as the New York City metro, where marketing costs are very high,” he says. “Albertsons has very few stores in that market … not enough to operate profitably.”

To the contrary, Jetta continued, Albertsons’ would be better served investing “funds to protect its [share] in existing markets,” which he believes “is a greater imperative than further extending their geographic sprawl. A perfect example of a better allocation of resources would be building stores and geographic concentration in the New York City market, and increasing its marketing dollars there.”

Advantage: Everyone?

However, other observers believe all parties involved in the transaction actually stand to benefit.

“For Albertsons, it’s been the missing piece in the bridge … they’ve been trying to fill for decades,” says Burt Flickinger, managing director of Strategic Resource Group, a New York-based retail consultancy. “For the Golub family, this [would be an] acquisition where there’s a winner all the way around – there are no losers.”

For Albertsons, increased control over and efficiency with supply chain operations in its Northeastern territory marks a significant win, Flickinger says, as the company prefers to manage close to 100 percent of buying, warehousing and transportation.

“Price Chopper has three excellent distribution facilities between Rotterdam, Schenectady and Voorheesville,” all within about a 15- to 20-mile distance of one another, and close to its corporate headquarters outside of Albany,” he says. For instance, Albertsons’ automated facility in Pennsylvania’s Lancaster County is at capacity, making distribution from the Albany-area facilities to Acme stores in the New York City area a more cost-effective option.

For Price Chopper, an Albertsons acquisition can improve competition on the cost front, as the grocer is threatened by intense competition from deep discounters, mass-merchandisers and club stores, Flickinger says. Price Chopper’s prices rose too much, for example, in some of New York State’s and Vermont’s lower income counties, forcing residents to travel 100 miles round trip to shop at the competition. Albertsons’ purchasing power, which is about 1,500 percent greater than Price Chopper’s, should help offer lower prices to consumers in these areas.

“Price Chopper, particularly in the urban and suburban areas, always did a tremendous job in terms of being an effective promotional lower-price leader,” he states. “Albertsons, through its analytics and better cost of goods, will bring better price discipline and make the [lower-density] counties very competitive.”

Moreover, Price Chopper stands to benefit from capital infusion and stronger analytical capabilities for its fresh-focused Market 32 banner, a format Flickinger says, based on his team’s observations, has struggled to provide a higher return on the hundreds of millions invested into it than originally anticipated.

Of course, should the acquisition come to pass, it could be the first of a one-step, two-step approach from Albertsons. E-commerce remains a growing threat, and a number of competitors make formidable opponents in their click-and-collect and delivery services, such as Ahold USA with Peapod, and Wakefern Food Corp. with ShopRite Delivers. Following the first step, which could be the “keystone in the bridge” between Baltimore, Washington, Philadelphia, New York, New Jersey and New England, Albertsons could make the second step of acquiring Fresh Direct, which is hitting Peapod hard in the New York City area.