When a judge halted the proposed $24.6 billion acquisition of Albertsons by Kroger, the decision noted that “supermarkets are distinct from other grocery retailers.” And as GlobeSt.com has reported, the FTC previously argued that the deal would raise prices by eliminating head-to-head competition, and also weaken union bargaining power.
But what about the landlords?
“News of the failure of the merger is mostly good news for landlords who count on these supermarkets as anchor tenants,” David Curry, a partner at law firm Farrell Fritz, tells GlobeSt.com. “The merger would likely have resulted in the closure of several stores for each brand, both underperforming stores and any locations in which both brands serve a given community.”
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For example, says Curry, Albertsons has 134 stores in Arizona operating as Safeway and Albertsons. Kroger has 124 in the state, mostly under the brand Fry's Food & Drug. Some of those stores would likely have had to close.
“Landlords facing supermarket closures face other challenges as well,” Curry says. “Leases often contain radius restrictions, both on the landlord and tenant side. Landlords do not want tenants having stores within a certain distance of their centers, as it inevitably leads to a decrease in foot traffic. Also, some larger tenants in these centers — particularly large chains with bargaining power such as national drugstore chains — want supermarkets in the centers in which they operate, and therefore have options to terminate if there is no supermarket anchor operating at the center.”
For some landlords, in other words, it wouldn’t be a loss of just the supermarket, but potentially of other significant tenants. “The merger would have also resulted in renegotiations of many of these leases, with the merged company looking to take advantage of their position with landlords that need these stores to anchor their centers,” adds Curry.
At the same time, local developers and owners might have more power in negotiations as a result, says Sergio Gárate, an assistant professor in the practice of finance and director of the Goizueta Real Estate Program at Emory’s Goizueta Business School. He tells GlobeSt.com that commercial real estate is “a very atomized market when it comes to landlords” and developers. They typically have critical local information and might already own the best land. “They have a lot more power than the companies when they want to get into these markets.”
According to Gárate, the decision could be a positive result in looking at the concentration of groceries. “It opens the door to questioning the entire supply chain,” he says. “Is this concentration good? Are the efficiencies being transferred to consumers, or not?” If not, that might cause more rethinking of additional proposed mergers and strengthen the hands of landlords.
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