By Melissa Repko —
CNBC
Rival supermarkets Kroger and Albertsons announced plans to merge on Friday.
The companies said Kroger had agreed to buy Albertsons for $34.10 a share in a deal valued at $24.6 billion.
Albertsons shares closed Thursday at $28.63, having risen on reports that a deal was imminent.
Kroger is the second largest supermarket in the United States, behind Walmart, and Albertsons is fourth, after Costco.
Together, Kroger and Albertsons would be closer to Walmart.
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The boards of directors of both companies unanimously approved the agreement, which will need the green light from the regulatory bodies.
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The alliance comes at a difficult time for the food sector.
Supermarkets have been quick to keep up as shoppers embrace new ways to stock the fridge.
Businesses have had to invest in automation, employee training and other things as consumers move up and down store aisles, ordering home deliveries and using curbside pickup.
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Supermarkets have also been affected by inflation.
Food prices are up 11.2% from a year ago, according to the most recent data from the Bureau of Labor Statistics.
Companies have had to weigh when to pass on higher costs to customers and when to absorb them to remain competitive.
The food sector is highly fragmented.
Private regional supermarkets, such as HEB in Texas and Publix in Florida, remain powerful and command great loyalty.
Other newcomers, such as discounters Aldi and Lidl, and Amazon's Amazon Fresh, have also attracted customers.
Additionally, some Americans stock up on grocery stores like Costco, Walmart-owned Sam's Club, and BJ's Wholesale.
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Kroger and Albertsons also have numerous store banners, including names that the operators have acquired over the years.
Kroger grabbed about 8.5% of the $1.4 trillion US food delivery market last year, according to Morgan Stanley.
Albertsons' share was about 5%.
The next three big players after Albertsons are Ahold-Delhaize, Publix, Walmart-owned Sam's Club, and Target.
Ahold Delhaize's brands include Food Lion and Stop & Shop, along with Fresh Direct, an online grocery store it acquired.
To partner, Kroger and Albertsons will need the go-ahead from regulators.
Regulators will examine markets in which the companies have a dominant position and weigh whether they would have too much power if combined, said Eleanor Fox, a New York University professor specializing in antitrust and competition policy.
A merger would be less likely to be approved if they are the two largest food companies in many markets, she said.
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Some of the companies' markets overlap significantly, such as Southern California, Colorado, Seattle and parts of the Midwest and Texas, Morgan Stanley retail analyst Simeon Gutman wrote in a research note Thursday.
Other regions, such as the Northeast and Southeast, have very little overlap.
Albertsons Cos.
it brings a complementary footprint and operates in various parts of the country with very few or no Kroger stores,” Kroger CEO Rodney McMullen said in a press release announcing the deal.
The combination will likely undergo a lengthy review by regulators and could require the divestment of stores, Morgan Stanley's Gutman said.
Gutman also warned about the financial advantages of the operation.
Consolidation in the food sector has not historically translated into higher profits, he said.
However, he said the sector could be at a tipping point where a big merger could also boost margins.
