Blog: Dean BestAre US retail giants Kroger and Target looking to team up?

Dean Best | 26 March 2018

In pre-market trading on Friday, US retail behemoths Kroger and Target climbed on talk they were in discussions over a possible merger.

One report subsequently cooled that idea but suggested another kind of partnership could be in the offing.

Fast Company had initially reported the retailers were in talks over a merger, citing "several people with knowledge of the matter".

The publication said Kroger and Target had first started discussions last summer, with more talks over the autumn more still this year.

The report sent shares in both retailers rising. However, later on Friday, CNBC reported an unnamed source as saying there was "no truth" to the Fast Company report.

Nevertheless, the same source said Kroger and Target have met over US same-day delivery business Shipt.

Target snapped up Shipt in December, with John Mulligan, the US retail titan's COO, claiming the deal would lead to it "dramatically accelerating our ability to bring affordable same-day delivery to guests across the country".

Neither retailer has made any comment on the Fast Company or CNBC reports.

The reports have got retail analysts in the US chewing over what (if anything) could happen.

Barclays analysts Karen Short and Matthew McClintock issued a lengthy note on Friday in which they said they would not rule out a merger.

"A Target/Kroger union could help Target advance its store-within-a-store opportunity with food and there is evidence that Target has considered acquiring a grocer in the recent past," they wrote.

"Kroger faces many challenges and it will need to evolve its business as retail margins compress for food and consumables as large competitors (e.g. Amazon, Walmart) shift their business models to use these categories to drive traffic and monetize customers through less frequently purchased items - products that are 'in the tail'."

However, Short and McClintock did suggest there are "reasons to be sceptical" about a possible Kroger/Target merger.

"A deal between Kroger and Target would likely be done in order to evolve faster and narrow the gap versus Amazon and Walmart. However, if a deal is done, it could actually stunt Kroger and Target’s evolution over the mid-term as the companies wait for the deal to close and then begin the long process of integrating two very large and complex businesses. Said another way, there is a risk that a deal could produce an outcome that is opposite of what is desired. Both companies have recently outlined significant multi-year programmes at their respective investor days," they said.

"[Target chairman and CEO] Brian Cornell made a public appearance at [industry conference] Shoptalk earlier this week. We doubt that he would have attended the conference if the organisation were in the middle of making one of the biggest deals in retail history. However, cancelling would have raised suspicion."

It's now nine months since Amazon stunned the grocery industry (not just in the US but internationally) with its move to buy Whole Foods Market.

There is so much debate about Amazon's intentions in grocery and whether the e-commerce giant will make the same kind of inroads in that sector as it has elsewhere - enough debate to start its own cottage industry.

However, it would be a surprise if US grocery boardrooms were not gaming what impact Amazon could have - especially those boardrooms within the country's major retailers.

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