Kroger and Walgreens Team Up for Pickup

America’s largest standalone grocer is teaming up with its largest drugstore operator. Walgreens Boots Alliance (NASDAQ: WBA) will offer pickup of Kroger (NYSE: KR) grocery orders at 13 drugstores in Kentucky.

Customers will order groceries through Kroger’s Clicklist and pick them up at Walgreens drugstores, Supermarket News reports. In addition, Walgreens will sell an assortment of Kroger groceries.

The pickup concept has high level support. For instance, Walgreens Boots Alliance boss Stefano Pessina came all the way from Monaco to give his approval. Not surprisingly, Kroger CEO and Chairman Rodney McMullen is hyping up the deal.

“This concept brings together the best of two great brands to rethink convenience and redefine the way America shops for food,” McMullen says in a press release.

Walgreens and Amazon unite to fight Amazon

Obviously the real motivation for the deal is fighting off the threat from Amazon (NASDAQ: AMZN).

In particular, offering Kroger groceries at Walgreens creates direct competition for Amazon Go. Importantly, Amazon is planning to open 3,000 Go automated convenience stores in American cities.

Kroger and Walgreens are teaming up because they lack Amazon’s resources. For instance, Kroger had just $361 million in cash and equivalents on 18 August 2018. To emphasize brick and mortar’s lack of resources, Walgreens Boots Alliance reported $1.818 billion in cash and equivalents on 31 May 2018.

Meanwhile, Amazon reported $19.823 billion in cash and equivalents and $7.27 billion in short-term investments on 30 June 2018. Therefore, Amazon has over 12 times as much money in the bank as Walgreens and Boots Alliance combined.

In other words, Amazon can open hundreds of Go stores without borrowing money. Consequently, Walgreen and Kroger must team up to compete.

Why Walgreen is teaming up with Kroger

Walgreen is teaming up with Kroger because of its expertise in the grocery and drugstore business. For instance, Kroger has been operating automated checkouts in its stores for decades.

Significantly, Kroger owns 6% of the British supermarket technology company Ocado Group PLC (LON: OCDO). Ocado specializes in building robotic fulfillment centers, in particular.

Kroger and Ocado want to build up to 20 robotic fulfillment centers in the United States. Additionally, Kroger Chief Financial Officer Mike Schlotman thinks teaming up with Ocado will enable Kroger to open new kinds of stores.

A Kroger/Walgreen hybrid is an obvious use of the capabilities provided by Ocado. A robotic fulfillment center could obviously support both Kroger supermarkets and Walgreen drugstores.

Why Kroger and Walgreens Need Each Other

Moreover, a Walgreen drugstore is a logical addition to the 2,782 supermarkets Kroger operates. In addition, Kroger food brands like Simple Truth will be a logical addition to Walgreens inventory.

Importantly, Kroger operates 37 food manufacturing facilities across the United States. Therefore, Kroger offers Walgreens a source of low-priced food products to counter Amazon’s discounting.

Equally important is Kroger’s ability to provide hot takeout meals, meal kits, deli foods, and hot entrees to Walgreen. Markedly, Kroger has a good relationship with the delivery specialist Instacart.

Additionally, an obvious use for Instacart is delivery of Walgreens prescriptions. America’s growing legion of senior citizens will be obvious customers for prescription delivery.

Will Kroger Merge with Walgreens?

Under these circumstances many people will wonder if Kroger (NYSE: KR) will merge with Walgreens Boots Alliance (NASDAQ: WBA).

A merger could boost Kroger’s stock which was trading at $28.92 a share on 4 October 2018. Additionally, Walgreens could benefit, its stock was trading at $73.31 on the same day.

Such a merger is very logical but it will be difficult. In particular, Walgreens is a European company. Obviously that could trigger opposition from the economic nationalists in the Trump administration.

For example, Kroger and Walgreens will need Federal Trade Commission (FTC) permission for a merger. Such permission could be hard to get in today’s political climate.

Could Rewards Points help Kroger and Walgreens Fight Amazon?

A profitable merger the FTC could ignore is combining Kroger and Walgreens popular rewards points programs. For example, shoppers receive 10¢ off a gallon of gasoline or diesel fuel for every 100 Kroger Rewards points accumulated. In detail, shoppers earn a point for each $1 they spend on groceries.

Moreover, Walgreens shoppers earn $1 for every 1,000 Balance Rewards they accumulate. Allowing shoppers to use Walgreens Balance Rewards at Kroger and Kroger Rewards at Walgreens is an obvious way to attract new customers. Obviously, offering discounts on the Kroger 123 Rewards MasterCard at Walgreens is another logical step.

Uniquely, customers can access Walgreens’ Balance Rewards Program through Apple Pay. Therefore, shoppers manage Balance Rewards via mobile wallets. Integrating Kroger Rewards with Apple Pay could obviously increase business. However, Kroger is not accepting near field communications (NFC) apps like Apple Pay and Google Pay in its stores.

An intriguing possibility is Kroger and Walgreens to create a cryptocurrency rewards program and a proprietary digital wallet. Kik is already marketing Kin (KIN) a rewards-points program based on an ER20 Ethereum token in the Philippines for example.

An obvious advantage to a combined Kroger/Walgreens rewards program is that it could include other retailers. For example, Kroger/Walgreens Rewards customers could save money on building supplies at Lowe’s (NYSE: LOW) or burritos at Chipotle (NYSE: CMG). Obviously, customers could earn Kroger/Walgreens rewards at Chipotle or Lowe’s.

Will Single Payer Drive a Walgreens/Kroger Merger?

A merger might be worth the risks because Walgreen has expertise Kroger needs. For instance, WBA’s operations outside the USA are in countries with single-payer health insurance systems like the UK.

America is slowly moving towards single-payer despite stiff Republican opposition. For instance, 33 states have expanded Medicaid to cover all lower-income people, and several states are considering such an expansion.

Medicaid expansion will obviously provide Walgreens with tens of millions of new customers. Additionally, the federal government provided $59 billion for full Medicaid coverage in 2018, the Commonwealthfund calculates.

An obvious conclusion, is that Pessina is expanding his operations in the US to cash in on all that federal spending. Teaming up with Kroger is a logical means of cashing in on Medicaid expansion. For instance, Kroger controls much of the grocery business in states like Ohio and Colorado that are expanding Medicaid.

Kroger at a Glance

Here are details of Kroger’s vast operations:

· Operates 2,782 grocery stores in the United States.

· Operates 2,268 pharmacies in the United States.

· Operates 1,489 filling stations in the United States.

· Operates 1,056 stores with instore pickup.

· Kroger operates stores in 35 states and the District of Columbia.

· Uniquely, Kroger is the number one or two grocery brand in several major American cities.

· Markets Kroger dominates include; Los Angeles, Atlanta, Denver, Houston, Phoenix, Dallas, San Diego, Salt Lake City, Washington DC, Charlotte, Nashville, Cincinnati, Richmond, Norfolk, Albuquerque, and Indianapolis.

· Reported $27.869 billion in revenues for 2nd Quarter 2018.

· Reported a net income of $508 million for 2nd Quarter 2018.

· Kroger will pay a 14¢ a share cash dividend on 1 December 2018.

· Kroger reported nine years of dividend growth in 2018.

· Kroger shares offered a dividend yield of 1.91%, an annualized payout of 56¢, and a payout ratio of 26.4% on 3 October 2018.

· Operates 17 dairies across the United States.

· Owns such iconic supermarket brands as Ralph’s, Fred Meyer, Smith’s, Harris Teeter, and King Soopers.

· Kroger is a healthcare provider. In particular Kroger operates dozens of Little Clinics in its stores. The Little Clinics provide medical services in conjunction with hospitals and medical centers.

· Kroger operates one store in New York City; Murphy’s Cheese. Ironically, Murphy’s is a gourmet cheese shop.

· Kroger is one of the largest retailers of natural and organic foods in the world. For example, its organic sales reached $1 billion 2017, a press release announced. Therefore Kroger owns one fifth of America’s $5 billion organic food market.

· Kroger’s Simple Truth natural food brand reached $2 billion in sales in 2017, Kroger estimates in a press release.

· Uniquely, Simple Truth could be 138 on the Fortune 500; if it were a publically traded company, Kroger Vice President of Merchandising Roger Clark boasts.

· Kroger is a jeweler. It operates Fred Meyer Jewelry stores in many Kroger Marketplace supercenters.

· Kroger sells clothing, hardware, electronics, and other dry goods through its supercenters.

Walgreens Boots Alliance at a Glance

The Walgreens Boots Alliance drugstore empire is humongous. Here are details of the size of scope of the WBA Empire:

· Operates 8,175 drugstores in the United States.

· Operates drugstores in all 50 states, the District of Columbia and Puerto Rico.

· Operates in 25 countries worldwide.

· Operates 14,500 drugstores in 11 countries.

· Operates 390 distribution centers worldwide.

· Owns Boots the largest drugstore operator in the United Kingdom.

· Like Kroger Walgreens is a healthcare provider. In detail, Walgreens operates 400 in-store clinics nationwide.

· Reported $34.334 billion in revenues for 2nd Quarter 2018.

· Reported a net income of $1.342 billion for 2nd Quarter 2018.

· Paid a cash dividend of 44¢ on 20 August 2018.

· reported that Walgreen has achieved 42 years of dividend growth.

· Walgreen offered a dividend yield of 2.38%, an annualized payout of $1.76 and a payout ratio of 29.4% on 3 October 2018.

· Owns the Duane Reed drugstores in New York City.

Watch Walgreens and Kroger closely their proposed alliance could be the future of American retail. Therefore, investors and speculators could make money from it.

This commentary first appeared at Market Mad House your ringside seat for the Grocery Wars.