The Strange Ever-Growing Walgreens-Kroger Alliance
David Merrefield - Walgreens - Kroger Alliance - The Robin Report

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The Walgreens and Kroger alliance started nearly a year and a half ago when these two retailers agreed that a selection of Kroger private brand products – mainly health and beauty lines – would be placed into a few Walgreens stores. In turn, a selection of Walgreens\’ products would go into a few Kroger supermarkets.

Then, as was reported in The Robin Report, the two retailers accelerated the joint venture late last year by cross-pollinating additional product into about 50 stores.

Although the arrangement still involves relatively few stores (given the thousands of stores each of the retailers operates), it\’s become pretty big in terms of the volume of products. Some Walgreens stores now feature meat, produce, frozens and 2,000+ grocery items. At some locations, consumers can order online with Kroger and pick up their orders curbside at Walgreens. Voila! These Walgreens stores have been transformed into full-fledged supermarkets.

A Bigger Deal

And this partnership has taken an even bigger turn with the formation of a new joint manufacturing and Retail Procurement Alliance distribution deal.

The concept is that in instances where both Walmart and Kroger are carrying the same products, those products will be jointly sourced and distributed. Examples would include Kroger\’s extensive lines of private brands going into Walgreens\’ stores along with Walgreens private brands going into Kroger stores. Many national labels could be involved too.

[callout]For both brands, the most important consideration is that if the name of the game is to build a bulwark against the likes of Amazon and Walmart, the long game strategy will boost their brands, even if they don’t win the final battle.[/callout]

In some cases, private brands, whether Walgreens\’ or Kroger\’s, might be manufactured using Kroger\’s extensive private label manufacturing capabilities.

Clearly, the idea is to increase procurement volume, bulking up both retailers to better face off against Amazon, Walmart and other mass retailers. To underscore that ambition, Kroger told CNBC that the backstage procurement alliance would welcome other retailing partners looking to improve efficiencies at a lower cost, building an even larger alliance.

When we take a closer look at this entire scenario, we\’ve got a few questions about what\’s really happening here.

  • First, why would these two retailers — who are competitors across a lot of product lines, including pharmacy — want to enable one another?
  • What benefit could aligning customer curbside pickup facilities yield to either party?
  • What does the Kroger and Walgreens sourcing alliance mean to other retailers?

Curiouser and Curiouser

Let\’s take a look at the first issue concerning how the alliance could benefit the two parties. Strategically, there are a few obvious pitfalls.

  • Walgreens\’ shoppers might decide that having the selection of available Kroger product might disintermediate a visit to Kroger.
  • Kroger customers might skip their visits to shop at Walgreens and just pick up their groceries at those Walgreens curbside locations.

A possible solution? Offer cross-brand curbside pickup. In the meantime, some customer attrition or transferring will result from cross-merchandising, but the retailers might decide that profit-building efficiencies outweigh consumer losses.

But for both brands, the most important consideration is that if the name of the game is to build a bulwark against the likes of Amazon and Walmart, the long game strategy will boost their brands, even if they don\’t win the final battle.

And perhaps most mysterious, is this question:

  • Why would other retailers want to join the Walgreens-Kroger alliance? After all, wouldn\’t they just be enhancing the buying power of their competitors?

Well, yes, they would be boosting the fortunes of their competitors short-term, but it might be worth it. Maybe a small chain of supermarkets or even a large-scale grocery wholesaler would be interested in having a line of, say, Kroger\’s extensive Simple Truth natural and organic private brand, which has become the largest-selling product of its type in the nation. Developing such product isn\’t easy or cheap. Having that line alone could be reason enough for nearly any food retailer or even drug retailer to consider the Walgreens-Kroger sourcing and distribution system as a secondary supplier.

Finally, we shouldn\’t overlook the obvious:

  • Is it possible that the product unifications of the two retailers could presage a merger? Both Walgreens and Kroger are old-line companies that have grown over the years by acquisition, so it wouldn\’t be without precedent for either.

Walgreens has made numerous acquisitions, ranging from the small buyout of Duane Reade in New York to the huge buyout of Alliance Boots in Europe. Kroger has grown over the years through relentless acquisitions, such as that of Harris-Teeter in North Carolina. It now operates 16 store brands in addition to the Kroger banner itself.

So, we\’ll see over time how the buying alliance turns out for the two retailers. But in the meantime, such an arrangement might be worth considering by other retailers of all types. Efficiency and scale counts, especially as every retail sector sits in the shadows of Walmart and Amazon.

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