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Safeway and Albertsons may need to sell stores to close deal

Private equity firm Cerberus Capital Management plans to purchase Safeway in a $9.4 billion deal and merge it with Albertsons.
Private equity firm Cerberus Capital Management plans to purchase Safeway in a $9.4 billion deal and merge it with Albertsons.
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Some Safeway and Albertsons locations may be sold in order for the two supermarket chains to merge.

Combined, Albertsons and Safeway will have 455 stores in Southern California, if Albertsons owner, private equity firm Cerberus Capital Management, buys Safeway in a $9.4 billion deal.

That may cause regulatory agencies to ask that some stores be sold or divested, especially in areas where locations are very close in proximity, said Jim Lee, a USC adjunct professor and former Stater Brothers executive. 

"The whole point of divestiture is to ensure a competitive marketplace in the government's eyes," Lee said.

When the stores get sold on the market, that could become a great opportunity for grocery competitors to snap up new locations, Lee added. For example, when Albertsons took over Lucky's, it sold stores in 1999 and Stater Brothers bought 43 of them.

That allowed Stater Brothers to have a bigger footprint in areas like Orange County and northern San Diego County, Lee said. Purchasing existing supermarkets can be beneficial because the new owner can hire the same staff at the previous store and gain customers at an already existing location.  

"Literally overnight, they were able to have a stronger presence in those areas," Lee said.

RELATED: Grocery chains Safeway and Albertson's announce merger deal

Impact on Southern California consumers

With fewer players in the grocery marketplace, will that mean higher prices for consumers?

In a conference call with analysts, Safeway's CEO Robert Edwards said the merger would improve the company's "competitive position." It would lower prices for consumers and give them a better shopping experience, he added.

David Livingston, a managing partner at DJL Research, was skeptical. If there are price reductions, he doesn't think they will be significant enough for consumers to notice. 

"The merged companies are still going to have the same types of overhead (expenses) that other companies don't," Livingston said. He said those expenses include higher labor costs.

He said after an acquisition, the buyer generally looks for ways to cut costs, by ending redundant operations and closing stores. The combined company may also save money when buying products because of its larger size, according to Livingston.

But Lee, who was a former Stater Brothers' president and chief operating officer, doesn't think prices will go higher as a result of the merger.

"You cannot arbitrarily just raise prices," Lee said. "Customers will develop other allegiances. They are looking for value."