Target and Kroger are discussing a possible merger, several people with knowledge of the matter tell Fast Company. The talks come as the grocery industry grapples with Amazon’s increasing hold on the market.

The two companies first started conversations last summer about a partnership that could improve Target’s grocery business and give Kroger customers more access to merchandise and e-commerce. Target and Kroger spoke again in the fall and talks are ongoing this year. The companies appear to be struggling to decide whether a merger is the best path forward. Last year, Target and Kroger’s combined annual revenue added up to $195 billion.

Kroger declined to comment for this story. Target did not respond to requests for comment.

Amazon’s acquisition of Whole Foodsa deal valued at $13.7 billion–last year forced grocers and retailers alike to come to terms with the holes in their businesses. That led to a series of partnerships and acquisitions aimed at pulling sleepy grocery retailers out of complacency and into the digital age. Many grocers–including Kroger, Albertson’s, Publix, and Giant and Stop & Shop owner Ahold Delhaize–struck deals with Instacart to give their supermarkets a digital presence and provide on-demand delivery to their customers. Albertson’s also purchased meal-kit purveyor Plated.

At the same time, mega-retailer Walmart has pushed further into the grocery space. The company already commands the largest share of the nearly $800 billion U.S. grocery market, according to a CNBC report from last year. In 2017, Walmart teamed up with Google Home to offer voice-activated home shopping, just like Amazon offers grocery shopping via Alexa. This year, Walmart will make its grocery delivery service available to 40% of U.S. households. It is also building out a millennial-focused grocery brand on In 2017, Walmart raked in $485.9 billion in revenue.

Amazon has already started selling Whole Foods products on its flagship site, testing on-demand delivery of those groceries, and offering rewards to Prime  credit card holders.

Meanwhile, Kroger’s stock price has suffered in recent months and analysts are concerned about its failure to make crucial investments into its online sales division. Earlier this year, the supermarket chain discussed acquiring wholesale e-commerce brand Boxed, which would have given Kroger both delivery infrastructure and entry into merchandise sales. But Kroger offered less than Boxed’s $470 valuation and the potential deal dissolved, according to people with knowledge of the matter who spoke with Fast Company. Kroger also slept on an acquisition of Shipt, an on-demand grocery delivery service, which has since been purchased by Target for $550 million.

The Shipt acquisition is just one of many reasons why a tie-up between the country’s second largest grocery retailer and Target makes sense, believes digital supply chain consultant Brittain Ladd. Target has a growing e-commerce business. While digital sales represent only 8% of the company’s overall business, online sales grew 29% in the fourth quarter of 2017, according to an earnings statement.

Those numbers are poised to go up. Food Marketing Institute and Nielsenestimate that 70% of consumers will be grocery shopping online within the next five to seven years, according to a January report. The joint report also says that online food and beverage spend could hit $100 billion as early as 2022.

A merger between Target and Kroger would not only give Kroger the infrastructure it needs to compete in a digital grocery landscape, it would expand the market opportunity for both companies. One of the reasons Walmart is so successful is because it sells both general merchandise and grocery. While Target does have a grocery business (it brought on Kroger exec Jeff Burt last year to lead it), Kroger’s is much greater in quality and scope.

“Target customers would have access–in Target stores and out of Target stores–to best-in-class grocery,” says Ladd, who is a vocal proponent of a deal between the two companies. In a recent article, Ladd noted that changing tastes are driving consumers to all-in-one shops like Walmart, Target, and Amazon. In 2017, food and beverage represented 20% of Target’s sales–with the majority of its business coming from home goods. Ladd argues that Target should either acquire Kroger or merge with it to make its grocery offering equal its merchandise.

If Kroger and Target were to tie the knot, he says, Target could offer its customers rewards for shopping at Kroger. Such a deal would also give Target some room to reconsider how it executes grocery in its stores, imagines Ladd, or even design an entirely new concept store with Kroger. Alternatively, he speculates, Kroger could buy Target’s grocery business and revamp the in-store experience (much like CVS did with Target’s pharmacy business).

Source: Fast Company