Kroger-Albertsons Deal Heads to Court With Food Price Focus
(Bloomberg) -- Kroger Co. and Albertsons Cos. are finally getting their day in court.
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Nearly two years after the acquisition was announced, the grocery giants on Monday started a federal court hearing in Portland, Oregon, on the US Federal Trade Commission’s bid to block the $24.6 billion deal. The FTC alleges the tie-up would lead to higher grocery prices for consumers and lower wages for the supermarkets’ unionized workforces.
More than 100,000 Americans wrote to the antitrust and consumer protection agency to express concerns about the proposed takeover, FTC lawyer Susan Musser told US District Judge Adrienne Nelson, who is overseeing the case.
The combination of Kroger and Albertsons will lead to “less choices for customers and more power for the merging firm,” she said.
The supermarkets say they need to combine to compete against bigger rivals Amazon.com Inc., Costco Wholesale Corp. and Walmart Inc., in what would be the biggest ever US grocery deal if it comes to fruition. They have pledged to spend $1 billion to cut prices, another $1 billion on improving worker pay and benefits and $1.3 billion on store conditions if the deal closes. Meanwhile, the companies have already spent more than $850 million to pay lawyers, investment bankers and other advisers.
Matthew Wolf, a lawyer for Kroger, said the companies won’t move forward with the deal if the judge rules in the FTC’s favor.
The acquisition will lead to “lower prices from day one, ramping up to $1 billion annual price investment,” he said. “All of this will only be possible if the merger goes through.”
In thousands of markets across the country, FTC’s Musser said, Kroger and Albertsons are each others’ closest rival. For example, in Corvallis, Oregon, the companies operate four out of six stores in the area, she said. Both grocers price-check and compare product selection against other supermarkets, she said, most often looking to the other company.
Focused on Walmart
While Albertsons may focus on matching prices with Kroger, that is a “one-way love affair,” Wolf said. Kroger doesn’t look to Albertsons but is instead “monomaniacally focused on closing the gap to Walmart’s prices,” he said.
Albertsons’ attorney Enu Mainigi said she can guarantee with “100% certainty” that prices would go down at its stores, since Kroger’s prices are already lower. Albertsons sells Kraft Heinz Co. macaroni and cheese for $3.99; Walmart is able to sell the same product for $2.98 because of its bulk buying.
“Albertsons cannot provide those price reductions on its own,” Mainigi said. “The merger will give the company the scale to better compete with Walmart, Costco and Amazon.”
Under US merger law, the acquisition would be illegal in 1,922 local markets, the FTC’s Musser said. Even when including organic grocery stores, club stores like Costco and limited selection outlets such as Aldi Inc., the tie-up would still lead to high concentration and harm thousands of areas across the country, Musser said.
Internally, Albertsons executives were aware of the potential competition issues, with one writing to his colleagues that the deal is “basically creating a monopoly in grocery,” Musser said.
Kroger’s Wolf pushed back on that assessment.
“Two-thirds of this country has nothing but benefit,” he said. “The public interest unambiguously favors this merger.”
The grocery transaction is latest FTC case to head to trial under the Biden administration, which has stepped up antitrust enforcement, particularly on the merger front. The results in court have been mixed with some high-profile losses, such as the challenge to Microsoft Corp.’s acquisition of Activision Blizzard Inc. That was followed by wins in the agency’s suit against Illumina Inc. over its purchase of the startup Grail and block of IQVIA Holdings Inc.’s deal to buy rival Propel Media Inc.
Jennifer Rie, a Bloomberg Intelligence analyst who focuses on antitrust, said the FTC’s odds of winning are good leading into the trial.
“We lean toward the FTC for now, given the sensitivity of the industry, a history of failed divestiture remedies in the grocery sector and weaknesses in the companies’ offered remedy,” she said.
Political Spotlight
The acquisition has come under a political spotlight during a period of historic inflation. Grocery inflation hit a four-decade high in 2022, driven by higher costs of labor, transportation and ingredients. Everything from beef and flour has become more expensive, though price increases have moderated in recent months. Retailers have said this year that prices of packaged foods remain high, with some manufacturers still weighing more increases.
Vice President Kamala Harris has called for a federal ban on food and grocery price gouging, part of proposals intended to reduce consumer costs. In a fact sheet on her economic proposals, Harris’ campaign specifically called for greater antitrust enforcement on food mergers, citing the FTC lawsuit against Kroger and Albertsons.
Eight states, plus Washington DC, have joined the FTC in the case, which is one of several legal proceedings aimed at blocking the deal. Colorado and Washington state have filed separate suits in state court, with trials scheduled to begin in September after the federal hearing ends. A complaint is also pending in the FTC’s in-house court, though on Aug. 19, Kroger filed a suit in federal court seeking to block that trial on constitutional grounds.
Kroger CEO Rodney McMullen and Albertsons CEO Vivek Sankaran are both expected to testify during the proceeding, which is expected to last three weeks. The executives already defended the deal nearly two years ago before a Senate subcommittee, arguing that the combined company would be the number-four grocery retailer behind Walmart, Amazon and Costco.
Proposed Divestments
In a bid to resolve the antitrust concerns, the companies have agreed to sell a group of nearly 600 stores to C&S Wholesale Grocers Inc.
That proposed divestiture is unlikely to work, as the company has never operated more than 100 stores at a time, Laura Hall, another FTC attorney told the judge. In 2021, C&S bought 12 stores as part of a deal between Tops Friendly Markets and Price Chopper Inc. and the company has struggled to operate those, Hall said.
C&S, which primarily operates as a wholesaler, is mostly interested in the distribution centers it will acquire from Kroger and Albertsons, and plans to recoup its investment without the retail supermarkets. Internally, the company estimates that it will take 11 years for the stores to be profitable, Hall said.
But the proposed divestiture also doesn’t remedy all the proposed harm, she said. In Corvallis, the companies said they would divest one of the four stores, but the combined Kroger-Albertsons would still control 50% of the market.
Kroger’s Wolf said C&S will become the eighth largest grocery chain in the nation and “a vital new competitor both to Kroger and to Walmart, Costco and Amazon.”
“After the merger, C&S will be the eighth largest grocery store in the country,” Wolf said. “They have the experience. They have the infrastructure.”
At a news conference Monday ahead of the trial start, unions representing more than 100,000 workers at Kroger and Albertsons stores called into question the companies’ promises to reduce consumer prices after the merger.
“Why wait if grocery prices are already inflated?” said Kim Cordova, president of United Food and Commercial Workers Union Local 7 in Colorado. “They’ve made massive profits during the pandemic, so what does a billion dollars mean to them?”
Jessica Crowley, a pharmacist at a Pavilions in Los Angeles, said the merger would also reduce patient access to medication, noting that C&S doesn’t have any experience operating pharmacies.
“History shows us we can’t trust merger promises,” she said.
Joining forces with Albertsons would help Kroger become a bigger national player. If the purchase goes through, the combined entity would operate more than 4,000 stores across 48 states and DC. The combined entity would also become more efficient with managing inventory, stores and distribution centers, according to industry analysts.
Both supermarkets have a lot at stake. The acquisition is Kroger’s boldest deal in history and one that would define the legacy of its CEO McMullen, who started as a part-time bagger at the grocer in the late 1970s. If the deal falls apart, Kroger will likely turn its focus on improving and investing in its existing stores.
Albertsons could emerge again as a deal target if the deal fails. In the near term, the grocer will need to focus on operations, technology and other areas it lags its rivals to compete more effectively. Sankaran, who was previously at PepsiCo Inc., joined Albertsons in 2019 to help take the company public the following year.
--With assistance from Max Zimmerman.
(Updates with Kroger, Albertsons arguments beginning in fifth paragraph.)
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