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Supermarket Giants Kroger and Albertsons Plan $25 Billion Merger Kroger and Albertsons Plan $25 Billion Supermarket Merger That May Face Hurdles
(about 7 hours later)
The grocery giant Kroger announced plans on Friday to acquire Albertsons in a deal that could reshape the supermarket landscape in the United States, uniting the country’s largest supermarket chains at a time when rising costs and competition from Walmart and Amazon squeeze the industry. Two of the country’s largest supermarket chains announced plans on Friday to merge in a deal that could alter the food retail landscape but will also face intense scrutiny by regulators.
But the deal, which values Albertsons at about $24.6 billion including debt, is likely to invite intense scrutiny from regulators who are focused on the potential for large companies to affect prices, and have a history of blocking deals that may directly impact consumers. Even before the deal was announced Friday, consumer advocates had raised objections to its possibility. Kroger said it would acquire Albertsons for $24.6 billion. The chains currently have total revenue of more than $209 billion and about 5,000 stores across the country under well-known chains like Ralphs, Safeway and Vons.
The deal would bring together chains including Ralphs, Safeway and Vons, among a handful of others. Executives at the two companies said the combination was needed to better fend off big-box retailers like Walmart, Amazon and Costco, which can use their size to sell yogurt, cereals and pastas at lower prices, and have increasingly taken a bigger share of consumers’ wallets. Moreover, they said, the companies would pass along to customers as much as $500 million in savings resulting from the merger.
Kroger and Albertsons operate nearly 5,000 stores across the country, as well as pharmacies and gas stations. But their combined annual revenue of $209 billion last year falls short of Walmart’s annual grocery sales, of about $218 billion. Though Amazon is a smaller presence in the grocery business, it is also pressuring rivals as it reaches further into every corner of the retail market with its delivery services. But the deal quickly drew criticism from consumer advocates, independent grocery chains and politicians who said it would limit shoppers’ choices of where to buy groceries, especially in lower-income and rural areas, and could lead to higher prices for consumers and independent grocers.
Both grocers are coming off pandemic highs. Their sales soared as homebound customers stocked up on food, but inflation is now cutting into their profit margins, and customers have returned to dining out and spending less on groceries. At the same time, Amazon and Walmart have invested in the digital and delivery parts of their businesses and used their scale to keep prices lower. “We don’t need another mega grocery store chain,” said Stacy Mitchell, co-executive director of the Institute for Local Self-Reliance, an advocacy group that challenges areas of concentrated corporate power, such as the grocery industry.
The deal will certainly face significant political and regulatory scrutiny, heightened by a global food security crisis that is compounded by significant inflation in food prices. Food prices in the United States rose more than 11 percent in September from a year earlier, as the cost of everything from fruits and vegetables to cereals and flour continued to rise. If the merger went through, she said, the combined Albertsons-Kroger and Walmart would control 70 percent or more of the market in 167 cities in the United States. In some, like Salina, Kan., or Durango, Colo., the share would exceed 90 percent.
Lina Khan, who heads the Federal Trade Commission, which is expected to review the deal, has expressed deep concern about the impact of corporate consolidation. The proposed deal places political pressure on the Biden administration and will face tough regulatory scrutiny at a time when high inflation has compounded a global food security crisis. Food prices in the United States rose more than 11 percent in September from a year earlier.
Kroger and Albertsons said they planned to sell stores to competitors, and would consider spinning off between 100 and 375 stores into a separate, stand-alone company. Analysts have pointed to a overlap between the two grocers, particularly on the West Coast, as a likely source of divestitures. For the Democrat-led agency to approved the deal, Kroger and Albertsons will need to convince its members that they create a viable competitor in parts of the country in which there is significant overlap. “Grocery chains like Kroger and Albertsons are price-gouging families with inflated food prices, and further corporate consolidation would result in higher prices, employee layoffs and weaker supply chains,” Senator Elizabeth Warren, Democrat of Massachusetts, said in an emailed statement. “The F.T.C. should oppose this deal.”
But past efforts to carve out stores to form a new competitor haven’t worked. In 2014, the retailer Haggen in Bellingham, Wash., bought more than 100 stores that Albertsons had sold to win approval for its $9 billion merger with Safeway. A year later, Haggen filed for bankruptcy and blamed Albertsons for the breakdown of its business. Albertsons later bought back 33 of those stores from the bankrupt company. Nearly three decades of consolidation has resulted in far fewer grocery stores in the country. Since the mid-1990s, the number has declined nearly 30 percent, according to a report by Food and Water Watch, a consumer advocacy group. At the same time, the combined market share of the four largest grocery retailers tripled to 69 percent from 23 percent, the group said.
“Part of the rationale for this deal is that we need to be bigger. Well, if you’re bigger and more significant, what does that mean to the markets where you’re dumping stores for some smaller guy who will not have the purchasing power that you claim you’re going to get from this deal?” said Bill Baer, who led the Justice Department’s antitrust division during the Obama administration. These days, the biggest grocery retailer is Walmart, which generated $218 billion last year from food sales, or 55 percent of its U.S. revenue. Amazon, which acquired Whole Foods in 2017 and sells groceries on its website, is a smaller presence but is pressuring rivals as it reaches further into the industry.
“Divestiture is always a bright idea for merging parties, and it’s not always a very good idea for consumers.,” he added. It’s an industry at a pivotal juncture, after revenues and profits soared early in the pandemic as consumers ate most of their meals at home. Now people are eating more meals away from home than they did two years ago, inflation is slicing into store profit margins and some shoppers are shifting to less-expensive stores like Walmart.
Albertsons shares fell on Friday, a sign that investors are skeptical that the deal will get past regulators. By late morning, the stock was trading below $27 a share, more than 21 percent below Kroger’s $34.10 a share offer price. In June, Rodney McMullen, the chief executive of Cincinnati-based Kroger, told Wall Street analysts that the chain was seeing a significant shift in behavior among shoppers because of inflation. While some consumers continued to buy premium products, others were “aggressively” switching to store brands, he said.Still, little of that seems to have harmed the company’s bottom line. In the most recent quarter, which ended Aug. 13, Kroger’s operating profits grew 13.7 percent from a year earlier, allowing it to boost its dividend to investors by 24 percent. It has also repurchased $975 million of its own shares this year.
In announcing the deal, Kroger also sought to ease concerns about the impact on consumers by saying that it expects to save about $500 million in costs, which it plans to use to “reduce prices for customers.” Whether it follows through with those plans will likely be a key focus for regulators. As part of their pitch to regulators, Kroger and Albertsons are likely to argue that their combined scale is needed to compete against stores like Aldi and Lidl — two European chains that have been expanding quickly in the United States — as well as Walmart, Amazon and Costco.
Though cost savings in acquisitions often come from layoffs, the grocers may also point to fact that their workforces are unionized as part of their discussions with regulators. The Biden administration has been a significant proponent of unions. Neither Walmart nor Amazon are unionized on a large scale. The Federal Trade Commission has not always been convinced by that argument. In 2015, it successfully sued to block a merger between Office Depot and Staples, even after the retailers had positioned their merger as an effort to take on Amazon and lower prices.
Consumer protection groups raised concerns about the deal following reports of a possible merger on Thursday. The American Economic Liberties Project, a nonprofit that promotes antitrust legislation, criticized it as a “bad deal for consumers, workers and communities.” In its review, the F.T.C. is likely to consult with consumer advocates, competitors, suppliers and others. Regulators will also look at whether Kroger promised that past acquisitions would lower prices, and whether those promises came to fruition. The review could take months, keeping the companies and their employees grappling with uncertainty.
“There is no reason to allow two of the biggest supermarket chains in the country to merge — especially with food prices already soaring,” Sarah Miller, the group’s executive, said in a statement on Thursday. Kroger and Albertsons, which is based in Boise, Idaho, said Friday that they expected to close the deal in early 2024, and that Kroger would pay Albertsons $600 million if the merger fell apart over antitrust concerns.
As part of their pitch to regulators, Kroger and Albertsons will likely try to convince them that their scale is needed to compete against big box stores like Aldi, Lidl — two European chains that have been expanding quickly in the United States — and Costco, as well as Amazon.The agency, though, has not always allowed retailers to use Amazon as a boogeyman to help clear their deals. In 2015, the F.T.C. successfully sued to block a merger between the retailers Office Depot and Staples, even after they had positioned the deal as an effort to take on Amazon and lower prices. Hoping to stave off concerns about combined market share in various cities, which would be a key hurdle in a review by the F.T.C., the two grocery giants said they planned to sell stores to competitors, and would consider spinning off between 100 and 375 stores into a separate company.
A review process would likely include the F.T.C. talking with consumer advocates, competitors, suppliers and others. Regulators will also look to whether Kroger has promised that past acquisitions would lower prices, and whether those promises came to fruition. A review may also include formal requests for information about the companies’ plans or testimony from executives. That could take months, and the process can drag on companies and their employees as they grapple with uncertainty. Analysts have pointed to overlap between the two grocers, particularly on the West Coast in cities like Seattle, where they would have a combined 40 percent market share, as a likely source of divestitures.
Kroger, based in Cincinnati and founded in 1883, operates 2,750 grocery stores across the United States under banners that include Ralphs, Dillons and Harris Teeter and has a market capitalization of about $32 billion. Albertsons, based in Boise, Idaho, and founded in 1939, runs 2,200 supermarkets under names like Albertsons, Safeway and Vons and has a market capitalization of roughly $15 billion. Lina Khan, who leads the F.T.C., has expressed skepticism that these types of solutions are sufficient to create real competition against the newly formed entity. Peter Kaplan, a spokesman for the FTC, declined to comment.
Kroger’s chairman and chief executive, Rodney McMullen, will remain in that role at the combined company, as will Kroger’s chief financial officer, Gary Millerchip. In fact, some past efforts to form a new competitor haven’t worked. In 2014, the retailer Haggen in Bellingham, Wash., bought more than 100 stores that Albertsons had sold to win approval for its $9 billion merger with Safeway. A year later, Haggen filed for bankruptcy and blamed Albertsons for the breakdown of its business. Albertsons later bought back 33 of those stores from the bankrupt company.
“Part of the rationale for this deal is that ‘We need to be bigger,’” said Bill Baer, who led the Justice Department’s antitrust division during the Obama administration. “Well, if you’re bigger and more significant, what does that mean to the markets where you’re dumping stores for some smaller guy who will not have the purchasing power that you claim you’re going to get from this deal?”
He added, “Divestiture is always a bright idea for merging parties, and it’s not always a very good idea for consumers.”
Consumer advocates said the deal would be bad for consumers and independent grocery chains.
The biggest grocery retailers, like Walmart, use their size to negotiate better pricing from producers and suppliers. Kroger and Albertsons, which many analysts say are already big enough to negotiate good deals, hope to reap even more negotiating power.
But to make up those lost profits, suppliers often charge smaller and independent grocers more, said Chris Jones, counsel and a senior vice president of government relations for the National Grocers Association, which represents 1,700 family-owned grocery chains.
“If you squeeze a supplier on one side and you’re able to get product on preferential terms, the supplier has no choice but to increase prices or short product to buyers that have less leverage,” Mr. Jones said.
The independent chains then have to pass along the higher prices to their customers, who are often in the lower-income, urban and rural markets that the megastores bypass because they’re not profitable enough.
Rebecca Wolf, a food policy analyst at Food & Water Watch, concluded that this proposed merger offered consumers little benefit.
“A lot of advocates and consumer advocates who have been following this kind of work for a long time really know and understand that this type of merger will entrench the power of the grocery industry,” she said.