PORTLAND, Ore. – Who will win the ruling in a critical hearing in Kroger ’s $25 billion bid to takeover Albertsons , which is being challenged by antitrust regulators at the Federal Trade Commission ?
As the hearing is set to close Tuesday , antitrust experts weighed in on key arguments and revelations from three weeks of testimony and legal maneuvering.
Who has to prove what?
Antitrust lawsuits are about preserving competition to benefit consumers, but the burden of proof is on the FTC. To win a court order temporarily barring the deal from going through, regulators must convince U.S. District Judge Adrienne Nelson the agency has a “ likelihood of ultimate success ,” is “in the public interest” and prove the merger “may be substantially to lessen competition , or to tend to create a monopoly,” according to federal law.
What is the FTC seeking?
At issue is whether Nelson will grant a “preliminary injunction” that would block the deal while the FTC seeks to further fight the merger in a court in Washington, D.C. Antitrust experts say many deals collapse when they lose such court rulings because it means unacceptable and expensive delays. In opening arguments, a Kroger attorney warned the court the deal “ will not occur ” if it loses the ruling.
Antitrust experts say it’s close but indicate the FTC might be making its case. Meanwhile, the companies seeking to create at $208 billion supermarket giant with 4,400 stores and 640,000 workers is stuck explaining why it benefits consumers to retire decades of fierce competition with each other. There have also been embarrassing disclosures and blunders that might undo the deal.
What are the issues and how might they sway the hearing's results? Here are the key considerations:
Kroger: Our focus is Walmart
During the hearing, no less than 10 Kroger executives testified, most stressing the company’s No. 1 competitor was discounter Walmart, not Albertsons.
Several executives described how the Cincinnati-based supermarket chain’s strategy was to price thousands of items within a price “spread” just slightly more expensive (about 2% to 3% higher on the most sold items) than the world’s largest grocer but cheaper than traditional rivals like Albertsons. On the stand, Stuart Aitken, Kroger’s chief merchant and marketing officer, was the bluntest about his employer: It was “monomaniacally focused on Walmart.”
Beyond that, Kroger considers any retailer that sells food a competitor, not just traditional supermarkets. Other retailers it's eyeing: Costco, Aldi, Trader Joe’s, Dollar General and Amazon (which also operates Whole Foods).
The FTC has countered Kroger and Albertsons are traditional “one-stop” grocers with a broader selection of goods and shouldn’t be allowed to combine because those nontraditional rivals are a poor substitute.
Douglas Ross, an antitrust law professor at the University of Washington , said Kroger’s arguments were strong given that Walmart is already the world’s largest grocer.
“It does seem like the narrow supermarket ‘market’ (part of the FTC’s theory for barring the deal) isn’t likely to describe how shoppers shop for very much longer,” Ross said.
He added the case eerily brought to mind two unsuccessful retail merger attempts of the past. In the late 1990s, Office Depot and Staples attempted to merge, also citing pressure from Walmart. In 2004, Blockbuster’s bid for Hollywood Video was abandoned after the FTC opposed it, citing monopoly concerns.
“Within a few short years, Blockbuster and Hollywood Video were roadkill (to) Netflix,” Ross said.
Kroger, Albertsons monitor each other's prices
A major problem that has emerged during the hearing that antitrust experts say could kill the merger is the detailed rivalry between Kroger and Albertsons.
While Kroger executives said they were focused on tracking prices at Walmart, several also admitted they collected price check information from Albertsons, sometimes more than once a week. They described Albertsons’ and other traditional retailers’ prices as “a guard rail” for their prices – they wanted to keep below them on thousands of items.
On the stand, Albertsons CEO Vivek Sankaran also admitted he encouraged his team in emails to go after Kroger. He testified he ultimately wanted to compete better against Walmart, but Kroger’s pricing was closer, so he used them as a “motivator.”
William Kovacic, the director of the Competition Law Center at George Washington University , said two words to those rationales: “Nice try.”
The fact that Kroger and Albertsons collect so much information about each other’s pricing illustrates something regulators, and a quite possibly a federal judge, want to preserve for the benefit of consumers: They are competing.
“It’s a real tricky part for Kroger and Albertsons. They can point to Walmart as the premier competitor,” Kovacic said. “But the (FTC) can win if they show that competition between Kroger and Albertsons is significant in and of itself.”
Is $1 billion in promised savings to Albertsons' customers enough?
During the hearing, Kroger has stressed its lower costs: Its prices on groceries average about 10% to 12% less than Albertsons. As a benefit of the efficiencies from the proposed merger, the company pledged to “invest” $1 billion into lowering prices for consumers .
However, during the hearing Kroger officials indicated the $1 billion in savings won’t benefit all shoppers: The money would go toward lowering prices on acquired Albertsons stores. They also admitted it may take up to four years to implement all the cuts to get to the promised annual savings target. On the stand, one Kroger official was asked if the promised savings compared to the combined $200 billion in annual sales for both Kroger and Albertsons was just “pennies on the dollar?”
In an embarrassing moment, an executive admitted Kroger prices on eggs and milk at times increased faster than inflation, but he quickly added those items were also very volatile.
Christine Bartholomew, a law professor at the University at Buffalo , said the egg testimony could ding Kroger’s credibility on its pricing.
“Undoubtedly, the milk and egg testimony hurts Kroger's claims on pricing,” she said, adding the company’s ability to charge customers more indicated pricing power that regulators won’t want to increase. “It is difficult to accept an argument that the companies must merge to survive when they are still raising prices … Combined, that increase in market power signals significant risk to customers' pocketbooks in the form of higher prices.”
‘C&S is not Haggen’ but its proposed transformation is risky
For nearly two years, Kroger’s proposal to take over Albertsons has been haunted by the ghost of a disastrous divestiture when Albertsons bought Safeway in 2015. That year, Washington-based regional grocer Haggen acquired nearly 150 stores but struggled to operate them and filed for bankruptcy months later. Many of the divested stores were re-acquired by Albertsons, while others closed.
Seeking to mollify competitive concerns, Kroger and Albertsons cut a deal to sell off 579 stores to Keene, New Hampshire-based C&S Wholesale Grocers if their merger is approved. A Fortune 500 company with strong financial resources, C&S Wholesale has still garnered criticism as a potential buyer because of its limited retail presence: It owns and operates less than two dozen supermarkets. Not only does C&S Wholesale Grocers have a limited retail footprint, it has a history of buying and selling off supermarkets. Also, while still a large company, its sales have declined in the past five years after losing its largest wholesale client, Ahold Delhaize.
C&S Wholesale executives testified during the hearing their recent struggles are nothing to worry about but rather part of bigger plan to transform the company into a hybrid wholesaler-retailer. If the deal is approved, its retail operations would top 600 stores and command about $20 billion in retail sales.
Ross said the divestiture deal is key to winning approval: if a well-financed competitor acquires the stores, it could be argued consumers are not losing a competitor but getting a new one.
“While many people have focused on the famous Haggen failure, C&S is not Haggen – it is much stronger and far more likely to succeed,” Ross said.
Will a C&S Wholesale executive’s messages blow the whole deal?
A senior executive’s texts trashing the Kroger stores her company is buying in the transaction as well as similar communications mocking assets acquired in a previous deal were revealed during the hearing.
Bartholomew and Kovacic said the texts could undermine the divestiture deal’s appeal.
“The only way the merger could survive antitrust scrutiny is if the divestiture actually creates real, meaningful competition. The testimony from the C&S executive about getting the worst chains is damning,” Bartholomew said.
“It’s a recurring theme, not an impulsive observation,” Kovacic said, noting the executive has criticized multiple C&S Wholesale Grocer deals.
What is a whipsaw strike? Union offers a vivid example
Union groups have decried the proposed merger, saying it would weaken their bargaining power. As the hearing began, Local 555 – which had previously supported the deal before pulling support during a breakdown in contract negotiations – used a technique union officials say the deal endangered: a whipsaw strike .
For a week, 4,500 workers walked off the job from 28 Fred Meyer stores (a Kroger subsidiary), picketed and urged shoppers to get their food from Albertsons or (subsidiary) Safeway. During the hearing, union officials testified that shoppers will go to another nearby store to support the strike. Whipsaw bargaining and whipsaw strikes allow workers to play rival retailers off of each other. But if Kroger owned Albertsons, the technique wouldn’t work.
Bartholomew thought the strike might help make the case of the danger to unions as well as providing a vivid example of two companies in a local market of union workers.
A controversial concept advanced in the case by the FTC is that there are local union “markets” of workers that union grocers “compete” for that would be harmed by the merger. Kroger and Albertsons have dismissed the idea, asserting there is little difference in skills or pay between union and nonunion labor in the cities they operate.
“It is evidence that supports the FTC's claims that the merger could harm employers,” Bartholomew said, adding that the strike also vividly displayed a local labor market.
Kovacic disagreed.
“(The strike) can appear contrived – if it looks like posturing by the UFCW, it’s not going to affect the case,” Kovacic said.
Albertsons CEO hints at grim future
On the stand, Sankaran hinted Albertsons could face struggles in the coming years as nontraditional rivals continue to sell cheap food and the Boise, Idaho-based grocer fights to close its pricing disadvantage with Kroger, Walmart and others. He said layoffs, stores closures and market exits might have to be considered.
But FTC attorneys grilled Sankaran , asking him where all this concern was when he testified before Congress in 2022 and defended a massive $4 billion dividend paid out to investors as part of the deal. They also pointed to Sankaran’s $43 million golden parachute he will get if the deal is approved. Another embarrassing moment on the stand was Sankaran trying to explain why he and other executives didn’t know there was an auto-delete function on their mobile phones (that destroyed hundreds of texts) when they were under legal order to preserve communications as the company looked to sell itself.
Bartholomew wasn’t persuaded and Sankaran’s warnings call into question the nearly $1 billion both companies have plowed into trying get the deal approved.
“To me, it sounds like fear-mongering,” Bartholomew said. “If I was a shareholder, I would have a lot of questions about the companies' spending decisions.”
Ross was similarly unmoved by Sankaran’s warnings.
“(That’s) probably not a good move by Albertson’s. Companies often make dire warning about what might happen … and when the merger is disallowed make miraculous recoveries from their supposed deathbeds,” Ross said.
Who will win the ruling for or against the preliminary hearing (and why)?
Kovacic: The FTC wins. There’s too much disclosure on both the Kroger-Albertsons competition and the C&S Wholesale texts.
Bartholomew: Can’t predict, but the “FTC is making a good showing.”
Ross: Too close to call. “This case sounds pretty evenly matched.”
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This article originally appeared on Cincinnati Enquirer: Who could win in Kroger's regulatory battle with the FTC over Albertsons merger? And why?
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