Who are King Soopers' real competitors? Merger trial picks apart Colorado grocers

The parent companies of King Soopers and Safeway, Kroger and Albertsons, have stressed throughout the merger process they need to join forces to compete against behemoths like Walmart, Costco and Amazon.

On Monday, Kroger CEO Rodney McMullen testified in Denver District Court about the multi-format stores taking customers from the traditional grocer.

The number one threat? Walmart, he said.

Number two? Costco.

And what about Amazon?

“I would call Amazon a creeping competitor, where every year they're meaningfully more a bigger competitor than the past,” McMullen said.

The e-commerce site began with mostly selling books, McMullen explained. Now, Amazon sells everything and can deliver almost anywhere.

Then there’s an assortment of other smaller grocers such as Trader Joe’s or natural food stores like Sprouts, especially in Colorado. Don’t forget the rising German discount chains Aldi and Lidl, quickly spreading along the East Coast. Aldi and Lidl aren’t in the state, McMullen said — yet.

When McMullen conducts store visits to compare pricing with his Colorado division, he said “we would always go to Walmart, Costco, Albertsons sometimes or Safeway, Whole Foods almost all the time.”

Under cross examination, Colorado’s Senior Assistant Attorney General Jason Slothouber asked McMullen whether a Kroger market analysis listed Walmart and Albertsons as the two largest competitors in the Denver-Lakewood-Aurora metropolitan statistical area?

Kroger’s CEO agreed.

In Colorado Springs, same thing.

Slothouber pointed out how Kroger's list of 49 metro areas didn’t mention Costco or Amazon once as primary competitors.

McMullen explained it was because the list was from 2020 and Costco wouldn’t have been considered a top two competitor of Kroger’s four years ago and Amazon is harder to pin down due to online sales.

Second Judicial District Judge Andrew Luxen, who will decide on whether or not to place a permanent injunction to block the merger, also questioned McMullen on how Costco was a competitor to King Soopers with how the membership shop sells other products such as refrigerators, televisions and more.

"There's a King Soopers four blocks from where we're sitting right now," Luxen said. "And that King Soopers doesn't look a lot like a Costco."

His response was that many big-box retailers including Target have a large square-footage devoted to grocery with the same products.

Throughout two weeks of the trial so far, Colorado’s legal team picked apart the threat of other grocers, presenting a case arguing other formats aren’t sufficient replacements to Kroger’s King Soopers or City Market stores in the state in the same way Safeway and Albertsons are.

Kroger has nearly 150 stores in Colorado and Albertsons runs 105 stores statewide, most under the Safeway name.

Colorado Attorney General Phil Weiser is fighting to block the $24.6 billion merger in a separate trial from Washington state and the Federal Trade Commission's lawsuits.

Colorado wrapped up its case and presentation of witnesses on Monday with the testimony of an economist specializing in antitrust and monopolization issues who studied what the merger's impacts could be across the state. After that, the grocers began their defense.

The trial is running behind and has a new date for closing arguments set for Oct. 24.

There may be other competitors, but economist says they’re not the same

Before McMullen testified, economist Nitin Dua with Bates White Economic Consulting found in an analysis of Albertsons store closures that when a supermarket closes, customers diverting to a Trader Joe’s store is small unless it's within 0.1 or .2 miles away from the closure.

About 22% of customers went to a Trader Joe’s nearby, he found. But the number is much higher for another supermarket, where more than 50% of customers diverted to after a closure.

“A supermarket and a Trader Joe’s being located at the same distance from another supermarket, a supermarket is my closer competitor if I am running a supermarket,” Dua said. “And on top of that, Trader Joe’s declines pretty quickly, but a supermarket doesn't.”

King Soopers and Safeway have more “head-to-head competition” because they’re most similar in format, Dua said.

He analyzed the King Soopers 2022 strike launched by union grocery workers — which the state is also scrutinizing Kroger executives for — saying it was an ideal case study to analyze competitive effects in the region. During the strike, he found Albertsons gained $55 for every $100 Kroger lost.

The economist didn’t discount Walmart as a major competitor against King Soopers and City Market stores, though he expressed doubts about Costco and Trader Joe’s.

While Walmart may push Kroger to keep prices lower, he said the retail giant doesn’t ensure Kroger will continue to invest in quality products.

“Prices are not the only thing, to be clear,” Dua said. “Consumers also care about quality and consumers benefit from competition between all of these supermarkets: Kroger, Albertsons and Walmart.”

Colorado has argued Walmart is Kroger’s price floor and Safeway sets its price ceiling. And with the ceiling gone, Kroger has more free reign to raise prices like it did with its “mountain no-comp zones”, which Kroger denies it'll do if the merger goes through.

Kroger executives including McMullen and Stuart Aitken, chief merchant and marketing officer, testified Monday that Albertsons sets its prices about 10% and 12% higher than Kroger. The merger would allow them to set Albertsons stores — which the grocer would only get 14 in Colorado after the divestiture — lower to Kroger’s pricing levels.

And they both stressed how much Walmart sets the base of their pricing strategy and how they’ve been working to get Kroger closer to Walmart lows. If the merger goes through, they said Walmart would keep them grounded to lower prices.

“It would be the principal person that we would compete against on price,” McMullen said.