Kroger and Albertsons head to court to defend merger plan

By Leah Nylen and Jaewon Kang | Bloomberg

Kroger Co. and Albertsons Cos. are finally getting their day in court.

Nearly two years after the merger was announced, the grocery giants on Monday start 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.

Also see: Albertsons unveils list of 63 California stores to be sold ahead of trial

The grocers say they need to combine to compete against bigger rivals Amazon.com Inc. 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 if the merger goes through, another $1 billion on improving worker pay and benefits and $1.3 billion on store conditions. Meanwhile, the companies have already spent more than $850 million to pay lawyers, investment bankers and other advisers.

“It’s a swing for the fences,” said Bob Goldin, partner at food consultancy Pentallect Inc, adding that the grocers have put in significant amounts of resources to combine forces.

The grocery deal 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.

Related: Kroger-Albertsons merger could upend 164,000 workers in Southern California

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 merger 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.

See also: Kroger and Albertsons CEOs give details on controversial $25 billion merger

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’s campaign specifically called for greater antitrust enforcement on food mergers, citing the FTC lawsuit against Kroger and Albertsons.

Eight states, plus Washington D.C., 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 Wholesale Corp.

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. But the FTC alleges that even with those proposed divestments, the merger would harm competition in at least 550 cities and towns across the country.

The FTC also criticized the selection of C&S as a buyer, noting that while the company is the largest US food wholesaler, it has limited experience with retail and today operates only 23 stores.

The proposed deal has also sparked debates about the definition of a grocery store as the food-retail industry undergoes massive changes and competition intensifies.

Amazon jumped into the grocery sector with its purchase of Whole Foods Market and launch of Amazon Fresh. European retailers like Aldi Inc. and Lidl have expanded their footprint in the US, pitching their no-frills operations with low prices. Dollar stores have been selling more groceries, too, while regional operators ranging from Publix Super Markets to Wegmans Food Markets Inc. are adding stores. Walmart remains the nation’s biggest food seller and is attracting shoppers with its focus on value.

Related: Employees speak out against proposed Kroger/Albertsons merger

The grocery business has become much more complicated. Retail giants have diversified their operations, selling everything from advertising to prepared foods. They are also investing in technologies to fulfill online orders more efficiently.

Joining forces with Albertsons would help Kroger become a bigger national player. If the merger 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.

“They can’t price as effectively as those bigger stores like Walmart,” Noah Rohr, a Morningstar analyst, said of Kroger. “Closing the merger would help.”

Boldest deal

Both supermarkets have a lot at stake. The merger 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 merger doesn’t go through. 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 at Bloomberg.