Kroger:Regulators will likely be very critical of the deal as it aims to boost competition from Amazon and Walmart, which are both deep-pocketed.
Two of the nation’s biggest supermarket chains announced Friday that they would merge. This deal could change the landscape in the food retail sector, but regulators will be closely watching.
Kroger announced it would buy Albertsons for $24.6 million. They currently have a combined revenue of over $209 billion, and approximately 5,000 stores in the United States under well-known chains such as Ralphs, Safeway, and Vons.
The executives of the two companies stated that the merger was necessary to better compete with big-box retailers such as Walmart, Amazon, and Costco. They can use their size and sell yogurt, cereals, and pastas at lower prices and have increasingly taken a larger share of consumers’ pockets. They also stated that the merger would result in savings of up to $500 million for customers.
However, the deal was quickly criticised by independent grocery chains, politicians, and consumer advocates. They claimed that it would restrict shoppers’ options for where they can buy groceries, particularly in rural and lower-income areas. It could also lead to higher prices and greater competition between independent grocers and consumers.
Stacy Mitchell, co-executive Director of the Institute for Local Self-Reliance said, “We don’t need another mega supermarket chain.” This advocacy group challenges concentrated corporate power such as the grocery sector.
She said that if the merger was approved, Walmart and Albertsons-Kroger would own 70% or more of the market in all 167 US cities. Some cities, such as Salina, Kan. or Durango, Colo. would see a share of more than 90 percent.
The deal will put pressure on the Biden administration. It will also be subject to rigorous regulatory scrutiny in a time of high inflation that has exacerbated a global food security emergency. The September increase in food prices in the United States was more than 11% compared to a year ago.
Kroger:Senator Elizabeth Warren
Senator Elizabeth Warren, Democrat from Massachusetts, stated in an emailed statement that grocery chains such as Kroger and Albertsons were price-gouging families selling inflated food prices. Further corporate consolidation would lead to higher prices, layoffs, and weaker supply chains. “The F.T.C. “The F.T.C. should oppose this deal.”
A country with far fewer grocery shops has seen its number drop by nearly three decades of consolidation. According to Food and Water Watch, a consumer advocacy organization, the number of grocery stores has dropped nearly 30% since the mid-1990s. The group also reported that the market share of all four major grocery retailers increased to 69 percent, from 23 percent.
Walmart is the largest grocery retailer in America. It generated $218 billion from food sales last year, or 55 percent, of its U.S. revenues. Amazon, which purchased Whole Foods in 2017, sells groceries online but has a smaller presence.
After revenues and profits rose early in the pandemic, when consumers ate most their meals at home, it’s now an industry at pivotal juncture. People are now eating more out of home meals than ever before, inflation is cutting into profit margins in stores and some shoppers are switching to cheaper stores like Walmart.
Rodney McMullen (chief executive at Cincinnati-based Kroger) told Wall Street analysts in June that Kroger was experiencing a shift in shoppers’ behavior due to inflation. He said that while some customers continued to purchase premium products, others were switching to store brands more aggressively.
However, the bottom line appears to be unaffected by this. Kroger’s most recent quarter ended August 13. Its operating profits increased 13.7 percent compared to a year ago, allowing it increase its dividend to investors 24 percent. This year, it also purchased $975 million worth of its shares.
Kroger and Albertsons will likely pitch regulators that their combined scale is necessary to compete with stores like Aldi or Lidl, two European chains that have been growing rapidly in the United States, as well as Walmart and Amazon.
This argument has not been accepted by the Federal Trade Commission in all cases. It successfully sued to stop a merger between Office Depot & Staples in 2015. This was despite the fact that the retailers had presented their merger as an attempt to take on Amazon and lower prices.
The F.T.C. will be reviewing the results. The F.T.C. is expected to consult consumer advocates, suppliers, and competitors during its review. The regulators will also examine whether Kroger has made promises to lower prices in the past and whether these promises have been fulfilled. This review could take several months and leave employees and companies in uncertainty.
Kroger and Albertsons, which are based in Boise (Idaho), said Friday that they expect to close the deal by early 2024 and that Kroger would pay Albertsons $600 millions if it falls apart due to antitrust concerns.
The two grocery giants stated that they would sell their stores to other companies and consider forming separate companies to manage concerns about the combined market share of different cities.
Analysts point to the possibility of overlap between the two grocery stores, especially on the West Coast, in cities like Seattle where they would have a combined 40% market share as a source of potential divestitures.
Lina Khan, the F.T.C.’s leader, expressed doubt that such solutions would be able to create real competition for the newly created entity. Peter Kaplan, the FTC’s spokesperson, declined to comment.
Actually, previous attempts to create a new competitor failed. Haggen, a retailer in Bellingham, Wash. bought more than 100 Albertsons stores to get approval for the $9 billion Safeway merger. Haggen filed for bankruptcy a year later and blamed Albertsons. Albertsons purchased 33 of the stores from the bankrupt company.
We must be larger
“Particularly, the reason for this deal was that ‘We must be larger,'” stated Bill Baer, who headed the antitrust division of the Justice Department during the Obama administration. “Well, if your company is bigger and more important, what does this mean for the markets in which you dump stores for a smaller man who won’t have the buying power you claim you will get from this deal?”
He said, “Divestiture can be a good idea for merging parties but it’s not always a great idea for consumers.”
Advocates for consumers said that the deal would hurt independent grocery chains and consumers.
Walmart and other big grocery retailers like Kroger use their size to get better prices from suppliers and producers. Analysts believe that Kroger and Albertsons are large enough to negotiate great deals. They hope to gain even greater negotiating power.
However, to make up for those lost profits suppliers often charge smaller and independent grocery grocers more. Chris Jones is counsel and a senior vice-president of government relations at the National Grocers Association. This association represents 1,700 family owned grocery chains.
Jones stated that if you can squeeze a supplier to one side, and you are able to get product at preferential terms for the supplier, then the supplier will have no choice but increase prices or reduce product to buyers with less leverage.
Independent chains must then pass on the higher prices to customers who often live in lower-income markets, such as rural and urban areas.
Rebecca Wolf, a Food Policy Analyst at Food & Water Watch, stated that the proposed merger provided little benefit to consumers.
She stated that “a lot of consumers and advocates who have followed this type of work for a while really know and understand the importance of this type of merger to entrench the power and the grocery industry.”