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The Federal Trade Commission (FTC)’s trial to block Kroger’s acquisition of Albertsons concludes Tuesday. The three-week-long trial in a federal court in Portland, Oregon has revealed many reasons why a Kroger-Albertsons merger would hurt shoppers and workers and why the companies’ gambit to divest 579 stores to C&S Wholesale Grocers will fail to preserve competition.

Albertsons is Kroger’s Primary Price Competitor

As shoppers struggle with rising grocery prices, the big question at the heart of this trial is: will it make food inflation worse?

Kroger and Albertsons say that merging will let them cut prices through greater operational efficiencies and bargaining power over suppliers. Kroger has promised to invest $1 billion to lower prices.

The FTC argues that diminished competition will give Kroger more market power to raise prices, especially in regions where it competes directly with Albertsons. The agency presented evidence at trial that Kroger and Albertsons consider each other to be their “primary competitor.”

Kroger claims it needs to acquire Albertsons to compete with Walmart, however, internal communications suggest that Kroger is not trying to lower its prices to Walmart’s levels, even when it can. American Economic Liberties Project research manager, Laurel Kilgour, spotlighted one example when Kroger executives knew they could price their milk 10 cents below Walmart. Still, they held prices at 10 cents above Walmart for at least a month. In another instance, a Kroger executive maintained their egg prices even when wholesale prices dropped and Walmart lowered their prices, because a neighboring Albertsons store had not changed their egg prices. The Kroger store only lowered their egg prices when Albertsons lowered theirs. This suggests that competition with Albertsons, not Walmart, primarily influences Kroger’s pricing.

Selling to C&S Won’t Solve the Problem

The FTC also highlighted the holes in Kroger and Albertsons’s plan to sell off hundreds of stores to wholesaler C&S to satisfy concerns about preserving head-to-head competition. One of the FTC’s expert witnesses, marketing professor Edward Fox, noted that Kroger and Albertsons aren’t selling C&S enough supportive assets for divested stores to succeed, for instance, distribution centers.

Fox said that roughly half of the sold stores would lose their primary distribution center. C&S can support some stores with its distribution network, but in key markets such as Southern California, the Intermountain West, and Chicago, Fox said that C&S’s existing distribution assets are “not sufficient … to support those stores.”  Stores will also lose key tech assets, such as pricing algorithms and data analytics, that support e-commerce and loyalty programs, Fox testified.  

Kroger and Albertsons own a network of food processing plants that make some of their private label, aka store brand, products. More consumers are buying private label products to manage rising food prices. Yet Kroger and Albertsons plan to sell C&S just one of their food processing plants, a dairy facility in Colorado. C&S would pick up five of Albertsons’s private label brands, but Fox argued that “C&S will clearly be challenged to replace the private label sales” without more private label assets.

None of this may matter to C&S, since the wholesaler could have a plan to set up wholesale contracts with these stores before re-selling many of them. In internal communications revealed at trial, C&S executives had planned to flip stores the last time they acquired divested assets from a merger settlement when Price Chopper merged with Tops. “Just be careful with FTC. We want to say we can run them,” C&S vice president Alona Florenz wrote of the Tops stores. If C&S could not hold onto 12 divested stores then, the FTC doubts that the company can competitively keep open over 550 stores from Kroger and Albertsons now.

Albertsons Playing Poor After Private Equity Payout

Halfway through the trial, Albertsons CEO Vivek Sankaran took the stand to make a new argument, or threat. If this merger does not go through, he warned, Albertsons will have to consider job cuts, store closures, and finding a different buyer in two to three years.   

Not long ago in November 2022, Sankaran told Congress that “Albertsons [was] in excellent financial condition,” to justify a $4 billion payout to its private equity owners. When the FTC questioned why Sankaran changed his tune, Sankaran said market conditions have changed. Walmart has been gaining market share whereas Albertsons has flatlined or slightly fallen, from 6.5% of the market in 2021, up to 6.7% in 2022, then back down to 6.4% in 2023.

However, Kilgour pointed out that Albertsons’s financials are decent. Sankaran testified that, since becoming CEO in 2019, Albertsons’s balance sheet, overall growth, and e-commerce business have improved. Another executive confirmed that the company was “on target to achieve $2.3 billion in savings” between 2022 and 2025. Albertsons also holds the #1 or #2 spot, by market share, in 70% of the metro areas where it operates, according to its latest investor reports.

Certainly, private equity looting has left Albertsons in a worse position than some of its competitors, particularly raising its overhead by selling out land from under its stores and leasing it back to them. Yet since announcing this deal and receiving their big payout, Albertsons’s private equity owners have slowly sold off their stake in the company. This lowers the pressure on Albertsons to find another buyer.

Nonetheless, Sankaran says Albertsons and Kroger need to join forces to better leverage suppliers for lower prices. Even a giant like Albertsons says that it pays more for some products at wholesale than Walmart charges at retail. 

The answer to the retail buyer power arms race is not to allow more consolidation, but to enforce the Robinson-Patman Act. This law, already on the books, bans grocers from demanding lower prices from suppliers simply because they have the clout to do so. Enforcing it would discourage grocers from merging their way to fairer pricing.

What Happens Next

Both sides present their closing arguments on Tuesday. It could take a few weeks for the judge to decide whether to grant the FTC’s request for a preliminary injunction. Technically, an injunction would prevent Kroger and Albertsons from closing their deal until the FTC’s internal administrative court reviews the case. In practice, however, most companies abandon their deal if the Court grants a preliminary injunction.

Meanwhile, Kroger has sued the FTC alleging that the agency’s administrative proceedings violate the constitution. The charges rely on a recent Supreme Court decision that found the Securities and Exchange Commission could not use its in-house tribunal to seek civil penalties against individuals. If successful, this case would dramatically curtail antitrust enforcement.