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What Kroger and Albertsons’ Mega-Merger Means for Shoppers, Workers, Regulators

Kroger, the nation’s second-largest supermarket chain, rocked the retail world this month when it announced plans to take over Albertsons, the nation’s fourth-largest grocer. The $24.6 billion deal would create a grocery goliath rivaled only by Walmart, with nearly 5,000 stores serving 85 million households. Just one grocer would run the companies’ many regional chains, such as Harris Teeter, Ralphs, QFC, King Soopers, Vons, Safeway, Jewel Osco, and Acme.

If permitted (which is a big if), a combined Kroger/Albertsons empire would supercharge store closures, layoffs, price hikes, and supplier squeezing, further harming shoppers, workers, farmers, and independent grocers. The deal also includes an unusual private equity payout that could leave Albertsons permanently cash-strapped, to the detriment of workers and customers.

Image and source credit: Chartr.co, https://www.chartr.co/stories/2022-10-19-2-kroger-albertsons-deal

Reducing Direct Competition, Increasing Pricing Power

The concentrated grocery sector has received scrutiny lately for inflationary price increases. Groceries cost 10% more than a year ago, and while food manufacturers share the blame for raising their prices, the biggest grocers have passed most of these increased costs onto consumers, plus some. Net profits for both Kroger and Albertsons have only increased since 2020, and Kroger’s CEO told analysts last year that “a little bit of inflation is always good in our business.”

Kroger says that this merger will help it save $1 billion annually and lower prices for consumers. But taking over Albertsons will also give Kroger more power to raise consumer prices. One 2012 study by the Federal Trade Commission found that grocery mergers in already concentrated markets can result in significant price increases.

Kroger and Albertsons currently compete for customers in regions such as Seattle, Chicago, Phoenix, California, and the greater D.C. metro area. An analysis by the Institute for Local Self-Reliance found that this merger would give just two grocers, Walmart and Kroger/Albertsons, more than 70% of the grocery market in over 160 cities. “That’s an incredible level of concentration,” says ILSR’s co-director, Stacy Mitchell. “What happens if one of those grocery chains decides to pull out? The chance that your neighborhood becomes a food desert is much higher.”

In 1966, antitrust enforcers blocked a grocery merger that would have given one company a 7% market share of one metro area. But in recent decades, more laissez-fair antitrust enforcers have permitted mergers so long as grocers sell off stores in concentrated markets to maintain regional competition. Kroger and Albertsons have said they are willing to sell up to 650 stores and proposed spinning off as many as 375 stores into a new company owned by Albertsons shareholders. The problem is these divestitures don’t typically work.

For instance, in 2014 the FTC required Albertsons to sell over 140 stores to the Washington chain Haggen in order to buy rival Safeway. But the much smaller Haggen couldn’t manage this sudden expansion and accused Albertsons of sabotaging the stores it sold off. One year after buying the stores, Haggen filed for bankruptcy and Albertsons bought back 33 of the stores it sold, plus the whole Haggen chain for a steep discount while dozens of unsold stores closed.

More recently, when the FTC permitted the Ahold and Delhaize merger in 2016, it required 81 store divestitures. A review of local news reports by Food & Power confirmed that at least 16 of those divested stores have since closed and two have been sold back to Ahold, a roughly 20% failure rate.

Risks for Workers, Independent Grocers, and Suppliers

Taking over competitors isn’t the only way grocery mergers decrease direct competition. As the biggest stores get more powerful, they tend to push out smaller, independent grocers. Between 2019 and 1994, as grocery consolidation increased, the total number of stores declined by 30%. A big part of this trend is larger stores’ ability to squeeze lower prices and better terms from suppliers, who, in turn, raise prices charged to independents who cannot demand these concessions. Independent grocery closures particularly harm communities of color and rural areas that have been left behind by larger chains. “A merger would not only put smaller competitors at an unfair disadvantage, but also increase anticompetitive buyer power over grocery suppliers,” said Greg Ferrara, president of the National Grocers Association, about the Kroger/Albertsons merger.

Kroger already has more buying power than most grocers, it’s the second-largest U.S. grocer and the third-largest U.S. retailer, period. That said, Kroger’s revenues lag far behind the top two retail behemoths Walmart and Amazon, who command twice as much in annual sales. Kroger wants to take a page from their monopoly playbook by emulating the brute buying power they exercise over suppliers.

If a combined Kroger/Albertsons further squeezes suppliers, it could also hurt farmers and workers downstream on the supply chain. A 2018 study published in the American Sociology Review found that when a supplying business (like a food manufacturer) relied on just one or two major buyers it tended to lower its workers’ wages over time and that such monopsony power accounted for 10% of the wage stagnation workers have seen since the 1970s.  Kroger and Albertsons already exert direct buyer power over farmers through their 52 combined food manufacturing plants. Their merger could thus shrink the number of buyers for some agricultural products, particularly milk.

Grocery workers also stand to lose from this deal. Between their distribution centers, manufacturing facilities, and stores, Kroger and Albertsons employ more than 700,000 workers, many of them unionized. In fact, a combined Kroger/Albertsons would become the largest private sector union employer in the country. Despite union protections, many Kroger and Albertsons store workers struggle to meet their basic needs. A recent report found that 75% of west coast Kroger workers were food insecure, 44% could not afford their rent, and 14% experienced homelessness.

By taking over Albertsons, Kroger would amass even more power over workers, especially in more concentrated local labor markets, further driving down wages and exacerbating poor working conditions. In addition to the thousands of job losses stemming from store and distribution center closures, a merged Kroger/Albertsons grocer would likely close union stores over non-union ones where it has the option. Faye Guenther, President of UFCW 3000, said in a statement that “the proposed merger of these two grocery giants is devastating for workers and consumers alike and must be stopped.”

A coalition of UFCW locals representing more than 100,000 workers is exploring advocacy options to oppose the deal. However, the UFCW international has been more cautious and has not yet taken a public stance against the deal. The Teamsters, which represents Kroger and Albertsons warehouse workers, also released a critical yet nondefinitive statement on the merger that characterized it as “another example of why real antitrust reform is needed.”

A more immediate aspect of this merger that workers are particularly concerned about is an unusual pre-merger payout to Albertsons’ financial investors. Over the weekend Albertsons approved a special cash dividend to shareholders totaling $3.9 billion, almost 70% of which will go to its two largest private equity owners, Cerberus and Apollo. The payout will sap Albertsons of most of its liquid cash, weakening the firm to the point that Kroger could argue that Albertsons no longer poses a competitive threat, explained antitrust lawyer Basel Musharbash. Perversely, Kroger could argue that shoring up Albertsons by taking it over and resupplying it with capital could enhance industry competition, Musharbash said. 

This isn’t the first time private equity has looted Albertsons. Since Cerberus bought over 600 Albertsons stores in 2006, the firm has sold much of the land out from under its stores, forcing Albertsons to pay approximately $53 million annually to rent back land it once owned.

Every dollar that goes to pay investors is also one that can’t be put towards renovating stores, lowering food prices, or funding workers’ wages and pensions. In 2021, Albertsons reported that its pension plans were underfunded by $4.7 billion. “Albertsons just wants to pay out stockholders and bosses instead of investing in workers like me or keeping our stores safer for customers,” said Kyong Barry, a worker at South Auburn Safeway in Washington and a member of UFCW 3000. “Paying $4 billion to stockholders is ridiculous when skyrocketing food prices are forcing people in our communities to go hungry.”

What Happens Next?

Last week, senators Amy Klobuchar and Mike Lee announced that the Senate Judiciary antitrust committee will host a hearing to interrogate the deal. On Tuesday, senators Elizabeth Warren and Bernie Sanders, along with representative Jan Schakowsky, sent a letter to the Federal Trade Commission asking them to block the acquisition.

FTC chair Lina Khan has been critical of grocery consolidation and in a 2017 law review article, called the Albertsons and Safeway store divestiture remedy a “spectacular failure,” suggesting that the agency will think twice before settling for sell offs. Any case the FTC brings will need to face a conservative judiciary that denied federal efforts to block three recent mergers: the U.S. Sugar and Imperial Sugar merger, UnitedHealth’s acquisition of Change Healthcare, and a merger of medical testing companies Illumina and Grail.

In the meantime, workers and antitrust enforcers are challenging Albertsons $4 billion private equity payout. On Wednesday, a bipartisan group of state attorneys general sent a letter to the CEOs of Albertsons and Kroger, requesting Albertsons delay disbursing its special dividend until state regulators can review the deal. “Should any regulatory challenge to the merger succeed, or should the parties abandon the transaction, Albertsons would have to continue to compete with other grocery stores, a goal that its decision to enrich its shareholders to the tune of $4 billion will have made significantly more difficult to accomplish, if not unattainable altogether,” the letter says.

About the Open Markets Institute

The Open Markets Institute promotes political, industrial, economic, and environmental resilience. We do so by documenting and clarifying the dangers of extreme consolidation, and by fostering discussions of ways to reestablish America’s political economy on a more stable and fair foundation.

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