This article is adapted from the original Article "Kroger’s Merger Faces FTC Opposition" by Steve Watkins, Cincinnati Business Courier.
Kroger Co. has been working for a year and a half on the biggest acquisition in its history. Now the federal government has thrown up a huge roadblock that could cause it all to come crashing down.
Downtown-based Kroger’s $24.6 billion acquisition of Albertsons Cos. Inc., a deal that would marry the nation’s two largest traditional supermarket operators, has faced opposition due to concerns over the effect on competition since it was announced at the end of 2022. All of that came to a head Feb. 26 when the Federal Trade Commission sued in federal court to block the deal. That move will cause the deal to take months to complete, if it gets finished at all.
Stakes are high. Kroger leaders have said the transaction will help it achieve the scale the company needs to compete with behemoths like Walmart and Amazon. The grocer would gain the ability to lower costs, ship goods more quickly and efficiently from warehouses to stores, gain more buying power and be able to invest in lower prices, it said.
Analysts say Kroger makes strong arguments for the deal to go through, but the FTC has points in its favor to shut it down.
How the deal shakes out is anybody’s guess.
“It’s a toss-up,” said Brandon Zureick, managing director at Cincinnati-based Johnson Investment Counsel, who tracks Kroger.
Here’s how we got here, what happens next and what the lawsuit and possible outcomes mean for Kroger, the largest Greater Cincinnati-based company.
Deal has faced opposition
The transaction involving Kroger, the nation’s largest operator of traditional supermarkets, and Boise, Idaho-based Albertsons was announced in October 2022.
The acquisition would combine Kroger’s 2,700-plus stores in 35 states with Albertsons’ 2,272 locations in 34 states to give the company a huge footprint with stores in 48 states. They plan to sell off more than 400 locations that overlap, mainly in the West, but would still likely have nearly 4,500 stores if the merger is approved.
Kroger initially set a timeline of the first quarter this year to complete the deal. In January it pushed back that expectation to August.
The transaction has faced antitrust scrutiny from regulators and opposition from Congress members, attorneys general, unions and consumer groups ever since it was announced.
It was largely expected that all of those opposing voices would lead to the FTC’s legal action in late February. Kroger CEO Rodney McMullen was “disappointed, but not surprised” at the FTC’s move to file the lawsuit, he told CNBC’s Sara Eisen on its “Money Movers” show Feb. 28.
Kroger officials said McMullen was unavailable to comment for this story.
The FTC claims the acquisition would “eliminate fierce competition between Kroger and Albertsons, leading to higher prices for groceries and other essential household items for millions of Americans.” It also said the deal would result in lower-quality products, fewer consumer choices and eliminate “aggressive competition” for grocery workers.
“This supermarket mega-merger comes as American consumers have seen the cost of groceries rise steadily over the past few years,” Henry Liu, director of the FTC’s Bureau of Competition, said in a news release. “Kroger’s acquisition of Albertsons would lead to additional grocery price hikes for everyday goods. Essential grocery store workers would also suffer under this deal, facing the threat of their wages dwindling, benefits diminishing and working conditions deteriorating.”
The FTC even cited Kroger’s and Albertsons’ own executives in making its argument. It quoted one executive, whom it didn’t identify, telling the agency: “You are basically creating a monopoly in grocery with the merger.”
Kroger refutes the laundry list of potential problems. If the FTC blocks its merger with Albertsons, that would “actually harm the very people the FTC purports to serve: America’s consumers and workers,” Kroger officials said in a statement.
Kroger says the deal will actually help keep prices low, maintain jobs and strengthen competition. Its business model calls for it to take costs out of the business and invest in lowering prices. Kroger says it has invested $5 billion over the past 20 years to lower prices every year since 2003. And it committed to investing $500 million to start lowering prices on the first day the acquisition is complete.
Kroger also will invest $1.3 billion to improve Albertsons stores. And it’ll spend another $1 billion to increase wages and benefits.
“They’ve promised some tangible things,” Zureick said.
Kroger claims food prices will be more likely to rise if the acquisition is halted. That’s because it expects non-union retailers like Walmart, Costco and Amazon to gain more strength.
McMullen has said Kroger won’t close stores or facilities as a result of the merger.
To combat issues of store overlap in certain markets, Kroger and Albertsons agreed in September 2023 to sell 413 stores and as many as 650 to Keene, N.H.-based C&S Wholesale Grocers to appease antitrust regulators.
Long process
Those arguments will be heard in court. The process is lengthy and complex.
The case was filed in a federal court in Oregon. The judge there will determine whether the FTC can block the transaction before it’s completed or not.
The key thing to watch is the FTC’s efforts to seek a preliminary injunction halting the deal. If the judge approves that injunction, the deal is likely dead, said William Kovacic, a former FTC chair who was a member of the commission for five years and is now a professor of law at George Washington University. Some companies proceed and eventually go through the FTC’s process.
But a final resolution could take another year and still might not go in the acquiring company’s favor.
“Typically when a preliminary injunction is granted, the parties drop the merger,” Kovacic said. “Most companies would not wait that long.”
A decision on the injunction could take months. Getting a slot on the judge’s calendar to hear both sides could take three to six months, Kovacic said.
Eric Fruits, a Cincinnati native who is senior scholar at the Portland, Ore.-based International Center for Law & Economics, expects the process to run into 2025. Lawyers will need time to take depositions. It could take a month to hear the case and another month for the judge to decide, he said.
“It would be amazing if it got done by the end of the year,” he said.
If the injunction is not granted, the companies can proceed and merge. But the FTC can still try to block the transaction or even unwind it well after the deal is completed.
McMullen says Kroger is still shooting for wrapping up the acquisition by August. But if it drags on, it could harm Kroger.
“It does give the potential Kroger could take their eye off the ball,” said James Lewis, senior equity analyst at downtown-based Bartlett Wealth Management. “And it’s using resources they could use somewhere else.”
Court will decide on key points
The crux of the matter is determining what is considered a food retailer, Lewis said.
Others agree. Among traditional supermarkets, Kroger and Albertsons are dominant. But food retail has expanded far beyond that. Walmart is the dominant player now in grocery sales. Costco and Amazon – which owns Whole Foods and delivers groceries through online orders – are huge, too. Nontraditional rivals play a huge role in the marketplace.
The FTC isn’t including many of those. It said in the lawsuit those types of competitors offer very different experiences, such as Costco and other club stores requiring membership fees, limited assortment stores like Aldi offering less selection and Amazon and other e-commerce providers selling items sight unseen.
McMullen refuted the statements of executives quoted by the FTC. He said the deal won’t create a monopoly.
“Our No. 1 competitor is Walmart. Our No. 2 competitor is Costco. Our biggest increasing competitor is Amazon,” he said on CNBC. “And then you have the discount stores, restaurants and everything else. The industry is constantly changing.”
Walmart controls more than 25% of the national grocery market, based on figures from data analysis firm Numerator. Kroger has just 10.7%. A combined Kroger-Albertsons would have about 18%. Today, Albertsons ranks fourth with 7%.
“The merged entity doesn’t represent an overly large portion of the grocery sector,” Zureick said.
Burt Flickinger III, managing director at New York-based retail consulting firm Strategic Resource Group, said the FTC is overlooking changes to the grocery market.
“They’re stuck in anachronistic precedents from the 1950s and 1960s when there was no Walmart, no supercenters, no Costco, no Amazon,” Flickinger said.
But the FTC claims in its lawsuit more than 1,500 stores among the two companies would, when merged, create an increase in local market share that’s deemed illegal by antitrust standards. Further, the FTC said in the lawsuit even if non-supermarkets are included in the market analysis, “the proposed acquisition is still presumptively unlawful in most of the identified geographic markets.”
The question of whether C&S will become a viable competitor is another key. The FTC is dubious.
“Kroger and Albertsons’s inadequate divestiture proposal is a hodgepodge of unconnected stores, banners, brands and other assets … and falls far short of mitigating the lost competition between Kroger and Albertsons,” it said in the release.
Kroger’s ability to show C&S is a credible buyer is the key to getting approval, said Michael Montani, analyst at Evercore ISI. The good news for Kroger: The FTC previously approved C&S as a buyer of 12 Tops Markets stores that had to be sold in upstate New York and Vermont as part of a merger in November 2021.
“The companies will say C&S was good enough then, why not now?” Kovacic said. “But the FTC will say they have made a lot of mistakes with divestitures in the past and been burned. And the FTC has been quite dismissive of C&S.”
Others say Kroger has good arguments when it comes to its plan to divest stores.
“I think Kroger has a very valid strategy in saying it’s divesting stores where it would have monopolistic power,” Lewis said.
If Kroger is required to sell more than 650 stores it can pull out of the deal without penalty.
“I’m sure Kroger knows the math and it didn’t pull that 650 number out of the air,” Lewis said.
Arun Sundaram, an analyst at CFRA Research in New York, expects Kroger and Albertsons to be required to sell off about 200 more stores than they plan to now, bringing it near 650.
“We could also see Kroger and Albertsons seeking additional buyers, including more established grocery retailers with experience running grocery stores in the markets where the divestiture is occurring,” Sundaram wrote in a report.
Flickinger favors Kroger’s other arguments, too. He says it would help the unions because Kroger, a union shop, has created more than 110,000 jobs in the past 20 years.
“For commercial common sense, the FTC decision seems very uncommon and incongruent,” Flickinger said. “Kroger has a hall-of-fame team of executive leadership. Combining gives Kroger the opportunity to compete and it helps Albertsons, which has been undercapitalized.”
Are Kroger’s arguments valid?
“Oh yes, most definitely,” Lewis said. “I’ve always said whether it goes through or not depends on the definition of food retailing. And I don’t know how you can leave out Walmart, Amazon and Costco.”
Likelihood
Despite the FTC’s strong opposition, experts say Kroger’s acquisition of Albertsons is actually a little more likely than not to go through.
Fruits gives it a “slightly better than 50-50” chance of getting completed. One of his arguments: Judges don’t like to be trailblazers, and precedent shows that grocery deals get approved.
“I think Kroger and Albertsons make a pretty good case that this merger won’t harm consumers or workers,” he said.
But the FTC is driven to win this one.
“The current FTC has taken a very aggressive approach, and my guess is they really want a check mark in the win column,” he said.
Fruits believes the true size of the competitive market favors Kroger and Albertsons.
“If you can make the case club stores (and e-commerce) are part of the market, then that clears the way for the merger,” he said. “If (Kroger and Albertsons) did raise prices, then all those competitors would eat their lunch. If I were the judge today, I’d say we should let the merger go through with some spinoffs to C&S.”
Montani places the odds of the deal going through at 55% to 60%. He figures Kroger and Albertsons will find middle ground to satisfy the FTC.
The market seems to be betting the deal will go through. Kroger’s stock lost 2% the day the FTC filed the lawsuit. But it has rebounded 5% since then, closing March 5 at $49.58 and hitting a nearly seven-month high. Shares are up overall since the acquisition was announced in October 2022.
Kroger likely will do well whether the transaction goes through or not. It’s just likely to do better in the rapidly changing competitive environment if it acquires Albertsons.
“They remain on track to compete against these growing non-grocery retailers,” Zureick said.
Kroger could use the money it would have spent on the Albertsons acquisition to buy back its own shares, analysts said. That would boost its earnings per share and shareholder value.
The biggest bet in Kroger history is on the table. The outcome is critical and the process is lengthy.
Stay tuned.
Strategic Resource Group is the lead retail and brand CPG consulting firm throughout the United States and the globe. With more than three decades of experience, our team strategically collaborates with top retail chains, wholesalers, suppliers, and investment firms. Our retail industry experts are highly skilled at illuminating retail trends, identifying opportunities to increase consumption, and growing retail sales.
Stay in the loop with SRG’s insights and latest news reportings as Burt Flickinger makes special appearances on the radio, TV, and a vast amount of other platforms. Explore the ways to drive your profitability, discover top resources, and uncover your competitive advantages!