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Potential Merger of Supermarket Chains Raises Antitrust Concerns

*The views expressed in this article do not represent the views of Santa Clara University.

Credit: Allen | Flickr

This article is about the recently proposed merger between Kroger and Albertsons, two of the largest supermarket chains in the United States. We cover how the proposed merger could impact competition in the grocery industry and how it may affect consumers. Additionally, this article focuses on anti-competition concerns from members of Congress and expected antitrust scrutiny from the Federal Trade Commission.

Earlier this month, Kroger announced a proposed merger in which it would acquire Albertsons, its largest competitor, for $24.6 billion. Kroger and Albertsons are currently the second and third largest grocery retailers in the United States: Kroger possesses 8.1% of the market share while Albertsons possesses 4.8%. Kroger operates 2,750 grocery stores across the United States and has a market capitalization of around $32 billion. A few of the largest names included under the Kroger umbrella are Kroger, City Market, King Soopers, and Ralphs. Albertsons, on the other hand, runs 2,200 supermarkets in the U.S. and has a market capitalization of about $15 billion. Some of its largest brands include Albertsons, Safeway and Vons. If the deal is approved, it would be one of the largest deals in the U.S. grocery industry and would create a supermarket giant with over 5,000 stores, capable of collectively generating $209 billion in yearly revenue.

There are a few different motivations behind the proposed merger. In part, it is aimed at challenging Walmart’s stranglehold on the grocery market. The company has been ranked the world’s first largest retailer by sales for nine consecutive years, with over 10,500 stores under various names and a market capitalization of nearly $380 billion. Walmart owns 25.2% of the total market share and sells more groceries than both Kroger and Albertsons combined. During the pandemic, Walmart’s e-commerce sales in the U.S. increased by 74%, and total revenues grew by 8.6%, earning a total revenue of $134.62 billion by April 2020. Walmart’s growth across sectors has also been fueled in part through various mergers and acquisitions. In 2016, in part looking to fend off a rabid Amazon marketplace, Walmart acquired e-commerce entity for $3.3 billion in its attempt to speed along its digital strategy. This led to large-scale development of curbside pickup, home delivery, and expansion into categories of goods such as apparel and home decor.

In addition to taking on the grocery giant, Kroger and Albertsons also hope to combat rising inflation and prolonged supply chain delays caused by the recent COVID-19 pandemic. The companies claim that the merger would allow them to save millions of dollars in operating costs and give them a stronger bargaining position when dealing with suppliers. The total cost savings for the two companies, said to be over $1 billion, also appears to be a driver for the deal.

Not everyone is as optimistic about the merger, however. Many consumers, already battling historical high inflation at grocery stores, are worried that the deal might drive their grocery costs even higher. Over the last year alone, food prices have increased by 13%. Kroger and Albertsons argue that the increased size and bargaining power they would gain from the deal would help them reduce costs, allowing them to pass savings on to consumers. The companies claim that $500 million in cost savings from the deal will go towards lowering prices for consumers, and part of the $1.3 billion that Kroger plans to invest in Albertsons will be used to lower prices in those chains. Some lawmakers, regulators and consumer advocates are worried, however, that the companies will redirect their savings into profits for shareholders instead of reduced prices for consumers. A 2012 study found that mergers in highly concentrated markets, like the supermarket industry, “can result in significant increases in consumer prices” because the merger would force out competition and concentrate power among the larger chains. The truth of the claimed benefits behind the merger for everyday shoppers remains to be seen.

The proposed merger has drawn attention from both sides of the political spectrum given the current climate of inflation and high food prices. Democrats, like Bernie Sanders and Elizabeth Warren, have urged regulators to block to deal, calling it an “absolute disaster” and claiming that Kroger and Albertsons are “already gouging families with inflated prices.” The top Republican on a Senate antitrust subcommittee, Mike Lee, announced that he would do everything he could to “protect consumers from anticompetitive mergers that could further exacerbate the financial strain [they] already feel in the grocery store checkout aisle.” He, along with the chair of the Senate Judiciary Subcommittee on Competition Policy, Antitrust and Consumer Rights, Amy Klobuchar, announced that the subcommittee would convene a panel in November to scrutinize the proposed merger.

This is not the first time that Albertsons has been under the FTC’s microscope for a massive merger in the grocery industry. In 2015, the FTC found that a proposed $9.2 billion merger between Albertsons and Safeway would likely be anticompetitive and detrimental to consumers in 130 local markets throughout various states in the U.S. Behind the FTC’s reasoning were claims that the merger would lead to higher prices and lower quality for supermarket shoppers in the affected areas. Albertsons appeased FTC regulators by agreeing to sell 146 stores to West Coast grocery chain Haggen for $300 million. Only months later, however, Haggen filed for bankruptcy after its stores failed to gain a foothold in Southern California markets. The company blamed its deal with Albertsons as the reason for its demise. Albertsons agreed to buy back many of the stores it had sold to Haggen, an act that drew heavy criticism from observers, including Lina Khan, the current chair of the FTC.

Khan, an appointee of President Joe Biden, has been vocally critical of the supposed benefits that large-scale mergers have on consumers. Over the last year alone, the FTC has sued to block six different mergers under Khan. It successfully shut down two different proposed mergers from U.S. arms maker Lockheed Martin and from chipmaker Nvidia, but suffered a defeat when a U.S. administrative judge ruled against its challenge to Illumina Inc.’s acquisition of Grail.

With a hearing set to be held next month by the Senate’s anti-competition subcommittee, Kroger and Albertsons are fully aware of the challenges they will likely face from Khan and the FTC. Analysts estimate that the companies may have to divest themselves of 350-450 stores, 7-10% of their total stores, in order to appease regulators. The two companies announced that they are willing to divest up to 650 supermarkets to secure clearance for the nearly $25 billion deal. If there are no buyers for these stores, Kroger and Albertsons are prepared to divest between 100 and 375 stores into a newly created stand-alone company called SpinCo that will be owned by Albertsons shareholders. Kroger appears to be comfortable with the FTC’s likely challenge, stating, “we welcome the opportunity to outline how this transaction will benefit America’s consumers by expanding access to fresh, affordable food.”


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