Blocking the proposed $24.6 billion merger of pure-play grocers Kroger and Albertsons would “maintain the downward slide of the traditional grocery store, reducing consumer choice and reducing price competition,” the two retailers argued in their post-hearing brief, submitted on Sept. 27, in the federal antitrust case brought by the Federal Trade Commission and nine attorneys general.
Arguments in the case, which began on Aug. 26 in the District Court of Oregon, concluded at the end of September with the submission of the post-hearing briefs, and both sides still await a decision by Judge Adrienne Nelson. Meanwhile, Kroger and Albertsons continue to defend their proposed deal in separate antitrust cases in Colorado and Washington.
All three lawsuits argue that the merger violates antitrust law and would create a monopoly in the grocery industry, but Cincinnati, Ohio-based Kroger and Boise, Idaho-based Albertsons maintain that competition remains high in the industry from non-traditional grocers such as Walmart, Costco, and Amazon, among others. They also argue that the divestiture of 579 stores to C&S Wholesale Grocers would ensure continued competition in the market.
“The merger with Albertsons provides Kroger with the best opportunity to successfully compete with the non-union behemoths — Walmart, Costco, and Amazon — that have come to dominate the retail grocery industry, both in stores and online,” Kroger and Albertsons said in the post-hearing brief.
That competition continues to intensify through the growth of online grocery sales from Amazon and others, the grocers noted. An analysis by Albertsons “found that customer spend on e-commerce is expected to increase by 11% in the next 10 years, whereas customer spend inside a grocery store is expected to increase by 1.6%.”
The two grocers refuted one of the key arguments brought by the FTC, that Albertsons is a head-to-head competitor with Kroger, arguing that Kroger’s “longstanding pricing policy is to narrow the spread to Walmart.”
“While this strategy has helped Kroger close the spread with Walmart — and enabled Kroger’s prices to be 10% to 12% lower than Albertsons’ — Walmart continues to be the low-price leader,” the retailers argued.
They said that bigger competitors like Walmart, Costco, and Amazon will continue to dominate the grocery market without the merger, and “Albertsons’ customers will continue to pay more than Kroger customers, and Albertsons may have to consider alternatives, such as layoffs and store closures.”
Kroger and Albertsons have argued throughout the case that the FTC and attorneys general aiming to block the acquisition invoke “neoclassical economics” in their assertion that Kroger will raise prices if Albertsons is no longer a competitor “even though the data establishes that today, in places where there is no Albertsons competing with Kroger, Kroger’s prices are not higher.”
Calling the case a “trial-by-anecdote,” Kroger said that it must operate in the “real world” where most customers do their shopping at more than one store. Calling the one-stop-shopper argument “an archaic view of consumers” that is “unsupported by data or anything other than attorney speculation,” the grocers argued in the post-hearing brief.
“Albertsons’ customers shop for groceries, on average, six times at six different places in a given week,” the grocers noted, adding that over 90% of shoppers visit more than one grocery retailer per month. “[I]f they were engaging in one-stop shopping, the number of trips for the week would be one. This data confirms that the one-stop shopper fails to accept the reality of the change in the retail landscape in the last 20 years.”
In addition to the larger, nontraditional players, Kroger and Albertsons said they face fierce competition from pure-play grocery chains like Food Lion, Amazon Fresh, Publix, Ahold Delhaize, Wegmans, H-E-B, and Hy-Vee, among others. “Kroger views these retailers as a threat to the very existence of the corner grocery store,” the brief added.
Kroger reiterated its promise to invest billions of dollars into the business to bring the acquired Albertsons stores up to speed, improve employee wages, and lower prices.
“The evidence shows that following the merger, Kroger’s business strategy is to invest $1 billion in prices, and another $1 billion in wages, every year after a ramp-up period. Kroger will invest another $1.3 billion in store improvements. This will lead to lower prices, better stores, and improved associate wages and benefits,” the retailer said.
Failure to merge could mean a bleak future for Albertsons, which was sold to private-equity firm Cerberus Capital Management in 2005. Albertsons CEO Vivek Sankaran took the stand in early September, telling the court that the chain faces challenges from “category-blurring” competitors, and rejection of the deal could lead to layoffs and store closures. The post-hearing brief noted that a failed merger could also mean that Albertsons could “exit certain markets.”
Kroger and Albertsons also refuted claims by the FTC that the plan to divest 579 stores to C&S Wholesale Grocers is unlikely to fill the vacuum of competition left by the departure of Albertsons.
The brief said that the decision to divest to C&S Wholesale Grocers followed a rigorous bidding process, which started with 92 interested parties — 72 strategic buyers and 20 financial buyers.
C&S Wholesale Grocers, which began looking for a “transformative acquisition” in 2021, rose to the top of the list because of its experience as a wholesaler and provider of services to more than 7,000 independent retailers, the brief noted.
It was a strategic move for C&S, which had to pivot following the loss in 2019 of one of its largest customers, Ahold Delhaize, which represented 44% of the wholesaler’s sales. Ahold Delhaize made its own pivot in 2019, deciding to establish its own distribution model.
“Our other main wholesale competitors both have bigger spaces in retail,” the brief noted, quoting C&S Wholesale Grocers President of Retail Mark McGowan. “And as a company, a family-owned business, our owner wants the company to grow. And as we looked out at business and the future of the business, we also felt we needed to diversify.
“We needed to get better at serving our independents, and we needed to get better at retail. So for us it’s transformational change, which our owners and our team are incredibly passionate about.”
The FTC has argued that other store divestiture plans have failed, such as Albertsons’ sale of 146 stores to Haggen in 2015, following the grocery chain’s purchase of Safeway. Over half (57%) of the stores sold to Haggen closed, and many were sold back to Albertsons.
Federal regulators warn that the same could happen in the Kroger, Albertsons deal, but the grocery chains argued that C&S would stand to lose hundreds of millions in the deal if it fails to operate the divested stores.
“With no fact or expert witness testimony in support, plaintiffs’ counsel have speculated that C&S may sell off stores after the divestiture, presumably to turn a quick buck selling the real estate. But Plaintiffs presented no evidence that C&S planned to do so or even that such a strategy would be financially viable,” the grocers noted. “To the contrary, with a purchase price of $2.9 billion and underlying asset values of only roughly $2 billion, C&S would ‘lose $900 million if [it] did that.’”
Albertsons has said it will send C&S Wholesale Grocers one of its top executives, Chief Operating Officer Susan Morris, “along with four complete division teams and hundreds of subject matter specialists” to support the reorganized grocery chain.
“C&S is well capitalized — with $900 million in new equity funding the purchase — and is getting a team of experienced retail executives …” the post-hearing brief noted.
Additionally, roughly 67,000 Kroger and Albertsons employees would move over to C&S Wholesale Grocery in the transition, and the new chain plans to launch its own private-label brand with roughly 2,000 to 3,000 new products.
“C&S has a comprehensive plan: It has identified the risks associated with the divestiture, it has conservatively quantified and budgeted for the risks, and it has included $1 billion to address any unexpected expenses beyond what it has projected,” the grocer explained in the brief.
