Published on Nov 02, 2022
Kroger’s (KR) planned $24.6 billion acquisition of rival grocer Albertsons (ACI) would result in common control of more than 1,400 closely competing stores absent divestitures, according to a Capitol Forum analysis.
Past reviews of grocery mergers by the FTC have centered on economic analyses of local markets where store overlaps would result in a substantial loss of competition.
The Capitol Forum analysis found that overlaps sometimes occurred when an Albertsons-operated store was near a Kroger-operated one; in other cases, multiple stores from the companies competed in the same region. At least 762 stores operated by Albertsons are within three miles of a Kroger-operated store, and at least 686 stores operated by Kroger are within three miles of an Albertsons-operated store, according to The Capitol Forum’s analysis.
Of those 762 Albertsons locations, 12 are within three miles of a both a Walmart Supercenter and traditional grocery store, 29 are within three miles of another grocery store but no Walmart Supercenter, 354 are within three miles of a Walmart Supercenter but no grocery store, and 367 are within three miles of neither.
The most divestitures needed would be half of the overlapping stores, or about 700. But in some cases where multiple stores from the companies compete in a region, then the divestiture of just one of them could eliminate the overlap issue.
Kroger and Albertsons said in their merger agreement that they’d divest up to 650 stores, a number that would address even an aggressive posture by the FTC on overlapping locations.
As part of their divestiture plan, the firms said they would spin off between 100 and 375 stores into a new standalone public company described in the deal press release as an “agile competitor.” Kroger has 2,750 grocery retail stores under 28 names, including Ralphs, Harris Teeter, and Pay Less. Albertsons, with 2,273 retail stores, owns 24 brands including Vons, Acme, Pavilions and Star Market.
It’s unclear whether divestitures will be sufficient. A person familiar with the matter said Kroger thinks divestitures should resolve concerns and that the company has a path to closing the deal. But antitrust enforcers in the Biden administration and likeminded antimonopoly advocates view such remedies as inadequate, raising the question of whether divestitures will be enough to keep the agency from attempting to block the deal outright with a lawsuit.
In a 2017 Harvard Law and Policy Review article, future FTC Chair Lina Khan noted the “defects” of remedies in horizontal mergers and cited divestitures in the 2015 Albertsons/Safeway deal as one of two “spectacular failures” of such remedies. In that case, Albertsons ended up buying back 33 of the 168 divested stores after Haggen Holdings, which purchased 146 of them, went bankrupt.
“Even if divestitures could be perfectly tailored and if they preserved competition in narrow markets in every instance, they would fail to advance the citizen interest standard,” Khan wrote. She added that “the agencies should establish a strong presumption in favor of enjoining mergers in concentrated industries.”
More recently, in September testimony to the Senate Judiciary antitrust subcommittee, Khan said the FTC is “reassessing the efficacy of its approach to merger remedies and identifying how to learn from lessons of the past.”
“Specifically,” she continued, the agency “will not hesitate to reject proposed divestitures that cannot fully cure the underlying harm.”
Antimonopoly groups like the Open Markets Institute, where Khan worked as a legal director, have likewise criticized the Albertsons/Safeway settlement. The group called it a “failure” in a 2016 blog post, while the American Economic Liberties Project described it as a “disaster” in a January 2021 report critical of antitrust enforcement under former President Barack Obama.
Albertsons/Safeway isn’t the only example of failed divestitures following a grocery merger settlement. After the FTC in 2016 required Koninklijke Ahold and Delhaize Group to divest 81 stores as part of the agency’s clearance of their merger, at least 16 of the stores closed and two were sold back to Ahold, according to a review of local news reports by the watchdog website Food & Power.
Claire Kelloway, the website’s primary writer and a senior reporter and researcher at Open Markets, wrote in an October 27 post that the Kroger/Albertsons merger would harm suppliers, farmers, grocery workers and independent grocers, and that divestitures like those proposed by Kroger and Albertsons “don’t typically work.” AELP urged antitrust enforcers to block the merger, calling it “a cut and dry case of monopoly power.” The two groups—along with many others opposed to the deal—are still refining their advocacy strategy.
Pressure to stop the merger is coming from progressives in Congress as well. In an October 25 letter, Senators Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) and Representative Jan Schakowsky (D-IL) called on the FTC to oppose it.
Even with the planned spinoff, “the joint company would still boast an enormous market share in certain markets and wield significantly more buyer power and more labor power than independent grocers, suppliers, and workers fighting for better conditions,” the letter said. “The new firm would also likely result in layoffs of employees nationwide.”
The viability of the standalone entity is likely to trigger skepticism from FTC staff reviewing the deal, former agency officials said.
It’s unclear which stores the companies are eyeing, and the specific assets needed to run a grocery chain—such as logistics and distribution facilities and operations and teams of white-collar workers—that would be included in the spun-off entity.
Kroger, however, views its spinoff plan as “a really clean option in the sense that it could potentially be a faster way to package up the strategy around divestitures,” said Chief Financial Officer Gary Millerchip during the company’s October 14 analysts’ call on the deal.
A spokesperson for Kroger declined to comment on The Capitol Forum’s analysis. Spokespeople for Albertsons and the FTC didn’t respond to requests for comment.
Kroger sees a path to closing through divestitures. A divestiture package could be part of a litigation strategy geared toward convincing a court to allow the merger, especially given the high likelihood that the FTC will sue to block the deal. The merging companies could point to past settlements as examples in which the FTC did allow mergers with divestitures.
While the aftermath of Albertsons/Safeway will certainly help the FTC argue that divestitures in supermarket deals don’t work, courts are more willing than the agencies to accept divestitures, an antitrust attorney said.
The agency’s definition of a geographic market will be important in determining how many stores it will want to be divested. In recent grocery merger reviews, the FTC has varied in its definition of a geographic market, homing in on Price Chopper and Tops stores within eight miles of each other in a 2021 complaint against a merger between those companies, and using a radius of 0.1-10 miles and two to 10 miles in consent orders for the Ahold/Delhaize and Albertsons/Safeway deals, respectively.
Former FTC officials who’ve worked on grocery deal reviews said the agency will likely use a radius of eight or 10 miles, or even as wide as 15 miles in rural areas, in such an analysis. The agency may also use customer loyalty cards to determine how far shoppers travel.
In addition to defining the geographic market, the definition of a competitor based on products for sale will also be key to an FTC review, the former officials said. In recent settlements on grocery deals, the agency used similar language on this front, describing competitors as stores where consumers can one-stop shop. The analysis excluded “hard discounters, limited assortment stores, natural and organic markets, ethnic specialty stores, and club stores” from the relevant product market.
That means it’s unlikely that Trader Joe’s, Whole Foods and big-box membership stores like Costco and Sam’s Club would make the cut, leaving rivals like Publix, Wegmans, Food Lion and Giant owner Koninklijke Ahold Delhaize, and small independent operators. The FTC has, however, counted Walmart Supercenters as competitors in recent deal reviews, categorizing them as “hypermarkets” that carry the full range of conventional supermarket offerings alongside products not found in the typical grocery stores.
Kroger, though, sees Trader Joe’s, Amazon and Costco as rivals in a highly competitive industry, said the person familiar with the matter. Still, regardless of how the agency defines its competitors, Kroger is confident the deal will close, the person said.