Mariam Zuhaib/AP Photo
Kroger CEO William Rodney McMullen speaks during a Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights hearing on the proposed Kroger-Albertsons grocery store merger, at the Capitol in Washington, November 29, 2022.
This story is part of a Prospect series called Rollups, looking at obscure markets that have been rolled up by under-the-radar monopolies. If you know of a rollup like this, contact us at rollups(at)prospect.org.
This week marks the first anniversary of one of the dumber business deals of the past few years not involving Elon Musk: the proposed merger of Kroger and Albertsons, two massive supermarket rollups at the vanguard of the debate over greedflation. Separately, the two companies each control thousands of stores; together, they generate nearly a quarter-trillion dollars in annual sales. Kroger and Albertsons were a huge part of the reason public approval of the grocery industry plummeted 14 points to 40 percent in the year leading up to the merger announcement.
And so when these two beloathed behemoths announced their intention to merge last October—and to pay Albertsons’ private equity owners Cerberus and Apollo a $4 billion dividend in the process—the backlash was swift, bipartisan, and in certain ways unprecedented. Multiple state attorneys general sued to stop Albertsons from paying the dividend, something that had never really happened before. (Their attempts were unsuccessful but courageous.) The Senate Judiciary Committee hauled both companies to Capitol Hill, where they promised under oath to reinvest every last cent they saved maximizing “efficiencies” into lowering prices for consumers.
But Albertsons and Kroger did one shrewd thing: They set the timeline for closing the transaction so far into the future that the overburdened Federal Trade Commission could take its time deciding whether and how to challenge the merger. In the meantime, the two companies are attempting to quietly change the narrative about themselves and the industry they’re trying to dominate. Kroger hired John Boehner and a former executive director of the Congressional Black Caucus to mollify the Capitol Hill backlash, and won a critical endorsement from Sen. Sherrod Brown (D-OH). Albertsons tempered its aggressive markups; overall grocery inflation, an astonishing 13.5 percent year over year when the merger was announced, eased to 3 percent.
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The two parties coalesced around a compelling story, of two survivors joining forces in a death fight against the same unstoppable forces that had destroyed department stores and Toys ‘R’ Us and anyone who competed with Amazon. And they devised a detailed plan they promise will cure all potentially anti-competitive outcomes: sell 418 mostly West Coast stores, a few distribution centers, and some of their grocery brands to a shadowy, family-run New Hampshire concern called C&S Wholesale.
The idea behind the spin-off is something akin to a carbon credit for economic concentration: If two merging companies isolate the parts of their business with the most direct customer overlap and divest them into a new entity, then the harmful effects of the consolidation will be offset by the creation of a “new” competitor or the strengthening of an existing one.
The evidence that such a plan would have the desired effect is, as you might expect, lacking. Divestitures have been regulators’ favored mode of enforcing antitrust law for four decades, and their track record of preserving or bolstering competition is mostly abysmal.
In fact, Albertsons did the exact same thing just eight years ago, when the supermarket giant acquired Safeway. The result was, if not the biggest embarrassment in recent FTC history, possibly the fastest. In 2015, Albertsons and Safeway spun off nearly 150 stores to an 18-store regional chain called Haggen, which like Albertsons was controlled by a private equity firm, Comvest Partners. Comvest invested essentially no cash in the deal, and management warned that it would be a certain failure. But the divested stores owned valuable real estate the C-suite knew it could flip to property investors, and Comvest determined that the zero-risk upside it could generate by monetizing the real estate was too “juicy”—in the words of one executive—to pass up.
So Comvest sold off the stores, piling Haggen with ruinous lease obligations, and paid itself a quick dividend. According to a lawsuit brought later by Haggen, Albertsons allegedly sabotaged the spun-off stores by raiding them of canned and packaged goods and dumping them with all their perishables (and allegedly many already-perished items), as well as hoarding information about crucial systems from their new managers. The result was disaster. Some of the stores lasted just weeks under new management, Haggen was in bankruptcy by the end of the summer, and by the end of 2015 Albertsons had repurchased the strongest stores in the portfolio for roughly a third of what they’d sold them for. Another hundred or so shut down altogether. The FTC-approved “remedy” turned out substantially worse for the competitive landscape—and better for Albertsons and its private equity parent Cerberus Capital Management—than doing nothing.
TO BE FAIR, THERE ARE SOME SALIENT DIFFERENCES with this 2023 version of the supermarket spin-off. C&S Wholesale is a real company, reported to generate $33 billion in annual revenue, with a national footprint, a reputation for competence, and a legitimate incentive for keeping stores open—it famously hates to lose customers for its wholesale business. Many of the stores will keep their banners, associated loyalty program systems, and private-label brands. As a massive wholesaler of groceries, C&S is far less likely to antagonize loyal customers by simply failing to stock its shelves than, for example, Cerberus, which ran the defunct retailer Mervyns into the ground 15 years ago by failing to pay its bills and starving department stores of inventory. And the price is right: C&S is getting 413 stores and the other ancillary assets for $1.9 billion. That comes out to far less than half of the roughly $9.4 million per store Kroger is paying for Albertsons, which theoretically should leave C&S with the flexibility to invest in upgrades and marketing.
Talking to the merger’s defenders, one gets the sense they almost relish talking about the sordid Haggen saga, because it set such a comically catastrophic precedent there’s almost no way to look worse by comparison. “It’s not apples and oranges, it’s like apples and tires,” quipped one rep for the merger in a recent interview.
At the same time, the financial landscape brings risks that weren’t present in the Haggen deal, which was brokered when the federal funds rate was roughly zero. C&S, whose debt is already rated sub-investment grade, is widely expected to finance its transaction with a substantial portion of debt. Whatever debt C&S floats to finance the transaction, it will inevitably be paying double-digit rates on it, in a rapidly softening economy.
John Marshall, a financial analyst who serves as capital strategies director for the United Food and Commercial Workers Local 3000, sees the moderate price tag as one of many red flags. In Albertsons’ 2015 spin-off, Haggen was induced to take on an acquisition it could not absorb because the appraised value of the real estate it stood to acquire was $450 million, well over the purchase price of $309 million. The same reasoning could be at work this time. Marshall estimates that the eight warehouses C&S stands to acquire are alone worth between $400 million and $800 million, and suspects they may be the real motive behind the deal, which is being financed with help from SoftBank, a minority shareholder in a high-flying warehouse robotics company controlled by C&S owner Rich Cohen.
Private equity ownership of supermarkets has invariably produced more food deserts, more dead malls, more price-gouging, and more of the general harms one associates with monopolization than any other form of ownership.
Marshall says that wholesalers like C&S have demonstrated little affinity for the consumer-facing aspects of supermarkets. Cohen, a reclusive multibillionaire who stepped down from the business his grandfather co-founded to helm the robotics company Symbotic, Inc., in 2017, has shown far more interest in the logistics side of the grocery business. A chilling 2014 Jacobin essay on white-collar workforce exploitation written by a longtime C&S buyer depicts a uniquely Darwinian corporate culture that rejects specialized product expertise in favor of ensuring that each employee feels maximally “interchangeable and disposable,” a vibe that tends to make ambitious operational pivots difficult to pull off. “Wholesalers have a terrible track record in this business as retailers [and] we are significantly concerned about C&S’s ability to successfully run retail operations,” Marshall said at a recent press conference detailing the union members’ concerns.
Based on the financial statements of supermarket-anchored strip mall real estate investment trusts, Marshall calculates that the underlying real estate value held by C&S, presuming it conforms pretty closely to the average square footage and leased-to-owned ratios reported by both Kroger and Albertsons, could be worth as much as $3.5 billion. Even if the valuation is closer to the $264 per square foot Regency Centers recently paid for a portfolio of 77 supermarket-anchored malls, selling off the new real estate as Comvest did would still net C&S more than $2.5 billion, a massive immediate return. “Because there is so much value that C&S can derive without ever earning a dollar of profit from operating stores successfully, how will they be incentivized to do that?” Marshall asked at the press conference.
Of course, there could be other reasons the portfolio is spinning off at such a discount. Kroger and Albertsons could stuff the transaction with stores that have expensive lease obligations, or leases that prevent landlords from opening another supermarket on the premises, which have little to no real estate value whatsoever. Such stores are generally far more expensive to operate than company-owned stores, and by extension far likelier to shut down. For its part, an Albertsons spokesperson dismissed the speculation: “C&S is a 100-year-old company with $30 billion in revenue and it would have no reason to monetize its real estate to fund operations.”
Which brings us to the central problem of analyzing the antitrust implications of the deal. No matter how big or small the firm or chain in question, private equity ownership of supermarkets has invariably produced more food deserts, more dead malls, more price-gouging, and more of the general harms one associates with monopolization than any other form of ownership. There’s a case to be made that as stewards of the supermarket industry, both C&S and Kroger are far preferable to Cerberus and Apollo—and that plays right into the hands of Cerberus and Apollo. That’s why it felt like such a Pyrrhic victory when the Department of Justice successfully blocked publishing giant Penguin Random House’s acquisition of Simon & Schuster last fall, only to send the latter into the arms of KKR over the summer.
But even if C&S turns out to be a competent long-term player in the supermarket business, workers have plenty to be anxious about. The warehousing behemoth has a well-documented track record of buying up unionized distribution facilities for bottom-dollar price tags, shifting the volume to non-union warehouses, and firing thousands of Teamsters. In 2015, C&S conspired with Albertsons owner Cerberus Capital Management to oust the Teamsters from a Safeway-owned warehouse.
Also, the C&S partner in the spin-off, SoftBank, is the single biggest backer of gig work apps, which represent perhaps the greatest existential threat to the resurgent labor movement. SoftBank has kept a low profile in recent years as its reputation was ravaged by high-profile busts like WeWork and FTX, but behind the scenes the VC firm and its portfolio companies remain a lobbying juggernaut, helping to tank the Biden administration’s efforts to confirm acting Labor Secretary Julie Su and rolling out gig-ification campaigns in states like Massachusetts. Gig-ification has already taken a heavy toll on the supermarket workforce through the advent of Instacart and DoorDash, a SoftBank portfolio company that replaced all of Albertsons’ California delivery drivers three years ago, following the passage of a ballot initiative legalizing the misclassification of workers as “independent contractors.” It’s entirely possible that SoftBank and C&S see the spin-off as an opportunity to build a massive robot and gig worker–powered grocery logistics platform of the future—a project that could ultimately yield a formidable “competitor” at an incalculable cost to workers.
Kristoffer Tripplaar/Sipa USA via AP Images
THERE IS SO MUCH TO SPECIFICALLY DISFAVOR about Albertson and Kroger’s “solution” to the anti-competitive consequences of their merger proposal that it’s easy to forget that divesting 413 supermarkets to Bernie Sanders himself would not solve the problems created by concentrating a quarter-trillion dollars in market power in a single entity.
In the 1960s and 1970s, when companies determined to have violated antitrust laws were regularly ordered by judges to divest problematic assets, the divestments nearly always failed to yield viable (much less competitive) businesses, or in some cases to even happen at all. In the 1970s, right-wing economists like Kenneth Elzinga, a protégé of the late libertarian deep-state deity James Buchanan, zeroed in on the sky-high failure rate of divestitures to undermine anti-merger legislation and antitrust itself. Perhaps unsurprisingly, when Buchanan’s brain trust at the Center for the Study of Public Choice began migrating to Washington to run the Reagan administration, they made divestitures the centerpiece of the new antitrust enforcement.
Reagan’s chief anti-antitrust revolutionary, assistant attorney general William F. Baxter, couched his ideological revolution in the language of quantitative rigor and precision, drafting a new merger policy powered by the Herfindahl-Hirschman index, a mathematical formula for gauging concentration within a given market. Baxter pledged not to intervene in mergers in industries with an HHI below 1,000 points or which increased the HHI in a given market by fewer than 100. The markets were defined narrowly but also regionally, so that national chains could snap up local assets like supermarkets and hospitals far more easily than regional ones, with the idea that competitive advantages generated by exploiting “economies of scale” were unalloyed virtues that should be nurtured.
Most importantly, when a merger did threaten to drive up the HHI in a concentrated market by more than 100 points, Baxter rarely sought to block it outright, instead ordering his staffers (and by extension, the M&A desks at the requisite investment banks) to suggest asset sales or licensing agreements to push the deal below the threshold. By the Clinton years, the only Americans who thought about antitrust at all seemed to have unblinkingly accepted the notion that anti-competitive conduct was something that could be surgically extracted, like a cancerous tumor from an otherwise virtuous mega-merger.
For example, hospital giant HCA accumulated some 600 hospitals in the 1980s—and again under Rick Scott in the 1990s—without ever having to sacrifice more than a handful of hospitals in high-concentration markets. It did not matter that studies repeatedly demonstrated that HCA systematically and substantially hiked prices wherever it acquired a hospital, HHI notwithstanding.
Divestitures quickly became a profit center unto themselves, in fact. Investment banks and leveraged-buyout shops celebrated the enhanced income opportunities presented by mergers that involved complicated carve-outs, and the merging companies relished the opportunity to dump aging plants and underfunded pension obligations on leaner rivals or corporate raiders. Hastily spun-off divestitures, especially in the newly merger-mad oil industry, swiftly resulted in plant closures and mass layoffs, and by 1985 Rep. Jim Florio (D-NJ) was calling for a divestiture moratorium and proposing strict new guidelines on their design and approval. But the ideologues and market fundamentalists who increasingly dominated the discourse about capitalism cheered on the carnage as somehow representing the apotheosis of “competition.” In 1988, then-SEC commissioner Joseph Grundfest even praised leveraged buyouts as a “private anti-trust program.”
The two parties have concocted a curious history of the grocery industry, in which traditional supermarkets are endangered minnows in an ocean tyrannized by Amazon, Costco, Walmart, and Aldi.
But if keeping prices low was the goal—and it was pretty much the only goal that was allowed under the Reagan revolutionaries’ “consumer welfare” theory of antitrust—divestitures were an abject failure. In reviewing the effects of various antitrust agency responses to mergers on prices, the economist John Kwoka found that divestitures resulted in price increases of about 7.7 percent, as compared with 7.4 percent for mergers the agencies merely rubber-stamped.
Since that paper was published in 2011, multiple FTC divestitures have had almost implausibly anti-competitive outcomes, thanks to an Obama antitrust team that was helmed by attorneys like Deborah Feinstein, who cut her teeth working for James Buchanan acolytes in the 1980s and early 1990s. The Albertsons-Safeway-Haggen debacle occurred on Feinstein’s watch, and in the Obama years divestiture-led remedies became something of a model.
In 2013, Hertz volunteered to sell off a down-market division called “Simply Wheelz” as a condition of its acquisition of Dollar Thrifty, which gave Hertz 36 percent of the national rental car market. The buyer was a small private equity–backed company whose chief executive soon warned the agency that his financiers were scheming to bankrupt the startup and that they should call off the deal. Simply Wheelz was bankrupt within months, and the cost of renting a car has since climbed 50 percent. The FTC demanded that Ticketmaster spin off a college sports ticketing platform called Paciolan that appears to have mostly stagnated as prices for concert tickets doubled over the past five years alone.
This continued in the Trump years. Celgene sold its blockbuster psoriasis drug Otezla to Amgen as a condition of its 2019 merger with Bristol Myers Squibb, and Amgen not only hiked its price more than 20 percent over the three years that followed, but allegedly used the drug as part of an illegal bundling scheme to force pharmacy benefit managers to sabotage a heart drug that competed with one of its less popular offerings.
Feinstein has vigorously defended her record, and divestitures as a concept. “In my view … consent orders are as effective in maintaining or restoring competition as going to court,” she said in a 2013 speech. But in normalizing divestitures as the most serious possible enforcement action the agencies are willing to take, she and her predecessors have instilled in corporate America some kind of unalienable right to buy and sell out at non-market-based prices.
THE KROGER-ALBERTSONS MERGER, for example, was driven largely by the desire of Albertsons’ private equity insiders to cash out their positions at the pandemic-era peak, without having to contend with the laws of supply and demand. When Apollo Global Management converted a large portfolio of Albertsons preferred shares into common shares in December 2021, the stock dropped more than 20 percent that month. Within weeks of the sell-off, the Albertsons board announced it was undertaking a “review of strategic alternatives” with the intention of “maximizing shareholder value” in the face of what its CFO delicately termed the “overhang of the preferred shares that have hit the market.”
The company initially tried to sell itself to a competitor identified in an SEC filing as “Party A”—widely believed to be Giant and Food Lion parent Ahold Delhaize—which backed away from the deal almost immediately following Albertsons’ proposal that the transaction be modified to allow the company to “return capital to its stockholders through the declaration of additional dividends,” aka the notorious $4 billion cash grab. That really drives home the extreme sense of entitlement private equity firms feel about having their cake and eating it too; not only were they seeking to exit their investment at a massive premium to its value, they wanted to pay themselves a ten-figure “dumping bonus” for doing it. They ultimately found a partner willing to endorse the scheme in Kroger, which reasoned that the consolidation gains would be worth paying a premium for the raided assets. Later, Washington state judge Ken Schubert dismissed a lawsuit attempting to halt payment of the dividend, on the grounds that it wasn’t the court’s place to interfere in a private business decision.
Since then, the two parties have concocted a curious history of the grocery industry, in which traditional supermarkets are endangered minnows in an ocean tyrannized by Amazon, Costco, Walmart, and Aldi. A PowerPoint presentation notes somewhat impertinently that Amazon’s market capitalization is 64 times that of Albertsons, ignoring the fact that despite Amazon’s domination in e-commerce, it hasn’t fully realized its grand grocery ambitions, and controls no more than 2 percent of the grocery market. Randomly, the presentation lists Costco as one of four companies that “dominate” the grocery business, despite having less than one-eighth as many stores as the proposed Albertsons-Kroger tie-up. And while Aldi and Walmart are clearly unparalleled competitors, they gained market share during the pandemic in large part as a direct result of traditional supermarkets’ conscious decision to trade profit margin for market share, and fat private equity dividends for solvency.
In reality, both Kroger and Albertsons were experiencing handsome profit growth by themselves, and each was formidable enough alone to hike prices aggressively, strike fear into the hearts of small vendors, and spend lavishly on lobbyists. It should not fall on our overburdened antitrust enforcers to pore over the individual assets changing hands in service of coming up with a carve-out that somehow brings a merger into technical compliance with an arbitrary Reaganite standard devised by bad-faith ideologues. At the same time, given the path by which we arrived at this juncture, the agency may decide that merely relieving the nation of another Cerberus portfolio company is a boon to the competitive landscape.
There are signs the FTC is gearing up to act soon. Sources told Supermarket News that the divestiture did not change minds inside the agency. In September, chair Lina Khan made headlines for asking a receptionist at the MGM Grand what steps the Las Vegas casino would take to protect her personal information if she wrote down her credit card number for the hotel to charge after its systems recovered from a ransomware attack. But Khan was in Nevada to speak to workers and community activists concerned about the potential closures and layoffs that might result from the supermarket mega-merger. In a 2017 Harvard Law Review paper, Khan and Sandeep Vaheesan (who is an Open Markets Institute colleague of one of the authors) expressed skepticism about the efficacy of divestitures as a mode of antitrust enforcement, using the “spectacular failures” of Haggen and Simply Wheelz as case studies. And perhaps most hopefully, both of Alaska’s Republican senators—and separately, two dozen Alaska state legislators—recently wrote the agency to express their opposition to the merger, highlighting either the improbable ideological diversity of the movement to resurrect antitrust law, or the terrifying state of grocery prices in Alaska, which has given rise to a whole subgenre of TikTok videos. (A half gallon of milk for $18!)
Whatever the case, it’s important to remember that “kitchen table” realities occasionally still have the power to pierce through the most impressive campaigns of corporate gaslighting, and that the public will rally behind the FTC if it sues to block Kroger-Albertsons. Here’s hoping they can find a judge who buys their own groceries.
