Rogelio V. Solis/AP Photo
The more pricing power that Kroger and Albertsons have, the fewer choices consumers have other than to accept higher prices.
Today, anti-monopoly fighters control the major agencies that police mergers. They have been newly aggressive in scrutinizing concentration across the U.S. economy, more than willing to challenge the mergers-are-good orthodoxy of the past 40 years. But they are running into the buzz saw that is the federal judiciary. On several occasions in the past few months, courts have rejected attempts by the Justice Department’s Antitrust Division and the Federal Trade Commission to block mergers. Just last month, UnitedHealth was allowed to combine with Change Healthcare, medical testing companies Illumina and Grail were approved to merge, and the U.S. Sugar-Imperial Sugar deal was waved through.
To be clear, the losses are a good thing. It means that the agencies aren’t afraid to try to block the kinds of cases that haven’t been bothered with for decades. The federal judiciary, despite President Biden’s installation of a near-record number of judges, remains hostile to many of these cases, in thrall to a long-standing, corporate-friendly way of looking at antitrust. (The judge in the UnitedHealth case literally allowed the merger through because the company seemed trustworthy.) But that’s only going to change if the agencies are persistent at moving the legal philosophy around corporate power away from surrender. Matt Stoller of the American Economic Liberties Project calls this the “antitrust shooting war,” and the agencies are showing themselves willing to take some casualties.
In the short term, however, this means that companies are more emboldened to take on more and more mergers, thumbing their nose at the DOJ and FTC, and believing that the judiciary is on their side. That’s what could be behind the preposterous merger announced Friday between Kroger and Albertsons. The $24.6 billion deal would put together the country’s two largest supermarket chains at a time when prices for groceries are already skyrocketing. It takes a supreme amount of faith in the laissez-faire attitude of the courts to believe that they would accept this deal.
You might think that there isn’t a Kroger or an Albertsons in your neighborhood, so this merger won’t affect you. You are probably wrong. Kroger brands include Ralphs, Dillons, Food 4 Less, Fred Meyer, Harris Teeter, King Soopers, Mariano’s, and several more. Albertsons, boosted by a 2015 merger with Safeway (more on that later), has that chain in its stable, along with Acme, Haggen, Jewel-Osco, Shaw’s, Pavilions, Vons, and many more. The illusion of choice in supermarkets masks the dominance.
Congressional testimony this January from the National Grocers Association indicates that over 60 percent of all American grocery sales are concentrated in just five companies: Amazon, Walmart, Kroger, Albertsons, and Ahold Delhaize (a Dutch grocer that owns several brands like Giant, Food Lion, and Stop & Shop). This merger would put two of those five together. It would give Walmart, the biggest grocery outlet in America, and the merged company something close to half the market.
Just last week, the September statistics on inflation showed significant increases in food costs, particularly for food consumed at home, which has risen 13 percent year over year. Staples like eggs (30.5 percent), chicken (17.2 percent), and coffee (15.7 percent) are rising even faster than that overall average.
Over 60 percent of all American grocery sales are concentrated in just five companies: Amazon, Walmart, Kroger, Albertsons, and Ahold Delhaize.
There are a lot of factors in rising food costs, including impacts on grain sales from the war in Ukraine, drought conditions in U.S. produce-growing areas, and an avian flu outbreak. But outsized profit margins from retailers haven’t helped, and Kroger and Albertsons have been part of the group of companies practically boasting about them. Last summer, Kroger CEO Rodney McMullen said that “a little bit of inflation is always good in our business,” because “customers don’t overly react” to increases in prices. Albertsons CEO Vivek Sankaran made similar comments.
McMullen would take over as CEO of the combined company if the merger goes through. But Sankaran stands to gain a $50 million golden parachute in the deal. Meanwhile, Albertsons’ parent company, private equity giant Cerberus Capital Management, will earn a windfall too, perhaps as much as $7 billion.
The more pricing power that Kroger and Albertsons have, the fewer choices consumers have other than to accept higher prices. And it’s undeniable that these two giants teaming up would lead to more pricing power. A merged company would also have the ability to squeeze suppliers with fewer retail outlet options, increasing profit margins for the merged company. A combined Kroger-Albertsons, paying less for wholesale goods and charging more for retail customers, would be bad for shoppers, supplying businesses, and the overall economy.
While McMullen and Sankaran are clearly confident that they can engage in a competition-destroying merger without anyone resisting, they should think back to the end of the Obama administration. Most of the time, Obama’s antitrust agencies were fairly pliant on mergers, but it got to a point where even they had to step in. And in those cases, they were very successful in preventing the most absurd attempts at concentration.
Obama’s agencies blocked a proposed merger between AT&T and T-Mobile, as well as two proposed insurance company tie-ups, Aetna-Humana and Anthem-Cigna. (The latter two proposed combinations technically died in February 2017, the first month of the Trump administration, but the Obama Justice Department had done the heavy lifting.) Courts blocked the insurance mergers, showing that despite the pro-corporate tilt of the judiciary, egregious mergers that concentrate markets do not always, or even often, get approved.
The already aggressive Biden forces—Lina Khan at the FTC specifically, as her agency holds jurisdiction over the grocery industry—will surely challenge this merger. The last time the FTC had a chance at a big grocery merger, the Albertsons-Safeway deal, offers lessons on what not to do.
The FTC attempted a conditions-based approval that forced the sale of 168 stores in Western states where Albertsons and Safeway would have had a strong hold on the market. Most of the stores were sold to Haggen, a small chain in the Pacific Northwest that had only 18 stores at the time. Haggen was woefully underequipped, however, to handle the increased logistics and complexity of a massive increase in their retail outlets. It took only nine months for Haggen to file for bankruptcy, having grown way too fast for them to manage.
Here’s the punch line. You might have noticed that Haggen was in the list of stores in Albertsons’ suite of brands. That’s because when Haggen liquidated its holdings in the bankruptcy, Albertsons bought 33 of the stores, including many of the same ones it had previously sold in the forced FTC divestiture. And it bought them back for about one-fifth of what it sold them for, making a nice profit in the exchange.
It’s no surprise that Kroger and Albertsons are already offering to divest between 100 and 375 stores as a condition for this deal. But we know what it looks like when antitrust enforcers try to appease large businesses in the grocery space. As the Haggen affair makes clear, the whole idea of using conditions to allow high-level mergers and competition simultaneously has been a failure.
Fortunately, Lina Khan already knows this—and she’ll have a good chance of success at blocking this merger. Biden’s antitrust enforcers may still have to climb uphill to get judges to see the dangers of monopoly power. But some things are as plain as the nose on your face, or the overpriced loaf of bread in your shopping cart.
