Antitrust review may get tougher for Kroger-Albertsons merger

“Fresh Perspectives” is a new Winsight Grocery Business column from Executive Editor Russell Redman, who will share insights on news, trends, people, issues and events in and around the grocery industry.

Is the regulatory environment about to change for the Kroger-Albertsons mega-merger?

The Federal Trade Commission (FTC) and Department of Justice (DOJ) on Wednesday proposed new merger guidelines as part of an effort by the Biden administration to bolster antitrust enforcement. The draft guidelines are subject to a 60-day comment period ending in mid-September.

Also on Wednesday, the U.S. Department of Agriculture (USDA) unveiled a partnership with bipartisan attorneys general in 31 states and the District of Columbia to sharpen competition and fortify consumer safeguards in food and agriculture, including in grocery, meat and poultry processing, and other markets. The USDA said the move stems from Biden’s “Executive Order on Promoting Competition in the American Economy,” issued in July 2021.

Together, the FTC/DOJ and USDA announcements could spell a more stringent antitrust review for The Kroger Co.’s $24.6 billion deal to acquire Albertsons Cos. The agreement, unveiled in mid-October, would combine the nation’s first- and second-largest supermarket retailers into a company with annual revenue of about $210 billion and 4,996 stores, 66 distribution centers, 52 manufacturing plants, 3,972 pharmacies, 2,015 fuel centers and 710,000 workers in 48 states and D.C.

“With these draft merger guidelines, we are updating our enforcement manual to reflect the realities of how firms do business in the modern economy,” FTC Chair Lina Khan said in a statement.

Closer look at the proposed guidelines

Of the 13 draft merger guidelines submitted for comment by the FTC and DOJ, at least seven jump out as likely regulator concerns about the Kroger-Albertsons transaction, a horizontal merger:

• Guideline 1: Mergers Should Not Significantly Increase Concentration in Highly Concentrated Markets.
• Guideline 2: Mergers Should Not Eliminate Substantial Competition between Firms.
• Guideline 4: Mergers Should Not Eliminate a Potential Entrant in a Concentrated Market.
• Guideline 7: Mergers Should Not Entrench or Extend a Dominant Position.
• Guideline 8: Mergers Should Not Further a Trend Toward Concentration.
• Guideline 11: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers.
• Guideline 13: Mergers Should Not Otherwise Substantially Lessen Competition or Tend to Create a Monopoly.

“As markets and commercial realities change, it is vital that we adapt our law enforcement tools to keep pace so that we can protect competition in a manner that reflects the intricacies of our modern economy,” commented Assistant U.S. Attorney General Jonathan Kanter of the DOJ’s Antitrust Division. “Simply put, competition today looks different than it did 50—or even 15—years ago.”

Meanwhile, the USDA said its Agricultural Competition Partnership with state AGs will take aim at “anticompetitive market structures and practices, as well as price gouging and other anti-consumer practices,” in food, retail, meat and poultry processing, and other agriculture sectors.

The USDA also cited a “lack of choices for consumers and producers” as another key focus area for the partnership.

“The Biden-Harris Administration is committed to addressing corporate consolidation and its negative effects on the U.S. economy, such as unfair competition and increased prices,” according to Agriculture Secretary Tom Vilsack. “By placing necessary resources where they are needed most and helping states identify and address anticompetitive and anti-consumer behavior, in partnership with federal authorities, through these cooperative agreements we can ensure a more robust and competitive agricultural sector.”

Kroger and Albertsons expect to close their merger deal in early 2024. / Photos: Shutterstock

Industry feedback

When contacted by WGB, Kroger and Albertsons spokespeople said via email that the companies had no comment on the FTC/DOJ’s proposed merger guidelines. An FMI-The Food Industry Association spokesperson said in an email that the grocery retail trade group still needs to review the draft guidelines, since “there’s a lot here.”

The National Grocers Association (NGA), representing the independent grocery sector, on Wednesday welcomed the proposed FTC/DOJ merger guidelines.

NGA already had been pressing the FTC to clamp down on anticompetitive behavior from “power buyers” such as Walmart, Amazon, Costco, Target, Dollar General and big supermarket chains. These retailers use their scale to command more favorable supply terms, lower pricing, special product package sizes and first call on high-demand items, NGA said, leaving independent grocers at a marked disadvantage in supply and pricing. According to the association, a merger of Kroger and Albertsons likely would mean more of the same.

NGA said it’s still assessing the impact of the draft merger guidelines on independent supermarkets and will submit comment on the FTC/DOJ’s proposal. Citing a Food & Water Watch report, NGA noted that four national grocery retailers—Walmart, Kroger, Costco and Albertsons—account for 69% of all U.S. grocery sales, and Kroger and Albertsons aim to merge.

“NGA is pleased to see federal antitrust enforcers take seriously the competitive concerns that arise when dominant firms abuse their buyer power to impose discriminatory terms on their rivals,” stated Chris Jones, senior vice president of government relations and counsel for NGA.

“NGA and its members have consistently warned federal antitrust officials about how US consumers are worse off due to buyer power abuses in an increasingly consolidated grocery sector,” Jones explained. “This problem has been laid bare by pandemic-era supply chain disruptions and increasing food price inflation, where independent grocers have been put at critical disadvantage relative to their dominant competitors, especially those who serve rural and urban communities.” 

Gauging market concentration

In remarks on Wednesday about the USDA’s partnership with state AGs, President Biden also pointed to market concentration in grocery.

“The Department of Agriculture, together with bipartisan attorneys general in 31 states and the District of Columbia, are ramping up enforcement of antitrust and consumer protection laws in food and in agriculture,” Biden said. “For example, just four supermarket companies control over a third of the market nationwide. And it’s even more concentrated at the local level, where consumers have had even fewer stores to choose from. Groceries in consolidated markets will charge you more because you have nowhere else to shop. Now the Department of Agriculture and partners in the states are going to make sure large corporations cannot artificially raise food prices through price fixing and price gouging.”

The White House said the FTC/DOJ’s proposed guidelines also would shrink the threshold of the Herfindahl-Hirschman Index (HHI), used by agencies and the courts to gauge market concentration. Under HHI, the higher the index, the more concentrated a market, and the bigger the change in the index resulting from a merger, the more likely it could cause harm. In 2010, regulators raised HHI thresholds indicating whether a market was “highly concentrated” and if a change in the index triggered by a merger created concern—effectively allowing more mergers to proceed. The draft guidelines unveiled Wednesday would restore both values to pre-2010 levels.

Much of the FTC’s antitrust assessment depends on how broadly or narrowly regulators define the grocery retail marketplace.

In a November webinar by JPMorgan, Numerator chief economist Leo Feler explained that the market could be defined by certain product segments in the food/supermarket channel (meat and dairy only, groceries only or total basket) or by the total basket for supermarkets plus mass retailers; for supermarket, mass, drug and dollar retailers; for fast-moving consumer goods (FMCG) overall; or for FMCG, e-commerce, delivery and restaurants. He presented a Numerator analysis of the Kroger-Albertsons deal showing 68 high-risk and 50 moderate-risk core-based statistical areas (CBSAs) post-merger in terms of high HHI levels and high HHI changes.

Regulators also may evaluate the power a merged Kroger-Albertsons would gain in terms of leverage with suppliers and how that might impact the grocery market and the supply chain, Feler added.

Kroger CEO Rodney McMullen and Albertsons CEO Vivek Sankaran at a Senate hearing on the merger agreement in March. / Photos courtesy of U.S. Senate

Antitrust review moves forward

When announcing the merger deal, Kroger and Albertsons estimated they would need to divest 100 to 375 stores to clear the antitrust review by federal and state regulators. The agreement also includes a ceiling of 650 store divestitures, at which point the two retailers could revisit the transaction. Stores would be divested through direct sales to other operators and/or via a newly formed spinoff company, dubbed SpinCo.

“We are working cooperatively with the regulators and, at the same time, to identify potential buyers for the stores we expect to divest to obtain clearance for the transaction,” McMullen said in a conference call with analysts on Kroger’s first-quarter results. (Call transcript provided by AlphaSense.)

Cincinnati-based Kroger received a second request for information from the FTC on the proposed merger in early December. Citing anonymous sources, the investor website Seeking Alpha reported in June that the grocer is “a couple months away from certifying substantial compliance” with that request, possibly in the calendar third quarter or early fall.

While Kroger and Albertsons still expect an early 2024 completion for the merger, industry observers have said antitrust approval likely will take longer for such a large transaction—the biggest U.S. supermarket merger ever—and could last as long as two years.

McMullen has said in media interviews and earnings calls that negotiations with the FTC have made headway and the integration process with Albertsons is proceeding. Recently, both McMullen and Albertsons CEO Vivek Sankaran cited some public “myths” about the merger in a Cincinnati Enquirer op-ed article. Essentially, the two CEOs reiterated what they’ve said publicly since the emergence of the deal: No store closings or job cuts are upcoming, and the combined company plans to use its scale to lower prices, not increase them.

“We continue to engage with various stakeholders, in addition to the regulators, and are actively working to address inaccuracies and misrepresentations about the merger,” McMullen told analysts in the Q1 call. “We made a commitment on the day we announced the deal that this merger is about growth and that we will not lay off any frontline work associates as a result of this merger. We are also committed to not closing any stores, distribution centers or manufacturing facilities as a result of the merger.”

Integration planning has “progressed nicely,” he added. “We remain on track and continue to expect the transaction to close in early 2024.”