Consumer group sues to stop Kroger-Albertsons merger

A group of 25 consumers from 11 states have initiated a private lawsuit in federal court to block The Kroger Co.’s planned $24.6 billion acquisition of Albertsons Cos.

In the suit, filed last week in the U.S. District Court for Northern California in San Francisco, the consumer group claims the Kroger-Albertsons merger—by combining the nation’s largest two supermarket companies—violates antitrust law because it would stifle competition, reduce consumer choice and raise prices in the grocery store sector, as well as lead to job cuts from store closings.

The complaint calls on the court to halt the merger and permanently block Kroger from acquiring Albertsons under Section 7 of the Clayton Antitrust Act. In addition, the suit requests that Albertsons be prohibited from paying out a $4 billion special dividend announced with the merger deal and that any funds already paid be disgorged.

“If Kroger’s proposed acquisition of Albertsons is consummated, the companies’ combined power will be used to increase prices for groceries, decrease the quality of food, eliminate jobs, close stores and offer less choice for consumers due to the overlap in geographic areas,” the lawsuit stated.

“The proposed elimination of Albertsons by Kroger poses a substantial threat to the plaintiffs, and to the public at large,” the suit document explained, “in that the proposed elimination will only serve, as the Supreme Court warned, to ‘reduce available consumer choice while providing no increase in industry capacity, jobs or output,’ and may potentially cause loss to the plaintiffs and the public at large in the form of higher prices on food and other consumer goods, the elimination of consumer choice and other potential anticompetitive effects which deprive the plaintiffs and the public at large of the salutary benefits of competition.”

Potential market impact of the merger

Announced in mid-October, the Kroger-Albertsons merger would create 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 the District of Columbia.

Kroger and Albertsons have said the deal would create synergies that would enable them to better compete against larger rivals like Walmart, Amazon and big-box mass chains in an increasing omnichannel grocery marketplace. They noted that the deal also would offer consumers lower pricing via economies of scale and personalized promotions plus improved access via integrated brick-and-mortar and digital channels.

In the lawsuit, the consumer plaintiffs claim Kroger would hold a 36% supermarket market share if its planned acquisition of Albertsons is approved by regulators. / Photo: Shutterstock

The 25 consumers filing the private suit—which describes each as a “consumer and customer of the defendants” [i.e. Kroger and Albertsons]—come from Louisiana, Massachusetts, Nevada, California, Texas, Ohio, Colorado, Michigan, Florida, Pennsylvania and Washington and are represented by multiple counsel, led by the Alioto Law Firm in San Francisco.

Together, Kroger-Albertsons would command a 36% market share of U.S. supermarket sales, with Kroger currently holding a 23.6% share and Albertsons a 12.4% share—well above the next-largest competitor, Ahold Delhaize USA, at 9.2%, according to the lawsuit. Kroger and Albertsons said they plan to divest from 100 to 375 stores to address regulatory concerns, and their agreement includes a cap of 650 store divestitures, at which point the companies could opt to re-evaluate the transaction.

The consumer group, though, contends that store divestitures wouldn’t provide an adequate remedy to resolve antitrust issues with the deal. “This acquisition allows for a divestiture of as many as 650 Albertsons stores; however, past supermarket divestitures have struggled within months of being separated and ultimately failed,” the suit stated.

Perhaps more important, the consumers argue, the removal of Kroger-versus-Albertsons as a competitive check would weaken the supermarket sector if the merger deal earns regulatory approval.

“Should the proposed elimination of Albertsons go unchallenged, the nation would not only lose the competition of Albertsons, but also the potential competition that Kroger would provide by further building its own national presence the old-fashioned way: by competing for customers instead of buying them,” according to the suit.

The Albertsons special dividend issue

The lawsuit also alleges that Albertsons’ special dividend of $6.85 per common share, disclosed when the companies unveiled the merger agreement, is designed to “financially cripple Albertsons and to weaken its competitive position relative to Kroger.”

Both The Kroger Co. and Cerberus Capital Management LP, Albertsons’ largest shareholder, are named in the lawsuit, which said Cerberus would receive a third of the nearly $4 billion dividend payment. Albertsons, previously owned by an investment group led by private-equity firm Cerberus, went public in June 2020 after an initial public offering. Cerberus still holds an approximately 29% stake in the grocery retailer.

Albertsons was cleared by a state court to proceed with the payment of its $4 billion special dividend, which the grocer scheduled for Jan. 20 after a long delay. / Photo: Shutterstock

“The payment of this special dividend will leave Albertsons undercapitalized and will impede Albertsons’ ability to compete with other supermarkets, including Kroger, leaving shoppers to face higher prices, worse services, less innovation and even closure of Albertsons supermarkets,” the lawsuit stated.

After nearly 11 weeks of legal battles, including a temporary restraining order by the state of Washington, Albertsons initiated the special dividend payment on Jan. 20. Washington and other states contended that the $4 billion payment, if made, would hamper Albertsons’ ability to operate and compete and could negatively impact consumers and workers. They also claimed the payment was anticompetitive because it was connected to a merger deal. Albertsons and Kroger, however, had said the dividend isn’t part of the merger transaction. The State of Washington Supreme Court ultimately rejected requests for an appeal and let Albertsons proceed with the dividend payment.

Defining the grocery retail market

Albertsons and Kroger expect the merger transaction to close in early 2024, pending regulatory approval and other closing conditions. But industry observers have said an antitrust review of such a large transaction likely will take much longer, up to two years.

Notably, the consumer group’s suit distinguishes between supermarkets and other  large grocery retailers in determining grocery retail market concentration—a distinction that the Federal Trade Commission, Department of Justice and other regulators might not make in weighing industry competition in geographic markets across the country.

In terms of the overall grocery retail market, mass merchant Walmart is by far the largest retailer by sales and deep discount chain Dollar General by store count.

“Retail stores other than supermarkets—such as convenience stores, specialty food stores, limited-assortment stores, hard discounters and club stores—may also sell food and grocery products, and may provide sufficient competition to effectively constrain prices at supermarkets,” the lawsuit stated. “But these retail stores do not offer a supermarket’s distinct set of products and services that provide consumers with the convenience of one-stop shopping for food and grocery products. Consumers shopping for food and grocery products at supermarkets are not likely to start shopping at other types of stores in response to a small but significant price increase by supermarkets.”

A report released in January by the U.S. Department of Agriculture, titled “A Disaggregated View of Market Concentration in the Food Retail Industry,” noted that today’s grocery retail sector isn’t just the domain of supermarkets and hasn’t been for years.

“In the past three decades, the food retail sector has been revolutionized by consolidation and industry changes. Two major economic forces may help explain these changes in the brick-and-mortar food retail industry,” the USDA report said. “First, large retailers that have not primarily sold food products have entered the food retail market and are now competing with traditional food retailers. Supercenters and mass merchandisers are examples of “nontraditional” food retailers that have been competing with traditional food retailers due to their substantial offering of food products and have been growing rapidly in new areas. Other new retail formats, such as discount stores and dollar stores, are continuing this trend.”

At the same time, the report cites ongoing consolidation in the grocery retail arena and its potential effects. “The second force is the growth of existing food retailers, which has been greatly accelerated in the past decades by national and large regional retailers, consolidating horizontally through mergers and acquisitions,” the USDA said. “The potential price and non-price ramifications of the changing local food retail market concentration can impact consumers, producers and especially low-income households with food accessibility challenges.”