Kroger-Albertsons merger divestiture to C&S called 'adequate remedy'

The Kroger Co. and Albertsons Cos.’ $1.9 billion deal to divest over 400 stores and supporting assets to C&S Wholesale Grocers offers a viable antitrust remedy to the supermarket giants’ planned mega-merger, the International Center for Law & Economics (ICLE) reported.

A nonprofit, nonpartisan research group, ICLE on Tuesday released a white paper titled “Food Retail Competition, Antitrust Law and the Kroger-Albertsons Merger,” in which the think tank evaluated $24.6 billion Kroger-Albertsons transaction, the divestiture pact with C&S and the Federal Trade Commission’s recent grocery merger experiences, including the failed Safeway-Albertsons divestiture to Haggen.

“With the FTC’s knowledge of the industry and of its own past successes and failures, divestitures remain an appropriate and adequate remedy for this merger,” Portland, Oregon-based ICLE wrote about the Kroger-Albertsons agreement. “The parties appear committed to working cooperatively with regulators to craft divestitures that fully resolve competitive concerns. Rather than blocking the deal outright, the FTC can allow the merger to proceed, conditioned on acceptable divestitures that protect consumers while permitting efficiency gains across the majority of stores.”

Carefully devised divestiture remedy

Related:Timeline: One year in, Kroger-Albertsons merger remains uncertain

Under the divestiture transaction, announced in early September, Kroger-Albertsons plans to sell 413 stores, eight distribution centers and two regional offices in 17 states and the District of Columbia to C&S. The deal—slated to close in early 2024, when Kroger expects to finalize the Albertsons acquisition—also includes the sale of Albertsons’ Debi Lilly Design, Primo Taglio, Open Nature, ReadyMeals and Waterfront Bistro private brands to C&S.

Keene, New Hampshire-based C&S also would acquire Kroger’s QFC retail banner in the Pacific Northwest, upscale Mariano’s brand in Illinois and Albertsons’ Carrs chain in Alaska, along with exclusive licensing rights to the Albertsons brand in Arizona, California, Colorado and Wyoming. The divestiture agreement, too, might require C&S to buy another 237 stores based on Kroger and Albertsons securing FTC and other regulatory approval for their merger, which would be the nation’s largest ever between supermarket companies.

At Groceryshop 2023 last month, Kroger CEO Rodney McMullen said his company and Albertsons “talked to dozens of potential buyers” for divested stores before selecting C&S Wholesale Grocers. / Photo by Russell Redman

When unveiling the proposed Albertsons acquisition, which this past weekend became a year old, Kroger and Albertsons estimated they would need to shed 100 to 375 stores for the merger to gain FTC clearance. The deal also had set a 650-store ceiling on divestitures, at which point they could revisit the agreement.

Related:Kroger-Albertsons merger stirs uneasiness in California

Cincinnati-based Kroger has said the transaction wouldn’t result in store closings or job cuts. Also, Kroger Chairman and CEO Rodney McMullen has reiterated in media interviews and earnings calls that potential suitors for divested stores would need to be financially sound, experienced grocery operators and committed to a unionized workforce—and to honoring collective bargaining agreements—at the locations sold. And in September, during a second-quarter conference call and a Groceryshop keynote, McMullen said those conditions have been met in the planned transaction with C&S.

“The targeted nature of the divestiture [to C&S] would allow the merger to proceed in the majority of geographic markets where there are no competitive concerns between Kroger and Albertsons. Divesting stores only where localized overlaps in specific regions exist enables the realization of efficiencies and benefits in the many remaining markets,” ICLE said in its white paper. “The FTC will still need to closely scrutinize the buyer and the proposed divestiture package. But the announced plan demonstrates that the merging parties [Kroger and Albertsons] are taking seriously the need for divestitures.”

Related:Non-traditional grocery retailers pose ‘existential threat’ to supermarkets

C&S different from Haggen

Critics of the Kroger-Albertsons merger—including state and federal officials, unions, community and consumer groups, and various grocery industry stakeholders—have cited the botched divestiture remedy of the 2015 Albertsons-Safeway merger as a reason to halt the Kroger-Albertsons combination. Further, they claim the C&S divestiture package will bring more of the same.

During its review of Albertsons-Safeway, the FTC identified 130 local markets in Western and Midwestern states where it believed the merger would be anticompetitive. In response, Albertsons-Safeway agreed to divest 168 stores in those markets, and Haggen—a small grocery chain with just 18 stores, mostly in Washington state—acquired 146 stores in Arizona, California, Nevada, Oregon and Washington. The divestiture to Haggen—a family-owned chain that shifted to private equity ownership for the transaction—was approved by the FTC.

“In retrospect, Haggen may not have been an appropriate buyer for the divested stores,” ICLE observed in its report. Indeed, the nearly tenfold increase in store count proved to be too much for Haggen, which struggled financially and began selling some stores. Less than a year later, Haggen filed for bankruptcy, and afterward Albertsons re-acquired 33 of the stores it had divested to Haggen.

But ICLE doesn’t expect such a debacle to befall C&S in acquiring stores and assets from Kroger-Albertsons.

“The specific characteristics of the proposed buyer of the divested stores suggests that it is unlikely to fall prey to the limitations that scuttled the Haggen divestiture,” the white paper stated.

Source: The Kroger Co., divestiture plan investor presentation

C&S generates about $30 billion in annual revenue and supplies more than 7,500 independent supermarkets, chain stores, military bases and institutions, offering more than 100,000 products. On its website, C&S lists 33 distribution centers/warehouses in 15 states coast to coast.

On the retail front, C&S operates 160 stores, mostly under the Piggly Wiggly banner in the Midwest and Carolinas but also including 11 stores under the Grand Union banner in upstate New York and Vermont. Overall, C&S licenses the Piggly Wiggly banner to approximately 500 independently owned and operated supermarkets in 17 states via its Piggly Wiggly LLC subsidiary. Thus, the Kroger-Albertsons divestitures, if approved, would give C&S a grocery retail network of about 1,073 stores, which under the companies’ agreement could grow to 1,310 locations if regulators call for more stores divestitures.

“Unlike Haggen, the purchasing party here has experience operating more than 160 supermarkets under brands like Grand Union. This existing operation of stores makes C&S better-positioned as a buyer than Haggen was when it attempted to rapidly expand from 18 to 168 stores,” ICLE explained. “While C&S is primarily a wholesaler, its Grand Union retail operations and the transition support offered under the divestiture agreement should position it to successfully operate the divested stores. In that way, the divestiture does not just spin off or increase the size of a horizontal competitor. Rather, the plan jump-starts greater vertical integration by C&S, whose wholesale operations include the production of private-label products.”

C&S executives also have described the company’s retail operations as an active part of its growth strategy. To that end, C&S has hired former Stop & Shop president Mark McGowan as senior vice president of retail to lead its grocery store expansion.

“By enabling C&S to take better advantage of the benefits of vertical integration, the divestiture appears to ensure that C&S will emerge with a structure more in line with the rest of the food retail market,” ICLE’s report noted. “Over the past decade, many retailers (including Kroger and Albertsons) have shifted toward ‘bringing private-label production in-house.’ This move by firms (even without any market power) likely reflects competitive advantages gained from vertical integration.”

Opponents and skeptics of the Kroger-Albertsons merger also have criticized the C&S divestiture deal as an unreliable antitrust remedy because of the possibility that, down the road, C&S could decide to exit the grocery retail business and sell off the acquired stores, potentially leading to store closures and layoffs. Though such a scenario is possible, the competitive analysis indicates that the C&S deal would be a sensible antitrust solution for the Kroger-Albertsons merger, according to ICLE.

“Regulators and merging parties alike operate under inherent uncertainty when predicting competitive outcomes. Antitrust analysis does not deal with certainties, but rather with probabilistic assessments of likely competitive effects,” ICLE said. “The relevant question is whether the divestiture is likely to effectively maintain competition in the markets of concern, not whether it can be guaranteed to perfectly do so in all scenarios. When we take more episodes than Haggen’s into account, despite the uncertainty, the FTC’s experience shows that targeted divestitures with an experienced buyer are likely to adequately protect consumers post-merger. The possibility that some unforeseen complication may arise does not negate the high probability that competition will be preserved.”

In a brief released in September, titled “Five Problems with a Potential FTC Challenge to the Kroger-Albertsons Merger,” ICLE said an FTC effort to block the transaction would collide with the law “as it is currently enforced by U.S. courts.” Such a move would be unlikely to prevail in court because of failure to account for “dramatic changes in the retail food and grocery landscape,” the viability of store divestitures as an antitrust remedy “routinely accepted by courts,” and “speculative” claims about harm to the labor market and purchasing power, the 19-page brief said.