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When America’s creaky food supply chain was unwinding pandemic-era disruptions in 2022, two of the country’s largest grocery store owners looked around the market and figured out that if they were ever going to to compete with Walmart, they would have to grow. A merger seemed like an ideal solution for Kroger and Albertsons. So after some talks, Kroger agreed to buy Albertsons for $24.6 billion in stock and cash.
That deal would have created a grocery behemoth, combining Kroger’s 2,700 stores and its 9.2% market share with Albertsons’ 2,300 stores and 6.4% market share into the second largest U.S. grocery chain. (That would have still trailed far behind Walmart, which last year sold 23.6% of all groceries in the U.S.)
But it all fell apart this month when a judge ruled that the Federal Trade Commission was right: The deal might be good for the supermarket chains, but it was bad for consumers, reducing the number of towns where Kroger and Albertsons compete and keep prices down. The companies had tried to pre-empt the FTC’s objections. But their plan to divest almost 600 stores to a grocery wholesaler with scant experience in retail was deemed unworkable by the judge.
Now Albertsons is suing Kroger over the nixed deal, arguing that Kroger had failed to help present a workable divestment plan to the FTC because it wanted to back out of the deal. Albertsons is seeking $6 billion in damages, the premium it says its shareholders have lost because the deal was scuttled.
“Kroger derailed the merger after suffering a classic case of buyer’s remorse,” Albertsons said in its complaint, filed less than 24 hours after the ruling that voided the merger.
Shares of Kroger are up more than 8% since Judge Adrienne Nelson’s ruling, while Albertson’s shares are up about 5%. Since they first announced the deal in 2022, Kroger stock is up about 45%, and Albertsons stock has fallen about 35%.
“These are both very large and very dominant supermarket companies and in many places each other’s closest competitors, without a third or fourth substantial competitor,” said Martin Gaynor, a former FTC chief economist and now a professor at Carnegie Mellon University in Pittsburgh. “The [FTC’s] concern was, should this merger go through, that competition would be gone, and once competition is gone, you can’t get it back.” And that, he said, would “cause a lot of harm to consumers in large parts of the country.”
But Richard Kestenbaum, a partner at Triangle Capital and a specialist advisor on consumer-related mergers and acquisitions, says that’s wrong. “This merger makes complete sense,” Kestenbaum said in an interview. “I don’t understand the FTC at all.”
Brick-and-mortar grocers are under severe pressure from both Walmart and online grocers, especially Amazon, Kestenbaum said. To fight the deep pockets of Walmart, Amazon, and even Costco, supermarkets need scale to match prices and quality, said Kestenbaum, who writes regularly on consumer M&A and urged the two grocers to merge as early as 2020. The growth of online shopping has changed the utility of a brick-and-mortar store, and as the number of shoppers declines, a store can lose the scale it needs to compete and even flip to being a money-losing property.
“When people start ordering online, [the stores] become a ball and chain because Amazon and Walmart have relatively unlimited resources,” Kestenbaum said. A merger, he said, “gives Albertsons and Kroger more scale and allows them to shave a penny or two off costs and push back against the competition.”
That penny matters because in the grocery business, profit margins generally hover between 2% and 6%. Albertsons’ profit margin last year was $1.2 billion, or about 1.5%, on sales of $79.2 billion. Kroger’s profit was about the same: $2.16 billion on $150 billion in sales, or about 1.4%.
This wasn’t Albertsons’ first attempt to grow by merger. In 2018, Albertsons was within a day of a deal to merge with Rite Aid, the pharmacy chain that eventually filed for bankruptcy protection. “Albertsons needs a dance partner,” Kestenbaum said, “because it’s smaller than Kroger. So it needs to combine with someone to have the scale required to succeed in the business.”
The FTC took a different view. Under laws first enacted during Ronald Reagan’s presidency, planned mergers that are above a certain size need to be reported to the FTC. The agency can sue to block the merger or require the companies to sell off assets to ensure the marketplace in which they operate remains competitive. It’s called the incipiency standard, and the FTC took almost two years to determine if the sell-offs and divestitures would maintain competition.
To keep their markets competitive, Kroger and Albertsons offered to sell 579 stores to grocery distributor C&S Wholesale Grocers, which owns the Winn-Dixie chain in the southeastern U.S., but has little experience running a massive regional chain — and that did not impress Judge Nelson.
“It got to the point where the government was persuaded that the divestiture package was not going to be sufficient,” said Andrew Gavil, a law professor at Howard University in Washington and a former director of the FTC’s office of policy planning. “Once they decide that, they’re basically sending the message, ‘We don’t want you to do this.’”
That the court upheld the FTC’s order, Gavil said, is a sign that new FTC rules, which rolled back some Obama-era easing of the Reagan-era guidelines, were accepted by the court as what’s called “persuasive authority.” That means it is likely to survive as a guiding precedent even when the FTC changes leadership when President-elect Donald Trump takes office next month.
The decision also shifted back to the companies the obligation to show their proposed remedy was sufficient, rather than forcing the government to “litigate the fix.” That, Gavil said, should make it easier for the government to ensure markets remain competitive and in the best interests of consumers.
Ultimately, that’s the question at stake here: If a few years down the road, Walmart and Amazon, and maybe even Costco, keep growing, what happens to Kroger and Albertsons? Both have lost some market share over the last few years, according to research firm Numerator. The court’s reasoning was that while Walmart, Amazon, or Costco could put both Kroger and Albertsons out of business down the road, the bigger issue is the near-term harm to consumers who would face higher prices if the two merged and there was no one left to compete in suburban malls and city centers, Gavil said.
Gavil noted that internal company documents showed Krogers and Albertsons saw each other as competition, not Walmart, because their real profits come from the kind of prepared foods that Walmart doesn’t offer, and Walmart and Amazon have different business models than the two grocers.
“You can’t really justify harm to one group of consumers because it will allow these companies in some way to compete better in essentially a different kind of business model,” Gavil said. “This happens in antitrust cases all the time these days where you have debates about how narrow a market should be and what the future of competition looks like.”
Kestenbaum disagrees. Grocery margins will become ever tighter as online shopping and apps make it easy to comparison shop. Legacy grocers like Kroger and Albertsons, he said, need scale to make those prices work. The rise of Amazon, Walmart, and others with vast scale and massive online presence is not happening in a separate universe from the brick-and-mortar grocers. “It does threaten the large fleet of legacy suburban grocery stores in the long run,” he said, adding: “I just don’t buy any of the FTC’s argument because it ignores Walmart, Amazon, and Costco.”