Attorneys for The Kroger Co., Albertsons Cos. and the Federal Trade Commission packed a courtroom Monday for the start of a pivotal hearing in the grocer's proposed $24.6 billion merger.
If the opening statements were any indication, the fate of the deal could hinge on how the stores' competitive market is defined.
The hearing is taking place before U.S. District Judge Adrienne Nelson in Portland, where the FTC sued to block the merger over antitrust concerns. The agency is asking Nelson to issue a preliminary injunction so it can complete an administrative proceeding into whether the transaction would harm consumers and workers in violation of U.S. antitrust law.
The FTC is joined as plaintiffs by attorneys general in eight states, including Oregon, while two other states have filed separate lawsuits.
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Kroger and Albertsons argue their combination is their only hope of achieving the scale necessary to compete on price with Walmart and Amazon.
Together, the two chains employ about 700,000 workers. Cincinnati-based Kroger has 2,722 stores in 35 states, while Boise, Idaho-based Albertsons has 2,269 stores in 34 states. The two agreed to in markets where there is the most overlap. In Oregon, Kroger owns Fred Meyer and Albertsons owns Safeway.
The deal rides on Nelson’s decision on the preliminary injunction, said Matt Wolf, Kroger's lead attorney, with the Washington, D.C., law firm Arnold & Porter Kaye Scholer LLP.
Our full Kroger-Albertsons coverage is here
“This proceeding will decide the fate of the merger, let there be no mistake,” he said. “There is never a merger if it has to go through the (FTC’s) serpentine, labyrinthine process.”
What did the FTC's attorney say?
If it does go through, the combined entity will control $220 billion annually of commerce, said FTC attorney Susan Musser. But to get a clearer picture of the impact, you have to zoom in to specific markets where the two grocers overlap, she said.
“Grocery competition is local,” Musser said.
Nearly 5,000 Oregonians wrote to the agency to express their concerns, she said. Kroger would control 60% of the grocery market in Corvallis.
“This harm isn’t about Corvallis or Oregon; this dynamic plays out in community after community across the country,” Musser said. “The merger would increase market concentration in thousands of markets across the country.”
The two chains compete both on price, placing downward pressure on each other and offering promotions to lure the other’s customers, and they compete on the quality of their products and services, including pickup and delivery options, Musser said.
“Shoppers benefit from competition today at both stores,” Musser said. “If it goes through, they will no longer have an incentive to compete and lower their (price) ceiling.”
What did Kroger's attorney say?
Kroger has vowed to reduce prices by $1 billion at Albertsons stores and not to close locations or lay off workers. Attorneys for Kroger and Albertsons told Judge Nelson that they need to join forces to compete with behemoths such as Walmart, Amazon and Costco, not to mention new entrants to the market like Dollar General, which is expanding its offerings to include fresh produce.
“These folks are taking an enormous share of the grocery market at prices that are much less than the incumbents,” Wolf said.
Kroger and Albertsons, he said, complement one another, while not going head-to-head in large swaths of the country.
“Put together, they have a footprint that can compete with Walmart and Amazon and Costco,” he said.
The FTC has excluded “real-world competitors” in defining the market, Wolf said. Consumers are willing to drive out of their way if it means saving money at Costco or the other large-format stores, he said.
“Amazon and Walmart put pricing pressure at larger distances,” he said.
The FTC’s Musser said that just because consumers shop at different stores doesn’t mean that they’re interchangeable. Kroger and Albertsons are “one-stop shops,” unlike many other outlets where people may buy food. Premium organic markets don’t have as wide a selection of goods and club stores and are also “fundamentally different” from grocery stores, she said.
“You can’t get a single avocado” at Costco, she said. “Supermarkets differ from other store formats.”
What did Albertsons' attorney say?
Enu Mainigi, an attorney for Albertsons with the D.C. firm of Williams & Connolly, said “prices will go down at Albertsons stores around the country on day 1."
Albertsons explored other alternatives before deciding the Kroger offer was the “best opportunity for long-term competitiveness,” Mainigi said. “Albertsons’ backup plan, if the merger is enjoined, is worse for employees, consumers and for competition.”
Albertsons will need to change its “cost structure,” which could mean layoffs and store closures, she said.
“We hope we don’t have to get there,” she said, adding that it would likely become a candidate for sale to someone else.
“The status quo is not an option for Albertsons,” Mainigi said.
Who is C&S Wholesale Grocers?
Also at issue is the ability of a lesser-known wholesale grocery distributor to absorb the stores Kroger and Albertsons agreed to divest. The two plan to sell 579 locations to Keene, N.H.-based C&S Wholesale Grocers in markets where their operations most overlap. FTC Attorney Laura Hall said C&S had a “poor track record of operating markets” and has closed many underperforming stores it acquired.
C&S supplies 100,000 products to 7,500 retailers across the U.S., as well as owning 160 grocery stores, including Piggly Wiggly. It would become the eighth-largest U.S. grocer by revenue if it acquires the divested stores, Wolf said.
“They have the experience, infrastructure, motivation and commitment," Wolf said. "Everything a supermarket does, they do today."
