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We’ve written about the Kroger/Albertsons merger since it was first announced as “breaking news”. In May, we expressed our doubts about whether the merger could be effected.
This is to update and reiterate that view.
The recent announcement that Kroger (NYSE:KR) and Albertsons (NYSE:ACI) would collectively sell more than 400 of their stores to C & S Wholesalers have contributed to sanguine aspirations Federal Trade Commission Chair Lina Khan will ultimately approve the merger of the two grocery giants.
It shouldn’t.
First, Khan is already skeptical of such divestitures in pursuit of mergers and even wrote a law review article in the Harvard Law and Policy Review ( 11 HLPR 235 (2017)) of the Albertsons and Safeway merger of 2015 that could be somewhat analogous to the Kroger/Albertsons merger.
Writing about the merger in 2017, then- Professor Khan and her co-author wrote in the Harvard Law & Policy Review,
“To allay the FTC’s concerns, the merging entities sold 146 Albertsons stores in towns and cities in the Western United States, where they competed with a Safeway, to a small supermarket chain called Haggen. Following this acquisition, the number of Haggen stores increased from 18 to 164. Even a casual observer could have predicted that Haggen would have great difficulty expanding its storefronts nearly ten-fold in a very short period of time. The skeptics have been proven right. Haggen struggled to integrate the new stores and, despite its reorganization efforts in bankruptcy, may be forced to liquidate. Underscoring how the remedy backfired, Albertsons has reacquired a number of the stores it sold through the bankruptcy process.”
Chair Khan reiterated those reservations again, as SA News Editor Joshua Fineman reported just last week.
C&S Wholesale Grocers is not a listed entity, so its financial wherewithal is not readily determined. However, according to Grocery Dive, it has about 160 locations, doing business as independent franchisees and retail stores under the “Grand Union”, “Piggly Wiggly” and other brands.
Adding 413 retail grocery stores to such a small chain – with a requirement to purchase up to an additional 237 stores, according to Grocery Dive, should the FTC require it – should give the FTC pause, given the 2015 Haggen experience.
Second, and little remarked upon by analysts, is how the merger will likely create a monopsony, or single buyer, in the market for grocery workers in many markets. While the merger partners have repeatedly asserted that they’ll treat their employees, whom they call “associates” fairly, C&S Wholesale has a rather hostile view toward union workers and a limited union worker footprint. For example, its tuition assistance benefits are explicitly prohibited to union employees.
We already know Kroger workers who were surveyed last year are struggling to make ends meet. As we wrote in May,
A survey of 36,000 workers at Kroger brands in four states by The Economic Roundtable and Occidental College found 78% of the workers report they are food insecure. They run out of food before the end of the month, skip meals and are hungry sometimes. Forty-four percent reported they are re unable to pay for rent and 14% are homeless now or in the past year.”
Grocery workers are among the lowest paid workers in the country, earning, on average, well below the poverty line for a family of four. Monopsony can only have a further deleterious effect on grocery workers’ wages in small towns and so-called “food deserts” in urban areas that both have limited grocery shopping – and employment – options.
Finally, this all come in the context of the 2024 presidential and Congressional elections with an incumbent administration that has focused heavily on what it calls “equity” and that has heavily endorsed workers in labor unions. Moreover, the Secretaries of State of seven states, including the “swing state” of Arizona, have questioned the merger, as has Colorado, Maine, Minnesota, New Mexico, Rhode Island and Vermont. Attorneys general in California, Illinois, Maryland, and Nevada – all part of the Biden Administration electoral college base – have either commenced actions against the merger or are considering it.
Summary
It seems almost certain that offloading the 416 store locations — and even more — will not suffice to appease Chair Khan, and she has seemingly hinted so. Moreover, Chair Khan’s expressed concerns about “economic inequality”, as related twice in the first two sentences of the abstract of her HLPR article, likely indicates that the monopsony that would result in the merger will receive extraordinary scrutiny.
Kroger and Albertsons have said they will pursue the merger through the courts, but that would take several months and, perhaps, even years.
This merger is dead.
Instead of trying to “shoehorn” a challenging deal that is anathema to the current administration, I think it would be preferable for Kroger, Albertsons, as well as C&S Wholesalers, to collectively spin-off as many as 500 more (i.e., beyond the 600 that were to be spun-off in the original merger plan) of their stores and distribution facilities for shares of a new public company. In turn, these shares can be distributed to their own shareholders and member owners as a public company. The new entity, independent in all respects, but with strong commercial ties, could still enjoy many of the logistical advantages of the original merger with licensing and supply contracts, but still be a sufficiently independent enterprise that it will not draw hostile regulatory scrutiny.
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