Hearings on the proposed merger between Kroger and Albertsons ended on Tuesday in Portland. The grocery chains argue that the merger is necessary for them to compete with non-traditional grocers like Costco, Amazon and even Dollar General. But the Federal Trade Commission sued to block the deal in federal court in Oregon on the grounds that it would harm workers and consumers. Lawsuits against the merger are also slated to begin soon in Washington and Colorado. In the meantime, U.S. District Court Judge Adrienne Nelson’s ruling on the Oregon case is expected to have significant implications for the deal.
Elizabeth Hayes has been following the proceedings as a reporter for the Portland Business Journal. She joins us with more details on what she heard over the past few weeks.
This transcript was created by a computer and edited by a volunteer.
Dave Miller: This is Think Out Loud on OPB. I’m Dave Miller. Closing arguments in the federal case over the proposed merger of Albertsons and Kroger were held in downtown Portland yesterday. The grocery chains say the merger would make them more competitive with mega retailers like Costco and Amazon. But the Federal Trade Commission which brought the suit says the deal could harm customers and workers.
Elizabeth Hayes has been covering the case for the Portland Business Journal and she joins us now. It’s good to have you back on the show.
Elizabeth Hayes: Thanks, Dave.
Miller: We’ve talked a bit about this merger on the show over the last few months. But can you just remind us one more time about the scale of this?
Hayes: Sure. So we’re talking about the number one, Kroger, and number two, Albertsons, traditional grocery chains in the United States. Combined they have more than 5,000 stores in 48 states, 700,000 unionized workers. So these are really just huge, huge companies, and this affects many, many people, not to mention the millions of shoppers as well.
Miller: Why did the Federal Trade Commission bring this suit? What is it asking Federal Judge Adrienne Nelson to do?
Hayes: The FDC brought the suit in February of this year. The two had announced their merger in late 2022. The lawsuit is asking Judge Nelson to issue a preliminary injunction which would basically, according to the FTC, pause the deal so that it can finish its administrative hearing. Whether it’s a pause or it kills the deal remains to be seen, and it remains to be seen how Judge Nelson rules, obviously. But a lot of folks, including Kroger, see this as pretty final whatever happens here. If she rules in favor of the FTC and against the company, it’s pretty much game over.
Miller: One of the questions at the heart of this case has been the current relationship between Kroger and Albertsons, and the extent to which they see each other as competitors. Why is this a key issue?
Hayes: This is a key issue because, as the FDC has laid out its case, it sees the two as fierce competitors, that the two keep each other in check, on price, and even on non-price items: quality, selection, promotions, services, etc., they go head-to-head. How you define the competitive market is really key to the FTC’s case.
Miller: What did Kroger and Albertsons executives say about the relationship between these two currently separate companies?
Hayes: They acknowledge that of course they compete in markets where they overlap. But really, they say the market is so much broader, and Walmart is the one that is really the market leader on prices and setting prices low. That’s really their big competition, Walmart. But also Costco, Amazon, which owns Whole Foods and has Amazon Fresh, and you can order groceries online. And then there’s Dollar General, which is rolling out more fresh produce. And you’ve got Trader Joe’s and Sprouts and all sorts of more specialty, organic, natural markets. So many competitors, so much choice for consumers already, that it really goes beyond this “traditional” supermarket.
Miller: How much testimony was there specifically about prices for consumers, and how they might change, might go up, if this merger were to go through?
Hayes: Well, nobody knows exactly. But that is a big part of the FTC’s case. Albertsons is 10%-12% higher than Kroger now, Kroger is higher than Walmart. Without Albertsons, what would keep Kroger from raising its prices? On the other hand, Kroger has vowed to cut prices at those Albertson stores by a billion dollars. It says that actually this deal will benefit shoppers, that they’ll see prices come down, or at least not go up as much as they would have without the merger.
Miller: A big part of the proposed merger is that the companies combined would sell 579 stores in overlapping markets, places where you can imagine now, say, there is Safeway right across the street from a Fred Meyer. And they would be selling them, largely, to the grocery wholesaler called C&S. This is called the divestiture. What’s the idea behind it?
Hayes: So as you said, this is a divestiture. And this is kind of their way of allaying some anti-competitive, antitrust concerns right out of the gate. So they agreed pretty early on to spin off up to 650 stores. It ended up being a package of 579, 62 of them in Oregon, like 124 or something like that in Washington. And the buyer they chose is this wholesale grocer which was not exactly a household name, C&S Wholesale, a privately-owned company based in New Hampshire.
Miller: How did they choose this company, which as you noted is not a traditional retailer, it’s a wholesaler?
Hayes: Well, they went through a whole process in which they narrowed down an interest list that had nearly 100 companies at the start. They say that they believe because of its vast scale on the wholesale side, it really knows this industry, it could be very successful. They’re selling these stores for nearly $2 billion. And the owner of C&S, Rick Cohen, it’s been in his family for several generations. He’s putting in $500 million of equity alone. A bank is putting in $400 million. They feel like C&S is very committed to making this work.
Miller: What did the FTC say or argue about C&S’s ability to operate these offloaded stores?
Hayes: They raised a lot of questions about C&S’s ability to do so. They made the argument that C&S has very limited retail experience. It only has about 23 stores right now, half of them are losing money. It made an earlier foray into retail back in the 2000s and ended up selling off those stores because they were not performing well, and then just got back into retail after it lost one of its largest wholesale customers in 2019. They say that it really lacks the experience to pull this off, that it’s being given this hodgepodge of stores that don’t make any sense. It’s not going to have the scale to compete with a combined Kroger/Albertsons. And it’s not getting a lot of the other resources that those stores have in terms of e-commerce, the private label brands, those sort of things that lure shoppers. And not to mention the fact that it’s not getting all the banners, basically brand names of the stores. It’s going to have to re-banner quite a few stores.
Miller: And this isn’t an academic point, can you just tell us what happened when there was a big chunk of divested stores when Albertsons took over Safeway? So what happened there?
Hayes: So they sold 146 stores, I believe, to Haggen, based up in Bellingham. And that didn’t go well, they ended up selling off a bunch and declaring bankruptcy. And Albersons bought back quite a few of those stores, like 30 stores or something. And in fact, some of those stores would be part of the current divestiture if this happens.
Miller: The companies are presenting a united front at this point, but it actually sounded like Albertsons current COO might not have been on board with this merger when it was first announced. Can you tell us more about what came out in the course of the trial?
Hayes: Sure. She said in an email to employees that she was saddened by this news. They asked her about that in court, she said you never want to be bought. It was traditionally Albertsons that was buying other companies, and now things were going the other way.
But then she said when she met with Mr. Cohen of C&S, she felt much better about this, that they have the commitment to succeed, to make a go of it, that they’re not just gonna turn around and offload the stores for the real estate or whatever.
Miller: I was really struck by the final sentence in one of your recent articles about this executive who had initially had misgivings, saying she was sad and mad about it, now saying she’s on board. You wrote that she confirmed during cross examination that she could receive $50 million in cash if this deal goes through. Are other executives in line to get similar payouts if this does happen?
Hayes: They are, the top 10 executives are in line to get about $150 million in golden parachutes because of the change in ownership, again, if this happens. The CEO of Albertsons, they asked him when he was on the witness stand to confirm that he’s getting $43 million. And by the way, the COO who was initially sad and mad about the merger, she would become the CEO of the C&S retail stores.
Miller: In the midst of this, Fred Meyer workers went on strike in Portland. Did that have any impact on the proceedings?
Hayes: Not really. It was definitely in the background, and it just coincidentally happened the day that the local union president Dan Clay took the stand in the trial – he was a witness for the FTC. That union opposes the merger. They did not for many months, but they changed their mind during the negotiations when things kind of broke down.
Miller: What other litigation is pending against this proposed merger?
Hayes: Well, right now as we speak, a lot of these same attorneys are up in Washington State in Seattle doing battle there. The Attorney General of Washington, Bob Ferguson, also brought a lawsuit, and it’s very similar. So that hearing is taking place right now in a Seattle courtroom, and likely before it finishes, on September 30th, a similar hearing is going to begin in Denver, Colorado. The Attorney General of Colorado also filed a similar lawsuit.
Miller: Given these other suits, how important is this federal case in Oregon?
Hayes: Well, that’s a great question. There’s so many competing proceedings here. Maybe a lot comes down to timing, as to when Judge Nelson renders her ruling. If it’s sooner rather than later before these other trials finish, you would think that would have a big impact. But pretty much everyone feels like this one in Portland is the key. If Kroger doesn’t win here, then likely that this whole deal is off.
Miller: Elizabeth Hayes, thanks very much.
Hayes: Thank you.
Miller: Elizabeth Hayes covers healthcare, law and the arts for the Portland Business Journal. She’s been covering the federal case over the proposed Kroger/Albertsons merger.
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