The deal, an effort to bulk up against deep-pocketed rivals Walmart and Amazon, is likely to invite serious antitrust scrutiny from regulators.
Two of the country’s largest supermarket chains announced plans on Friday to merge in a deal that could alter the food retail landscape but will also face intense scrutiny by regulators.
Kroger said it would acquire Albertsons for $24.6 billion. The chains currently have total revenue of more than $209 billion and about 5,000 stores across the country under well-known chains like Ralphs, Safeway and Vons.
Executives at the two companies said the combination was needed to better fend off big-box retailers like Walmart, Amazon and Costco, which can use their size to sell yogurt, cereals and pastas at lower prices, and have increasingly taken a bigger share of consumers’ wallets. Moreover, they said, the companies would pass along to customers as much as $500 million in savings resulting from the merger.
But the deal quickly drew criticism from consumer advocates, independent grocery chains and politicians who said it would limit shoppers’ choices of where to buy groceries, especially in lower-income and rural areas, and could lead to higher prices for consumers and independent grocers.
“We don’t need another mega grocery store chain,” said Stacy Mitchell, co-executive director of the Institute for Local Self-Reliance, an advocacy group that challenges areas of concentrated corporate power, such as the grocery industry.
If the merger went through, she said, the combined Albertsons-Kroger and Walmart would control 70 percent or more of the market in 167 cities in the United States. In some, like Salina, Kan., or Durango, Colo., the share would exceed 90 percent.
The proposed deal places political pressure on the Biden administration and will face tough regulatory scrutiny at a time when high inflation has compounded a global food security crisis. Food prices in the United States rose more than 11 percent in September from a year earlier.
“Grocery chains like Kroger and Albertsons are price-gouging families with inflated food prices, and further corporate consolidation would result in higher prices, employee layoffs and weaker supply chains,” Senator Elizabeth Warren, Democrat of Massachusetts, said in an emailed statement. “The F.T.C. should oppose this deal.”
Nearly three decades of consolidation has resulted in far fewer grocery stores in the country. Since the mid-1990s, the number has declined nearly 30 percent, according to a report by Food and Water Watch, a consumer advocacy group. At the same time, the combined market share of the four largest grocery retailers tripled to 69 percent from 23 percent, the group said.
These days, the biggest grocery retailer is Walmart, which generated $218 billion last year from food sales, or 55 percent of its U.S. revenue. Amazon, which acquired Whole Foods in 2017 and sells groceries on its website, is a smaller presence but is pressuring rivals as it reaches further into the industry.
It’s an industry at a pivotal juncture, after revenues and profits soared early in the pandemic as consumers ate most of their meals at home. Now people are eating more meals away from home than they did two years ago, inflation is slicing into store profit margins and some shoppers are shifting to less-expensive stores like Walmart.
In June, Rodney McMullen, the chief executive of Cincinnati-based Kroger, told Wall Street analysts that the chain was seeing a significant shift in behavior among shoppers because of inflation. While some consumers continued to buy premium products, others were “aggressively” switching to store brands, he said.
Still, little of that seems to have harmed the company’s bottom line. In the most recent quarter, which ended Aug. 13, Kroger’s operating profits grew 13.7 percent from a year earlier, allowing it to boost its dividend to investors by 24 percent. It has also repurchased $975 million of its own shares this year.
As part of their pitch to regulators, Kroger and Albertsons are likely to argue that their combined scale is needed to compete against stores like Aldi and Lidl — two European chains that have been expanding quickly in the United States — as well as Walmart, Amazon and Costco.
The Federal Trade Commission has not always been convinced by that argument. In 2015, it successfully sued to block a merger between Office Depot and Staples, even after the retailers had positioned their merger as an effort to take on Amazon and lower prices.
In its review, the F.T.C. is likely to consult with consumer advocates, competitors, suppliers and others. Regulators will also look at whether Kroger promised that past acquisitions would lower prices, and whether those promises came to fruition. The review could take months, keeping the companies and their employees grappling with uncertainty.
Kroger and Albertsons, which is based in Boise, Idaho, said Friday that they expected to close the deal in early 2024, and that Kroger would pay Albertsons $600 million if the merger fell apart over antitrust concerns.
Hoping to stave off concerns about combined market share in various cities, which would be a key hurdle in a review by the F.T.C., the two grocery giants said they planned to sell stores to competitors, and would consider spinning off between 100 and 375 stores into a separate company.
Analysts have pointed to overlap between the two grocers, particularly on the West Coast in cities like Seattle, where they would have a combined 40 percent market share, as a likely source of divestitures.
Lina Khan, who leads the F.T.C., has expressed skepticism that these types of solutions are sufficient to create real competition against the newly formed entity. Peter Kaplan, a spokesman for the FTC, declined to comment.
In fact, some past efforts to form a new competitor haven’t worked. In 2014, the retailer Haggen in Bellingham, Wash., bought more than 100 stores that Albertsons had sold to win approval for its $9 billion merger with Safeway. A year later, Haggen filed for bankruptcy and blamed Albertsons for the breakdown of its business. Albertsons later bought back 33 of those stores from the bankrupt company.
“Part of the rationale for this deal is that ‘We need to be bigger,’” said Bill Baer, who led the Justice Department’s antitrust division during the Obama administration. “Well, if you’re bigger and more significant, what does that mean to the markets where you’re dumping stores for some smaller guy who will not have the purchasing power that you claim you’re going to get from this deal?”
He added, “Divestiture is always a bright idea for merging parties, and it’s not always a very good idea for consumers.”
Consumer advocates said the deal would be bad for consumers and independent grocery chains.
The biggest grocery retailers, like Walmart, use their size to negotiate better pricing from producers and suppliers. Kroger and Albertsons, which many analysts say are already big enough to negotiate good deals, hope to reap even more negotiating power.
But to make up those lost profits, suppliers often charge smaller and independent grocers more, said Chris Jones, counsel and a senior vice president of government relations for the National Grocers Association, which represents 1,700 family-owned grocery chains.
“If you squeeze a supplier on one side and you’re able to get product on preferential terms, the supplier has no choice but to increase prices or short product to buyers that have less leverage,” Mr. Jones said.
The independent chains then have to pass along the higher prices to their customers, who are often in the lower-income, urban and rural markets that the megastores bypass because they’re not profitable enough.
Rebecca Wolf, a food policy analyst at Food & Water Watch, concluded that this proposed merger offered consumers little benefit.
“A lot of advocates and consumer advocates who have been following this kind of work for a long time really know and understand that this type of merger will entrench the power of the grocery industry,” she said.
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