Senators grill Kroger and Albertsons CEOs over grocery mega-merger

The top Democrat and Republican on the Senate’s antitrust committee led a grilling of the CEOs of Kroger and Albertsons on Tuesday over their planned grocery mega-merger, which comes after months of rising inflation that has hit consumers hard.

“The companies assure us that this is the merger that will make everything better,” said Sen. Mike Lee (R-Utah), ranking member of the Senate Subcommittee on Competition Policy, Antitrust, and Consumer Rights.

“They have announced commitments to spend $500 million to lower prices. $1.3 billion to update their stores, and a billion dollars to increase employee wages. Of course, they haven’t explained how we can be sure that these commitments will actually be fulfilled,” he added. 

Locally, Albertsons is the parent company of the United, Market Street, and Amigos brand of stores.

Unions and progressive advocacy groups have also raised concerns that the merger would raise prices, cut jobs and exacerbate inequality in food access through the closing of more locations. Those groups have urged the Biden administration to block the deal. 

Kroger CEO Rodney McMullen told the committee that these investments into lowering grocery prices and increasing wages for employees would be spread out in a four-year time frame. 

“By merging with Albertsons as an example,” McMullen said. “We’ll be able to have that positive impact and really further grow on what both of our companies have done individually.”

Vivek Sankaran, Albertsons CEO, pointed to the way in which the “completely transformed” marketplace for groceries has increased consumer competition. 

“The best way to compete with mega stores like Walmart and highly capitalized online companies like Amazon, will be through a merger with Kroger,” Sankaran said.

Lee also pointed to Albertsons’ $9.2 billion purchase of Safeway in 2015, in which one of the conditions was them having to divest over 100 of their stores. However, the company who bought those divested locations soon went bankrupt, leading to Albertsons soon buying the companies back at a discounted price. 

“Hollywood couldn’t write a more cynical plot, not if it tried,” Lee said. “Yet the companies assure us that this is the merger that will make everything better.”

Sen. Amy Klobuchar (D-Minn.), the subcommittee chair, said the merger is an example of the need for more funding for antitrust enforcement agencies. 

“To make sure they can do their job, we need to make sure they have the funding they need,” she said, also raising concerns about how Kroger’s promises would be enforced. 

Sens. Tom Cotton (R-Ark.) and Josh Hawley (R-Mo.) pressed McMullen over a religious discrimination case between the grocery giant and two former employees who were eventually fired for refusing to wear a uniform with a logo that they thought violated their religious beliefs. 

“I personally am not aware of this,” McCullen said, to which Hawley responded, “How is that possible? You’re being sued by the federal government. You have settled on a suit, and you don’t know about it?”

Kroger snapped up Albertsons in a $25 billion deal, hoping to create a U.S. grocery behemoth to better compete with leader Walmart on prices while bracing for potential antitrust roadblocks. 

The mega merger between the No. 1 and 2 standalone grocers in the United States would bring under one roof nearly 5,000 stores that include banners such as Albertsons' Safeway and Kroger-owned Ralphs and Fred Meyer.

The U.S. Federal Trade Commission could challenge the deal between the two major grocers as antitrust scrutiny intensifies under the Biden administration and decades-high inflation squeezes households, according to three antitrust experts.

"There is a significant risk of a challenge," said Andre Barlow of law firm Doyle Barlow and Mazard PLLC. "This is the type of deal that the FTC wants to discourage."

To help ease those concerns, the companies said they plan to divest some stores and that Albertsons is ready to spin off a standalone unit to its shareholders immediately before the deal's close, expected in early 2024. The new public company is estimated to comprise as many as 375 stores.

"We have a clear path to achieve regulatory approval with divestitures," company executives reassured investors on a conference call, adding that it was still too early to narrow down which markets the restructuring would occur in.

Barlow said the U.S. FTC would still have questions about who would run the stores, and whether they would have enough in the way of assets and purchasing power to compete effectively.

Still, some analysts were optimistic that the plan to divest stores would be enough.

Neil Saunders, managing director of GlobalData Retail, said "these (concerns) are mostly local issues where a merger produces a very high market share in certain areas. From a broader national perspective, a combined Kroger and Albertsons does not pose any major threat to the competitive dynamics of the market."

"Scale is necessary to deliver the prices and investments that consumers demand."

With a customer base of 85 million households and 66 distribution centers, Kroger and Albertsons would together have an edge over negotiations on product prices with suppliers, including consumer goods companies, at a time when prices of groceries and essentials are soaring in the country.

Kroger said it expects to reinvest about half a billion dollars of cost savings from deal synergies to reduce prices for customers. An incremental $1.3 billion will also be invested into Albertsons.

Market leader Walmart has been doubling down on its own grocery business and has traditionally used its scale to demand the lowest possible prices from food and beverage suppliers, leaving rivals at a disadvantage in price negotiations.

"The merger will accelerate our position as a more compelling alternative to larger and non-union competitors," McMullen said.

Kroger will pay $34.10 for each Albertsons share, representing a premium of about 33% to the stock's closing price on Wednesday, a day before media reports emerged of a deal between the two. read more

McMullen, who will serve as the head of the combined firm, said in an interview with Reuters that they had approached Albertsons after the smaller rival began a strategic review process earlier this year.

"One of the things that will be incredibly important to us is making sure that the (spun out) stores, when we sell them, is making it into a viable, strong business from a competitive standpoint."

Goldman Sachs and Credit Suisse were the financial advisors to Albertsons, while Citigroup and Wells Fargo advised Kroger. Citi and Wells also jointly arranged $17.4 billion of debt financing to support the deal.

Kroger will have to pay Albertsons $600 million if the deal is terminated.

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