Top 4 USA News - Supermarket Giants Kroger and Albertsons Announce Plan to Merge in $25 Billion Deal
Top 4 USA News -
Supermarket Giants Kroger and Albertsons Announce Plan to Merge in $25 Billion Deal
By Lauren Hirsch and Julie Creswell
Oct. 14, 2022Updated 12:25 p.m. ET
The grocery giant Kroger announced plans on Friday
to acquire Albertsons in a deal that could reshape the supermarket landscape in
the United States, uniting the country’s largest supermarket chains at a time
when rising costs and competition from Walmart and Amazon squeeze the industry.
But the deal, which values Albertsons at about $24.6
billion including debt, is likely to invite intense scrutiny from regulators
who are focused on the potential for large companies to affect prices, and have
a history of blocking deals that may directly impact consumers. Even before the
deal was announced Friday, consumer advocates had raised objections to its
possibility.
The deal would bring together chains including
Ralphs, Safeway and Vons, among a handful of others.
Kroger and Albertsons operate nearly 5,000 stores
across the country, as well as pharmacies and gas stations. But their combined
annual revenue of $209 billion last year falls short of Walmart’s annual
grocery sales, of about $218 billion. Though Amazon is a smaller presence in
the grocery business, it is also pressuring rivals as it reaches further into
every corner of the retail market with its delivery services.
Both grocers are coming off pandemic highs. Their
sales soared as homebound customers stocked up on food, but inflation is now
cutting into their profit margins, and customers have returned to dining out
and spending less on groceries. At the same time, Amazon and Walmart have
invested in the digital and delivery parts of their businesses and used their
scale to keep prices lower.
The deal will certainly face significant political
and regulatory scrutiny, heightened by a global food security crisis that is
compounded by significant inflation in food prices. Food prices in the United
States rose more than 11 percent in September from a year earlier, as the cost
of everything from fruits and vegetables to cereals and flour continued to
rise.
Lina Khan, who heads the Federal Trade Commission,
which is expected to review the deal, has expressed deep concern about the
impact of corporate consolidation.
Kroger and Albertsons said they planned to sell
stores to competitors, and would consider spinning off between 100 and 375
stores into a separate, stand-alone company. Analysts have pointed to a overlap
between the two grocers, particularly on the West Coast, as a likely source of
divestitures. For the Democrat-led agency to approved the deal, Kroger and
Albertsons will need to convince its members that they create a viable
competitor in parts of the country in which there is significant overlap.
But past efforts to carve out stores 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. 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?”
said Bill Baer, who led the Justice Department’s antitrust division during the
Obama administration.
“Divestiture is always a bright idea for merging
parties, and it’s not always a very good idea for consumers.,” he added.
Albertsons shares fell on Friday, a sign that
investors are skeptical that the deal will get past regulators. By late
morning, the stock was trading below $27 a share, more than 21 percent below
Kroger’s $34.10 a share offer price.
In announcing the deal, Kroger also sought to ease
concerns about the impact on consumers by saying that it expects to save about
$500 million in costs, which it plans to use to “reduce prices for customers.”
Whether it follows through with those plans will likely be a key focus for
regulators.
Though cost savings in acquisitions often come from
layoffs, the grocers may also point to fact that their workforces are unionized
as part of their discussions with regulators. The Biden administration has been
a significant proponent of unions. Neither Walmart nor Amazon are unionized on
a large scale.
Consumer protection groups raised concerns about the
deal following reports of a possible merger on Thursday. The American Economic Liberties
Project, a nonprofit that promotes antitrust legislation, criticized it as a
“bad deal for consumers, workers and communities.”
“There is no reason to allow two of the biggest
supermarket chains in the country to merge — especially with food prices
already soaring,” Sarah Miller, the group’s executive, said in a statement on
Thursday.
As part of their pitch to regulators, Kroger and
Albertsons will likely try to convince them that their scale is needed to
compete against big box stores like Aldi, Lidl — two European chains that have
been expanding quickly in the United States — and Costco, as well as Amazon.
The agency, though, has not always allowed retailers
to use Amazon as a boogeyman to help clear their deals. In 2015, the F.T.C.
successfully sued to block a merger between the retailers Office Depot and
Staples, even after they had positioned the deal as an effort to take on Amazon
and lower prices.
A review process would likely include the F.T.C.
talking with consumer advocates, competitors, suppliers and others. Regulators
will also look to whether Kroger has promised that past acquisitions would
lower prices, and whether those promises came to fruition. A review may also
include formal requests for information about the companies’ plans or testimony
from executives. That could take months, and the process can drag on companies
and their employees as they grapple with uncertainty.
Kroger, based in Cincinnati and founded in 1883,
operates 2,750 grocery stores across the United States under banners that
include Ralphs, Dillons and Harris Teeter and has a market capitalization of
about $32 billion. Albertsons, based in Boise, Idaho, and founded in 1939, runs
2,200 supermarkets under names like Albertsons, Safeway and Vons and has a
market capitalization of roughly $15 billion.
Kroger’s chairman and chief executive, Rodney
McMullen, will remain in that role at the combined company, as will Kroger’s
chief financial officer, Gary Millerchip.
Lauren Hirsch joined the New York Times from CNBC in
2020, covering business, policy and mergers and acquisitions. Ms. Hirsch studied comparative literature at
Cornell University and has an M.B.A. from the Tuck School of Business at
Dartmouth. @laurenshirsch
Julie Creswell is a New York-based reporter. She has covered banks, private equity, retail and health care. She previously worked for Fortune Magazine and also wrote about debt, monetary policy and mutual funds at Dow Jones. @julie_creswell
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