Under Fire By Lawmakers, Kroger & Albertsons CEOs Vow To Keep Stores Open, Avoid Layoffs After Merge
Supermarket Giants Testify Deal Would Allow Them To Compete Against Growing Crop of Rivals
By: Linda Moss
The CEOs of Kroger and Albertsons Cos. on Tuesday testified at a hearing in Washington that their proposed merger won't result in higher prices. (Bloomberg via Getty Images)
Senators spent more than two hours on Tuesday grilling the CEOs of the nation's two biggest grocery chains, Kroger and Albertsons Cos., over their proposed $24.6 billion merger, with lawmakers raising concerns about whether food prices would increase and store closings and layoffs would ensue as a result of the deal.
Rodney McMullen, Kroger's chairman and CEO, and Vivek Sankaran, Albertsons' chairman and CEO, defended their pending transaction at a hearing before the Senate Subcommittee on Competition Policy, Antitrust and Consumer Rights, in Washington. They insisted Kroger's acquisition of Albertsons, announced in October, is necessary for their companies to succeed in a brutally competitive and changed landscape for grocers.
Under questioning by several of the subcommittee's members, McMullen also said the deal would not result in any closing of stores, warehouses or manufacturing facilities or lead to layoffs of "front-line" workers. He also testified that the merged company is committed to lowering prices "on Day One" and is unionized, unlike its giant rivals Amazon and Walmart.
“Today the industry is larger, more complex and more competitive, with near endless opportunities and options of where and how to shop," McMullen said. "At Kroger, when we discuss competition, we look at where customers are actually shopping for food and eating today and in the future. Customers purchase food everywhere, from Walmart and Trader Joe’s, to Costco and Aldi, to Dollar General, 7-Eleven, Walgreen’s and restaurants, for example ... We operate on razor-thin margins. This merger will give us the flexibility, national footprint, and digital capabilities to compete more effectively.”
Critics Worry About Market Power
As soon as the merger was announced it sparked opposition from elected officials, some consumers groups and independent grocery chains about its impact in terms of potential store shutterings, job cuts and the possibility that food prices, already soaring because of inflation, would rise further because of the lack of competition. Kroger-Albertsons would gain huge leverage with vendors, to the detriment of smaller players, Michael Needler Jr., CEO of the Midwest grocery chain Fresh Encounter, testified.
In a number of markets, Kroger and Albertsons' stores compete directly against each other, and that would end with the acquisition, which could spur price hikes for consumers, Sen. Mike Lee, R-Utah, said during the hearing.
Members of the subcommittee expressed skepticism and raised anti-trust concerns about Kroger's and Albertsons' plans, which are under review by the Federal Trade Commission.
Kroger, based in Cincinnati, and Albertsons, headquartered in Boise, Idaho, would have an enormous combined real estate portfolio that includes 4,996 stores, 3,972 pharmacies, 2,015 fuel centers, 66 distribution centers and 52 manufacturing plants.
When they announced their merger Kroger and Albertsons said that in order to obtain regulatory clearance for their transaction they would divest stores. The plan is for Albertsons to spin off a company to its stockholders immediately prior to the merger’s closing, which would operate as a standalone public company.
“Kroger and Albertsons Cos. have agreed to work together to determine which stores would comprise SpinCo, as well as the pro forma capitalization of SpinCo,” the grocers said in their joint statement in October. “The establishment of SpinCo, which is estimated to comprise between 100 and 375 stores, would create a new, agile competitor with quality stores, experienced management, operational flexibility, a strong balance sheet, and focused allocation of capital and resources.”
At the hearing, Sankaran said, "The intent is not to close stores. The intent is to divest stores."
Memories of the Safeway Acquisition
But Sen. Amy Klobuchar, D-Minnesota, chairman of the subcommittee, said she feared a repeat of what happened in 2015, when federal regulators approved Albertsons' $9.2 billion acquisition of Safeway. As a condition of the approval, Albertsons had to sell 168 stores to prevent unfair competition in a number of markets. But in less than a year, the buyer of those stores filed for bankruptcy protection, and over 100 of the divested locations were closed, with more than 8,000 workers let go, according to Klobuchar. Albertsons was allowed to buy back 29 of the stores at a discount, she said.
"I have talked to the CEOs [of Kroger and Albertsons] about this," Klobuchar said. "I understand they have a different plan for divestment that they have already presented for hundreds of stores, but I think this weighs heavily on the minds of a lot of people who have concerns about this agreement just looking at the immediate past and what happened." The grocery industry has already seen an enormous amount of consolidation, she said, with the top four chains representing two-thirds of sales.
McMullen testified that Kroger and Albertsons are working with the FTC to determine the exact number and locations for store divestitures. Lee questioned how the proposed spin-off, as a smaller player in what Kroger an Albertsons characterize as a highly competitive industry, would survive.
Sen. Alex Padilla, D-California, said he was "acutely concerned about this merger." There are over 900 Kroger and Albertson's stores in the Golden State, according to Padilla. In Rancho Cucamonga, nine of its 11 supermarkets are owned by of Kroger or Albertsons, for example, he said.
"With less competition, prices go up," Padilla said.
Consumer Reports Expert Opposes Acquisition
The other witnesses at the hearing included not only Needler, the independent grocer, but Sumit Sharma, a senior researcher at Consumer Reports. Sharma testified that he didn't seen any redeeming features for consumers in terms of the proposed merger, and added that he expected it would result in grocery prices increasing.
Both McMullen and Sankaran refuted those concerns. Kroger now ranks fourth in revenue behind Walmart, Amazon and Costco, and would continue to be No. 4 even after the merger, according to McMullen.
Kroger's business model is to lower prices to attract more customers rather than making a higher margin on fewer customers, he said. Since 2003, the company has invested more than $5 billion to reduce prices annually and is committed to invest another $500 million post-closing to cut prices once its acquisition of Albertsons closes, according to McMullen. Several subcommittee members questioned how Kroger would be bound to follow through on that promise.
Subcommittee members also were critical of Albertsons' plan to make a $4 billion dividend payment to shareholders, an action that a number of state attorney generals across the country are opposing and trying to block.