The Journal. - Why the FTC is Challenging a $25 Billion Supermarket Merger

Starting point is 00:00:00 There are lots of supermarket chains around the country. There's Shaw's and Fred Meyer, Food for Less and Ralph's. But many of these chains are owned by just two companies, Albertsons and Kroger. I think most people know what a Kroger is. Albertsons, maybe a little bit less so, but most people know what these are, but I don't think they grasp how many different brands they have. That's our colleague Patrick Thomas. He covers the food supply chain, from agriculture to grocery stores.

Starting point is 00:00:44 He covers the food supply chain, from agriculture to grocery stores. For example, my parents shop at a grocery store in Omaha, Nebraska called Baker's. Who owns Baker's, you ask? Well, Kroger's owned them for over 20 years. And I can use their phone number for the loyalty program at the Mariano's here in Chicago. Both are Kroger stores. We go on vacation to Arizona. There's a Fry's, and they once again use the same phone number. Chicago, both are Kroger stores. We go on vacation to Arizona. There's a Fry's, and they once again use the same phone number. It's still a Kroger.

Starting point is 00:01:09 So there's all these different brands, and they're, you know, the more name brand stuff. They're pretty much just two companies. But Albertsons and Kroger are trying to merge their companies to become a supermarket empire. their companies to become a supermarket empire. In October of 2022, they announced a $25 billion deal that would combine their over 5,000 stores around the country. The company said this move would allow them to slash prices for consumers. But on Monday, the Federal Trade Commission filed a lawsuit to block the deal, arguing that the merger would be bad for competition, lower wages, and drive up the cost of food. It's going to be a major fight. It sets up another big battle between U.S. antitrust enforcers and some of the largest companies in the U.S. This is going to have big implications on how and where consumers buy their food. Welcome to The Journal, our show about money, business, and power.

Starting point is 00:02:14 I'm Kate Leinbaugh. It's Thursday, February 29th. Coming up on the show, why the government is trying to block a $25 billion supermarket deal. Introducing TD Insurance for Business, with customized coverage options for your business. Because at TD Insurance, we understand that your business is unique, so your business insurance should be too. Contact a licensed TD Insurance advisor to learn more. Albertsons and Kroger may be the nation's supermarket giants, but they face stiff competition. Over the years, more and more Americans have done their grocery shopping not in traditional supermarkets, but at Walmart. Walmart is kind of at the heart of this in a lot of ways.

Starting point is 00:03:19 How so? So Walmart has about 30% of grocery food market share in the United States. So most groceries are bought in this country at a Walmart, not one of the big supermarkets. They're retailers that happen to sell food. So they're selling groceries, but they're not a supermarket. So what is a supermarket? It's early in the morning before this large supermarket opens for customers. The idea of supermarkets goes back decades,

Starting point is 00:04:00 and it's central to the way Americans buy groceries. Before supermarkets, shoppers had to go to the butcher for meat, the baker for bread, and get milk from their milkman. The advent of supermarkets changed everything. A supermarket is like many little markets or departments all brought together into one big building. Each department sells a different kind of food. The supermarkets allow customers to purchase most or all their food or grocery shopping needs under one roof in a single trip.

Starting point is 00:04:36 The idea is you don't have to divvy up, you know, going to different stores to try and get different products or things you need. Everything from fresh, you know, meat, produce, your rice, pasta, whatever. Whatever you can imagine is all under one roof. And that's the primary goal. Now, Johnny, how would you like to open the market? Just push this buzzer. The doors are open.

Starting point is 00:05:01 Here come the customers. When did shoppers start moving away from, like, traditional supermarkets? You know, it began in the late 20th century, really coinciding with Walmart's rise. But even 20 years ago, 10 of the top 15 U.S. grocers by market share were supermarket grocers, your Kroger and Albertsons. Today, their market share has gone dramatically to the Walmart, Costco, Target, Amazon, Dollar General, all of these stores. And for the most part, there's only like Kroger and Albertsons

Starting point is 00:05:41 are like the last two big supermarkets hanging on. How are Albertsons and Kroger doing? How's their business going? Profit margins are pretty tight in grocery. And their profit margins have really come down significantly in the last couple of years compared to what it was 20 years ago, mostly because of this increased competition. And long term, the companies say that they're facing an existential crisis

Starting point is 00:06:08 with all of these different competitors, and from Walmart to Target and all of these stores, that's going to be a big problem for them. What had their strategy been to compete with these giants? So the strategy for supermarkets has been that they kind of want to redefine what a supermarket is by selling more products and having pharmacies and being able to do pretty much everything.

Starting point is 00:06:36 And to do that, these two big supermarkets think we need to put our brains together in order to sell you everything in the same way that Walmart does. You know, they want to have the same level of scale and gravitas that a Walmart can. At the heart of Albertson's and Kroger's deal is that they say they need scale so they can compete with Walmart. They say that given Walmart's size, it has more leverage with suppliers,

Starting point is 00:07:05 so it can offer lower prices. Their whole rationale is, we want to get bigger. We want to have the power that Walmart has with its suppliers to buy things at a better price, and we can offer it at a cheaper price, like the discounters, to consumers. That is why that their rationale is, hey, this is good for the consumer. This is why we think we need to do it. And this is why we think it'll pay off for people. And this will help them in their pricing power. And when Albertsons and Kroger announced their merger back in 2022, how was that received? Well, it was met largely with some criticism by various different groups. We saw lawmakers express a lot of skepticism from, you know, kind of some of the usual suspects.

Starting point is 00:07:55 You have people like Elizabeth Warren. We're not happy about that. Some farm groups, the Farmers Union, came out against it, too, because there's a fear that it would limit their ability to sell crops and livestock. And at that time, what did antitrust regulators say? So the FTC said they were going to review this. The FTC has been very aggressive, along with the DOJ, who shares antitrustment enforcement responsibilities. They've been very aggressive under the Biden administration in taking a hard look at mergers. That is not uncommon. We've seen a number of different ones from Spirit Airlines, Microsoft. We've seen a number of different mergers

Starting point is 00:08:37 come under pretty tough scrutiny. So immediately when this is announced, the FTC said, we're going to take a look at this. And they have spent over a year dissecting this in many different ways. What was the result of that review? They decided they are not going to let this happen and they're going to take it to court. That's after the break. That's after the break. Flavorful. Yodeling with them. Eww. Eww. Eww. Eww. Eww. Eww. Eww. Eww.

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Starting point is 00:09:45 With Cate Blanchett, Kevin Hart, Jack Black, Ariana Greenblatt, and Jamie Lee Curtis. Wow, you never see that. Borderlands. On Monday, the FTC laid out its case against the merger of Albertsons and Kroger. They came to the conclusion that this deal pretty much does the opposite of what the companies have said, right? The companies have said, we're going to lower prices. competition among supermarkets in communities, and that this is going to raise prices at a time when food prices are already really high. And that's where we think this is headed. Why does the FTC argue that this merger would add pressure on food inflation?

Starting point is 00:10:42 So their argument is that these are the two largest supermarkets and that they compete against each other directly in small towns, especially in markets in Colorado and Washington, California, even in the city of Chicago. But they're kind of all over the West and the Midwest. And the FTC says this is good for consumers that they compete against each other. They will lower their prices against each other because they can say they compete against Walmart and Costco, but really they resemble each other as their biggest competitors. That's their argument. And they're saying that by those two competing against each other, they lower prices to get consumers to come

Starting point is 00:11:26 into their store versus their competitor. So by bringing them together, they lose the incentive to drop prices, because then they would just be, they wouldn't have to compete in it. They'd be the only supermarket game in town, is their argument, and that they would have little incentive to drop prices for consumers, and that it's been good for consumers for them to compete against each other. And how does this move from the FTC fit into the Biden administration's approach more broadly to rising food prices? administration's approach more broadly to rising food prices? So the Biden administration has made addressing food inflation one of its higher priorities over the last couple of years in a number of different ways. Shortly after Biden took office, he went after the meat packers because

Starting point is 00:12:23 meat prices were really high. And he went after competition among the four biggest beef processors at the time, saying that they were going to put a bunch of money toward smaller upstart packers and ranchers to get more competition in the market. They hauled them in front of Congress. They've proposed new rules in terms for poultry companies that they've said is going to help the chicken farmer. All of these, by the Biden administration, have been rationalized under the guise of trying to lower food prices. The FTC also said in its lawsuit

Starting point is 00:12:56 that the merger would hurt workers' ability to organize. Albertsons and Kroger together have around 350,000 unionized workers who are represented by the United Food and Commercial Workers International Union. The FTC's argument echoes opposition to the deal from several chapters of the UFCW. They were not happy about it, saying that this would limit their bargaining power and that it was a threat to unionized workers and that they could lose the number of unionized grocery workers in America. That was the bulk of their argument that they didn't want to see. How would this deal limit their bargaining power? power. The problem they see is if you bring the two of them together, they essentially lose their bargaining power and their ability to say, you gave Albertson's employees an 8% raise. Why are we getting a 3% raise? I'm going to go work there instead. The unions are essentially

Starting point is 00:14:01 saying, you've completely clipped our bargaining ability and bringing them together is essentially taking out multiple unionized grocery stores. To try to appease antitrust concerns, Albertsons and Kroger said they would sell 400 stores to a wholesale grocery supply company that owns the Southern grocery chain Piggly Wiggly. Selling stores as part of a merger is a pretty common practice in retail deals.

Starting point is 00:14:29 But the FTC wasn't sold. The FTC is largely rejecting the company's offer to sell stores. They call the offer kind of a hodgepodge of stores in different markets. And they think it's the companies casting off stores that are lower performing or they don't really want and that this hodgepodge of stores will not survive, is how they put it. They basically don't think these stores will survive on their own,

Starting point is 00:14:58 is how the FTC has put this. And there's a precedent to it as well. There's a historical event where the FTC kind of got a black eye. Oh, what happened? Well, in 2015, Albertsons bought Safeway in a really big supermarket deal. And they divested 150 stores. A lot of these stores in that Safeway deal went to this other company called Hagen that was a much, much smaller grocery seller. It went bankrupt before a year. And then Albertsons actually bought Hagen the next year and bought back a lot of the stores they had divested. So that was kind of an embarrassing look for the FTC. And they do not want that to happen again.

Starting point is 00:15:47 How have Albertsons and Kroger responded to the FTC lawsuit? Kroger and Albertsons said they look forward to presenting their arguments in court. They think their arguments are sound, and they ultimately say that the FTC's lawsuit is good for Walmart and Costco and all their competitors, and this is ultimately going to be a detriment to the union and the consumers, and that it's a blow to the unionized workforce. That's how the companies respond. So they're on completely opposite ends of the argument spectrum. What's at stake for Albertsons and Kroger? Albertsons and Kroger would argue that their survival is at stake, their long-term survival, and that they have to do this in order to make themselves viable for the future,

Starting point is 00:16:40 and that this is for the good of the future of the American supermarket, that they must do this. The government does not agree with that. And ultimately, a lot of what this case will come down to in court is going to be, like, what is a supermarket? That's all for today, Thursday, February 29th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Dave Michaels. Thanks for listening. See you tomorrow.

The Journal. - Why the FTC is Challenging a $25 Billion Supermarket Merger

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