Today, Explained - Supermarket supermerger

Episode Date: October 27, 2022

Grocery story giants Kroger and Albertsons want to become one mega-company. The chains say merging will allow them to lower their prices, but antitrust researcher Ron Knox says we should be skeptical. This episode was produced by Victoria Chamberlin, edited by Matt Collette, fact-checked by Laura Bullard, engineered by Paul Robert Mounsey, and hosted by Noel King. Transcript at vox.com/todayexplained   Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

Could I ask you guys a question? Uh-uh. No. We can't record it? No. That's a camera, yeah? Oh, it's not a camera. It's just a voice.

Tell them I'm working hard. Today, Explained producer Victoria Chamberlain went creeping around a Safeway supermarket in Washington, D.C. yesterday asking employees and shoppers a question. Do you know who owns your local grocery store? The employees couldn't talk. The shoppers could. Victoria asked locals. Do you know who owns your local grocery store? The employees couldn't talk. The shoppers could. Victoria asked locals. Do you know who owns Safeway stores? Do you know the name of the company? I don't know. No, I don't know at all. And visitors. A conglomerate, which pees me off

because your fuel, your grog, and your food are all owned by the same company. People understand their local grocery store is part of a much bigger chain. But now, two of the biggest chains want to become one. What that means for you, your choices, and your wallet. Coming up on Today Explained. The all-new FanDuel Sportsbook and Casino is bringing you more action than ever. Want more ways to follow your faves? Check out our new player prop tracking with real-time notifications. Or how about more ways to customize your casino page with our new favorite and recently played games tabs.

And to top it all off, quick and secure withdrawals. Get more everything with FanDuel Sportsbook and Casino. Gambling problem? Call 1-866-531-2600. Visit connectsontario.ca. It's Today Explained. I'm Noelle King. Ron Knox is a senior researcher and writer at the Institute for Local Self-Reliance, and we called him up to explain this proposed supermarket supermerger. Supermarket chain Kroger announced that it wants to buy its rival Albertsons for about $25 billion.

Experts say the merger would give both companies more buying power, allowing them to be more competitive with Walmart. As part of the deal, Albertsons will pay a special cash dividend up to $4 billion to its shareholders on record as of October 24th. We will invest half a billion dollars or $500 million in lower prices for customers. That merger would combine the largest and the fourth largest grocery store chains in the country. Kroger, again, largest full-service grocery chain in the U.S. It's second only to Walmart in terms of grocery sales. These name brands, you know, these are like the corporate names of these companies. They might not be that familiar to your listeners, but through a series of other mergers and industry consolidation over the last few decades, these companies own a bunch of other name brand supermarket chains around the country.

So you might not have heard of Albertsons, but you might have heard of Safeway, for example. You might have heard of Jewel Osco. You might have heard of Acme Markets, which is really big in the northeast of the country. And then for Kroger, Dillon's, Fred Meyers, Food for Less, Harris Teeter, Mariano's, QFC, Ralph's, Ruler Foods, Smith, Vitacoast, Fry's, Home Chef, King Soopers. There might be others. It's a big deal. What are Kroger and Albertsons saying about this merger? Why do they say they want to do it? They're basically saying what a lot of companies say when they propose these kinds of mergers. They're saying that they're going to be able to save a lot of money and that they are going to take that savings and they're going to pass it on to consumers in the form of lower prices and they're going to be able

to reinvest in the stores and so on. How does this save them money? Well, let's say you have a city where you have some Kroger-owned stores and some Albertsons-owned stores. The companies merge. They probably don't need both of those stores. Having all that additional overhead is going to cut into profits and to the bottom line. So the companies tend to close those stores, lay off those workers who were at those stores, and save money that way. We're all dealing with inflation right now. When I go to my Safeway, which is owned by Albertsons, I know that I'm paying more for groceries than I was a year ago, 18 months ago. Why is that happening? So first, I would be remiss if I didn't mention that the producer price index, which is how they measure the cost of growing crops and raising cows and chickens and so on. Those things do fluctuate and they have been fluctuating. But the other thing that's happening is that we've seen a significant increase in corporate profits, particularly for these chains. Speaking of inflation, some companies see it as a threat to their business,

but the Kroger company, well, they're treating it like a competitive advantage. The Cincinnati-based grocery chain saw a 10% jump in its stock price today after telling investors it's growing by helping customers balance their budgets. A little bit of inflation is always good in our business. Kroger's profits grew nearly 14% over the last year. That's not revenue, that's profit. And what it did with that money is that it offered its shareholders a 24% increase in dividends, and it bought back about a billion dollars worth of its own stock. So those higher prices, again, kind of the two things that's happening there. Fluctuation in prices for the stuff that sits on supermarket shelves.

But then there's also this increase in corporate profits, which is just padding the bottom line of these stores. There is an argument if we don't grow, we will be subsumed by Amazon. We've already been subsumed by Walmart. Are you at all sympathetic to the argument that growth at this point is merge or become obsolete? Because our competitors are going to grow. Look, I understand. And I definitely understand the company's desire to increase their bargaining power when it comes to negotiations with their suppliers. They would love to pay less for things. The problem is in the assumption that these massive supermarket chains, these national chains, are somehow struggling to survive and are having a hard time keeping their doors open. That's really not what's happening. And you can see that from their bottom lines, you know, from their profits.

The idea that these companies have to merge to survive is really undercut by the reality that you see in the marketplace. All right. So Kroger and Albertsons own a lot of stores in the United States. Do you know how much of the country they're in? Like, if I looked at a map and I could see Kroger, Albertsons and every store that Kroger or Albertsons own, what would I be seeing? Well, between the stores and their warehouse facilities and others, they're in almost the entire country, 48 states plus Washington, D.C. And combined, they have more than 700,000 workers in those facilities. 700,000 workers. How many stores? Almost 5,000 workers in those facilities. 700,000 workers. How many stores? Almost 5,000 stores. Almost 5,000 stores and almost 700,000 employees. All right. So

when news of a merger comes, the people who are most likely to be nervous about it are the employees. 700,000 people got the news or heard the news that their employers are combining. Are those workers in unions? Some are and some aren't. Much of the Albertsons network of stores are unionized, but some of the Kroger stores are not. So a big example of that is Harris Teeter in the Washington, D.C. area. When Kroger bought the Harris Teeter franchise, they bought those stores as non-union stores. And since then, Harris Teeter has been very, very resistant to unionization, and they're still a non-union shop.

So it's kind of a mixed bag. Do we know what the employees are saying? I imagine this probably came as something of a surprise to them. The employees are worried. A few years back, there was a merger between Safeway and Albertsons. That's how Albertsons came to acquire the Safeway network. And since that merger, those companies have closed 170 stores. That's a lot of layoffs. That's a lot of union jobs lost. So employees are worried and some of the affected locals of the United Food and Commercial Workers, which is the union that organizes supermarket employees, they are very concerned as well.

And in some ways they're resisting this merger. Tom Geiger with UFCW 3000 says they've been opposed to the merger from the get go, which is why they've partnered with other unions in the area to stop this altogether. People that, you know, are having a hard time paying for food themselves, honestly, seeing the companies that they work for giving away billions to shareholders is not well received. When is this deal supposed to take place? You know, the companies say it's scheduled to close. They hope to close it by 2024, but it's going to face some significant scrutiny from the Federal Trade Commission before that can happen. And on the face of it, this is being done in part to lower prices for consumers, consumers who at this point in history are very concerned about inflation. Is it going to do that? Is my grocery bill going to be less? Well, you know, it's an interesting claim that the companies have made, right? If they wanted to lower prices to consumers, they could just do it. Because they, you know,

they don't need to offer these, you know, these dividends, they don't need to buy back their own stocks, they could lower prices on the shelves if it wanted to eat into some of those profits. And it hasn't done that. These mergers happen all the time, and not just in the retail sector, not just in supermarkets. But there are many, many instances of these mergers where in order to get the deal done, the companies say, look, we're going to lower prices. You're going to end up, you know, consumers are going to be better off if this deal happens, then the deal happens. And those price savings never actually occur. And what's more often prices go up, which is actually the natural thing that you would expect to happen when a company increases its power in the market,

and is able to essentially charge whatever it wants to charge for things because shoppers have fewer choices out there. The real danger is that you end up with this extremely consolidated grocery sector where you have one or two stores in a lot of places around the country. And these inflationary pressures that we're all having to deal with, we're all paying more for the stuff we need at the supermarket, those actually increase because these companies end up with even more power to charge whatever they want for the things that sit on their shelves.

That's the real danger. Support for Today Explained comes from Aura. Aura believes that sharing pictures is a great way to keep up with family, and Aura says it's never been easier thanks to their digital picture frames. They were named the number one digital photo frame by Wirecutter. Aura frames make it easy to share unlimited photos and videos directly from your phone to the frame. When you give an Aura frame as a gift, you can personalize it. You can preload it with a thoughtful message, maybe your favorite photos. Our colleague Andrew tried an AuraFrame for himself. So setup was super simple.

In my case, we were celebrating my grandmother's birthday and she's very fortunate. She's got 10 grandkids. And so we wanted to surprise her with the AuraFrame. And because she's a little bit older, it was just easier for us to source all the images together and have them uploaded to the frame itself. And because we're all connected over text message, it was just so easy to send a link to everybody. You can save on the perfect gift by visiting AuraFrames.com to get $35 off Aura's best-selling Carvermat frames with promo code EXPLAINED at checkout.

That's A-U-R-A-Frames.com promo code EXPLAINED. This deal is exclusive to listeners and-R-A-FRAMES.COM promo code EXPLAINED. This deal is exclusive to listeners and available just in time for the holidays. Terms and conditions do apply. That's a feeling you can only get with From tip-off to the final buzzer, you're always taken care of with a sportsbook born in Vegas. That's a feeling you can only get with BetMGM. And no matter your team, your favorite player, or your style, there's something every NBA fan will love about BetMGM. Download the app today and discover why BetMGM is your basketball home for the season. Raise your game to the next level this year with BetMGM, a sportsbook

worth a slam dunk. An authorized gaming partner of the NBA. BetMGM.com for terms and conditions. Must be 19 years of age or older to wager. Ontario only. Please play responsibly. If you have any questions or concerns about your gambling or someone close to you, please

contact Connex Ontario at 1-866-531-2600 to speak to an advisor free of charge. BetMGM operates pursuant to an operating agreement with iGaming Ontario. For the best of everything, let's go Krogering. You can always count on us. Let's go Krogering. Krogering.

Krogering. Let's go Krogering. You can always count on us. Let's go croakery, croakery, croakery. Let's go croakery, let's go croakery. We're back with Ron Knox. He's a senior researcher and writer at the Institute for Local Self-Reliance. And Ron, you also host a podcast. What is it called? It's called the Anti-Monopoly Happy Hour. Yo, welcome back. Welcome back to the Anti-Monopoly Happy Hour. I'm your host, Ron Knox, senior researcher at the Institute for Local Self-Reliance, your friendly neighborhood monopoly crusher. When we left off a minute ago, you seemed to be suggesting that even though Kroger and Albertsons are telling us, hey, consumers, you've been dealing with inflation. This is going to mean lower prices. You don't actually believe

that's true. What do you think is going to happen and why? Well, I think if this deal is allowed to go through, it's going to give this combined mega chain of supermarkets, power essentially on both sides of its ledger to affect prices however it wants. So the two sides are prices that it can charge for the things on its shelves that it sells to people. With fewer supermarkets to offer competition on price, not only price, but on quality, on innovation, on service, and so on, it's going to be able to do essentially what it wants, especially in parts of the country where there isn't a lot of other supermarket competition. And then the other side of its ledger is that it's going to be able to push down the prices that it can charge to its suppliers, brands that sell everything from

cereal to laundry detergent to beer, you know, and so on. All the things that you can find in most grocery stores. So that's actually what's going to happen. This isn't just a prediction with, you know, with nothing behind it. These mergers have been studied for a long time. 15 years ago or so, the government allowed a merger between Whirlpool and Maytag. These are obviously two massive appliance manufacturers. And the companies got this deal through by saying,

oh, it's going to save a bunch of money because it was going to cut out these overlaps and it was going to pass those savings on to consumers. Pretty much the same argument. So what happened? The two companies did save a lot of money because they closed factories all over the country and never reopened them. Today's announcement by Whirlpool that it's closing a plant in Arkansas and eliminating 5,000 jobs was eerily familiar news for the people of Evansville, Indiana.

Laying off, you know, thousands of workers, a lot of those were good middle-class union jobs. What happened to the prices? Researchers looked at the prices of the appliances that these two companies sold and found out that they had actually gone up after the merger. The prices of dryers in particular had increased pretty drastically. There's another example just a few years ago when AT&T was allowed to buy Time Warner after the government tried to challenge that deal and failed in court. The companies told the judge in court that they were going to lower prices for consumers. What actually happened was after that deal closed, just a few weeks later, they increased prices across the board. They cut out free HBO to their mobile subscribers,

and they made other changes that essentially served to pad its bottom line, make more money, and exert that new power they had in the marketplace. So again, this is not theoretical stuff. This is the kind of thing that happens when these big mergers are allowed to happen. In order for this deal to go through, somebody has to approve it, even as people like you are expressing disapproval. Whose court is this in now? This merger is going to be reviewed more than likely by the Federal Trade Commission, which is one of our two antitrust law enforcers and regulators, along with the Department of Justice. The FTC does retail supermarkets. That's kind of part of their remit. And they've analyzed every big supermarket merger for the last, you know, 40 years or so, and they'll continue to do so here.

The FTC never seems to say no. That's why there's a CVS on every corner, right is, it's going to drastically increase concentration, you're going to end up with fewer stores, you're going to end up with higher prices, all these other things, the agencies have allowed those if the merging companies can propose what we call a divestiture. That is, if they say, okay, we're going to spin off this number of stores, we're going to spin off this number of factories or production facilities, we're going to license our intellectual property. If they propose these kinds of quote-unquote fixes for these mergers, the agencies have tended to say, okay, great, you're good, you can do it. These so-called fixes, these divestitures,

when they're actually put into practice in the real world, often fail, and they often do not replace the competition that is lost in these deals. There are examples of that throughout industries, and certainly in the supermarket sector. There's been a pretty checkered history of these kinds of divestitures actually working. Tell me the story of when Albertsons acquired Safeway. It was a merger quite like the one that we're looking at now, where there were all of these overlaps around the country. And in a lot of places, there would be some really significant competition loss. So in some places, they would go from three supermarkets to two or even from two

to one. So the companies told the Federal Trade Commission, look, we're going to solve this. We're going to sell off a bunch of these stores to a third party. We're going to help them run these stores. We're going to help them get up and off the ground. And we're going to replace that competition that's going to be lost and everything's going to be hunky dory. And the Federal Trade Commission looked at the deal and said, OK, sure, why not? We'll buy it. So they sell off all these stores to a third party, this other quite small regional supermarket chain called Hagen's. And a few months go by and these stores struggle mightily to the point where Hagen actually has to declare bankruptcy. Hagen ends up suing Albertsons in federal point where Hagen actually has to declare bankruptcy.

Hagen ends up suing Albertsons in federal court. Hagen is suing Albertsons for a billion dollars. Hagen bought more than 100 stores from Albertsons earlier this year, including seven here in Southern Nevada. But they say Albertsons lied about pricing data and hacked into Hagen's confidential information. And that were it not for Albertsons' actions, Hagen's stores would have been fine and they would have been able to compete. So a lot of those stores get shuttered. Some get sold back to Albertsons. And essentially, all of the worst fears about that deal and its ability to quash competition come true. And for consumers, it meant what? You know, consumers lost the stores. I mean, there are places now in, you know, in Colorado

that had those stores close. These are in black and brown communities that have already suffered through disinvestment and other hallmarks of systemic racism. And now suddenly, the one store that they relied on for their food has closed. And so it's been very, very destructive for a lot of communities around the country. I think this store needs to be a grocery store. And I don't want to see it go away and not have any other options. That's what I want. Everybody knows me inside the store, you know. I've been coming here for almost 17 years. Why do companies get away with this if history shows us this is what happens? Consumers get screwed. It's hard to upend a philosophy that's been in place and been driven by true believers for decades. And

the evidence of these things failing, a lot of the evidence of higher prices, of hollowed out communities, of abused suppliers and workers, didn't really move the needle for the folks who were at the agencies during this time who weren't interested in those kind of results. And their interest was really in the philosophy that the government should take pretty much a hands-off approach, that the market's going to sort these things out on its own. The result is pretty clear, you know, to me today is that an economy that's really dominated by monopoly power in a multitude of industries. And certainly supermarkets are no exception to that. At the moment, the four largest supermarket brands combined control almost two thirds of the entire industry.

That is concentrated economic power. That is monopoly by our definition. And it's the kind of thing that will just get worse if this deal is allowed to go through. Lawmakers and regulators have spent much of the past several years asking whether tech companies are forming monopolies. One of the things that seems to happen in these hearings is that the lawmakers sometimes seem like they don't exactly know what tech companies are or do or how they make their money. And really nothing has happened. No one, nothing's been broken up, right? Mark Zuckerberg

is still Mark Zuckerberg. Arguably, this merger is a bigger deal because people have to eat. They don't have to be on Instagram. And I don't mean to be flip. I'm being literal. Do you think that this merger will get more scrutiny from Washington than we are used to seeing when the word antitrust or monopoly is being thrown around? I think it will get some significant attention on Capitol Hill, and I think that's important. But moreover, I think it will get significant attention at the Federal Trade Commission. Look, Lena Kahn, who's the chair of the FTC right now, she just gave a keynote address at a conference in Utah, and she talked about what she thought and perhaps what the commission is thinking about these kind of corporate divestitures

that are supposedly able to cure these problems in these big mergers, these big mega deals. And she said that, and I'm not quoting, I'm paraphrasing, but she said that the FTC is very concerned that sometimes these divestitures just don't actually fix the problem. And that in order to actually fix the problem, you just have to say no to these deals. Significant market consolidation deprives consumers, workers, and independent businesses of choice, further enabling dominant Hill is going to pay attention. I think lawmakers should pay attention because this is crucial to lots and lots of people around the country.

But moreover, I think the Federal Trade Commission is going to pay very close attention to this. And I think they will be very skeptical at this idea that the companies have put forward that they can just sell off some stores, fix this deal, and everything's going to be fine. Today's show was produced by Victoria Chamberlain and fact-checked by Laura Bullard. It was edited by Matthew Collette and engineered by Paul Robert Mouncey. I'm Noelle King. It's Today Explained. you