Roughly five months after announcing the largest merger in retail grocer history, Kroger and Albertsons are facing new opposition from twenty-six grocery customers seeking to terminate the merger and a substantive letter to the FTC from the American Antitrust Institute (“AAI”) explaining its concerns with the merger. These new challenges are in addition to an ongoing review by the FTC and public opposition from lawmakers and consumer groups. The question now is whether any of this will prevent the merger from closing.
Background of the Merger and Initial Challenges
In October 2022, Kroger announced it would acquire Albertsons for nearly $25 billion. The combined entity would operate roughly 5,000 grocery stores and 4,000 pharmacies. As part of the deal, the companies committed to divest 100-375 stores. At the same time, Albertsons announced it would pay a $4 billion special dividend to shareholders, which is not contingent on the merger closing.
Shortly after the announcement, state attorneys general from California, Illinois and Washington D.C. sought to block Albertsons from paying the special dividend to shareholders. The states alleged the special dividend violated Section 1 of the Sherman Act because it was part of an agreement between Kroger and Albertsons and would cripple Albertsons’ ability to compete. However, the states’ challenge was twice rejected, and the special dividend was paid in late January.
In late November 2022, four Democratic U.S. Representatives sent a letter asking the FTC to closely evaluate the Kroger-Albertsons merger. According to the lawmakers, the deal would “create competition-stifling concentration in markets across the country, hurting consumers, workers and small businesses.” The lawmakers argued the proposed divestitures were insufficient to prevent this harm and that the special dividend increased the likelihood of harm. Consumer groups also sent letters to the FTC raising similar concerns.
Then, in early December, the FTC issued a second request for information to Kroger and Albertsons concerning the merger. The FTC’s investigation is ongoing.
AAI Sends Letter Arguing the Merger is Likely to Substantially Lessens Competition
In early February, AAI sent a letter to the FTC asking it to challenge the merger because it was likely to substantially lessen competition and tighten the supermarket oligopoly, which would enhance incentives to unlawfully coordinate. AAI also argued the merger would significantly enhance monopsony power for Kroger, which would harm independent suppliers, rival grocers, and consumers.
AAI then took issue with the companies’ stated rationale for the merger. According to Kroger, the principal reason for the merger is to expand omnichannel distribution, i.e., expanding e-commerce and delivery capabilities. However, AAI claims there is “a clearly different reason for the merger,” which is “to combine the two largest supermarket players to amass monopsony and bargaining power in input supply markets.” According to AAI, if the parties were “truly motivated by creating omnichannel distribution, then neither party would be proposing to merge with each other. Instead, they would be investing in organic growth, or focused an acquisition strategy targeting businesses designed to create complementarities across distribution channels.”
Finally, AAI questioned whether the remedy proposed by the parties – divestiture of 100-375 stores – would preserve competition. According to AAI, there is a good chance the divestiture will place the responsibility of preserving competition in the hands of an untested rival. And recent history involving Albertsons has demonstrated this is, at best, a risky proposition. To obtain FTC sign-off of its 2015 acquisition of Safeway, Albertsons agreed to divest hundreds of stores. The FTC believed this would preserve the competitive landscape. But several stores were sold to an untested rival that could not maintain them, and, ultimately, most of these stores were shuttered or reacquired by Albertsons.
Customers File Suit to Stop the Merger
About a week before AAI issued its letter, a group of twenty-six customers of Albertsons and/or Kroger filed suit to block the merger and force the return of the $4 billion dividend payment. Then, just last week, the customers moved for a temporary restraining order seeking to prevent closure of the merger and require disgorgement of the $4 billion dividend.
The customers allege the merger is likely to substantially lessen competition in the national grocery market in violation of Section 7 of the Clayton Act and that the special dividend is an unlawful agreement in violation of Section 1 of the Sherman Act. Like AAI, the customers argue that if the merger is consummated, the companies' combined power will be used “to increase prices for groceries, decrease the quality of food, eliminate jobs, close stores and offer less choice for consumers due to the overlap in geographic areas.” And, like the states attorneys general, the consumers argue that the special dividend is an agreement between the parties that will substantially harm competition by handicapping Albertsons as a competitor.
Whether the FTC Will Challenge the Merger
While the other opposition garners some media attention, the FTC presents the greatest threat to the merger. And the agency seems poised to challenge the merger. Not only has the FTC issued a second request for information concerning this merger and generally shown a greater willingness to challenge large mergers in concentrated industries under current leadership, but Chairwoman Lina Khan has specifically criticized grocery mega-mergers in the past. In a 2018 article in the Harvard Law & Policy Review, Khan criticized Albertsons’ 2015 acquisition of Safeway, including its use of store divestitures as a merger remedy, which she claimed “backfired” after the divested stores were closed or returned to Albertsons.