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Albertsons, Kroger CEOs face grilling from Senate panel on proposed acquisition. Layoffs, market power, prices and more key questions

Acquiring Albertsons
BoiseDev complete coverage

Acquiring Albertsons
BoiseDev complete coverage

The chief executive officers of Boise-based Albertsons Companies and Cincinnati-based Kroger Co. appeared on Capitol Hill to face questions from a US Senate panel Tuesday.

Spearheaded by Democratic Sen. Amy Klobuchar of Minnesota and Republican Sen. Mike Lee of Utah, the Senate Judiciary Panel on Competition Policy, Antitrust, and Consumer Rights peppered the executives with questions.

Klobuchar noted that the hearing and its answers could be useful to the Federal Trade Commission in its review of the merger. The acquisition must pass muster with the FTC to move forward. She also said the senate panel could look at what policy changes to make around mergers for their consumer impact.

‘Cynical’

Both Klobuchar and Lee said they felt the acquisition was cynical – regarding the acquisition’s stated intent to lower prices.

Albertsons 2015 acquisition of Safeway, and a spinoff of some stores to Bellingham, Washington-based grocer Haggen, came up throughout the hearing. Haggen later declared bankruptcy, closed stores, laid off more than 8,000 employees — and Albertsons ultimately got 29 of the stores the FTC had required it to spin off, back.

Klobuchar referred to Florence, Oregon, where a Kroger-owned Fred Meyer and an Albertsons-owned Safeway currently compete.

“These two stores have to compete for business, which means they offer lower prices, provide fresher produce or services like curbside pickup,” Klobuchar said. “If they have the same owner, they have no incentive to compete.”

Rodney McMullen, Vivek Sankaran, Sumit Sharma, Andrew Sweeting and Michael Needler testify on Capitol Hill Tuesday. Via US Senate

Klobuchar said she talked to Sankran and McMullen about the example before the hearing, and they said they have a different concept for store divestment than the one used for Safeway. The chains hope to create a new SpinCo, which would be owned by Albertsons’ shareholders and contain perhaps a few hundred stores.

But Klobuchar said these small examples “weigh heavily on the minds of those who are concerned about this agreement.”

Lee took a more strident tone.

“Earlier this year, Kroger CEO Rodney McMullen confessed, ‘a little bit of inflation is good in our business.’ It must have been very good if they amassed $24.7 billion to buy up one of its competitors, Albertsons,” Lee said. “Hollywood couldn’t write a more cynical plot, even if it tried. Yet, the companies assure us that this is the merger that will make everything better. They have committed $500 million to lower prices.”

McMullen responded by saying that Kroger’s business model was to get more customers.

“Our business model – our fundamental business model – is around lowering prices to attract more customers rather than making higher margins on fewer customers,” McMullen said. “Our fundamental strategy is to lower prices and invest in associates and our local communities. When we do these things well, our customers benefit.”

No store closures, minimal layoffs

McMullen said the merger will not result in the closure of any stores in the combined company if the acquisition goes forward. He also said they will not “lay off any frontline associates through the merger,” though the phrasing leaves open the possibility of back-office and corporate office layoffs. A significant number of Albertsons’ non-frontline employees work in Boise.

Later, McMullen said in past cases, they haven’t laid off anyone.

“From an administrative support standpoint, we’ll look at – when we’ve looked at (past acquisitions of) Harris Teeter or Roundy’s, we haven’t laid off anyone because what we’ve found is the merged companies do things better than we do, and one of the key things is to find the best of both,” McMullen said.

Sankran helped lay out the case for the merger, saying the business of groceries is changing.

“The marketplace for grocers over the last decade has completely transformed,” Sankaran said. “The best way to compete with well-capitalized grocers like Walmart and online players like Amazon is to merge with Kroger.”

Dividend

Albertsons’ planned dividend of $4 billion to shareholders came up several times during the hearing. Sen. Lee asked Sankaran about the dividend payment — and asked why the company needed to merge with Kroger to lower prices for customers when it planned to give $4 billion to shareholders.

(The dividend payment is currently on hold, awaiting a hearing in Washington State.)

Sankaran said the dividend will return proceeds to shareholders.

“Albertsons Companies is in excellent financial condition,” Sankaran said. “That will remain the case after the dividend. It has nothing to do with the merger itself.”

However, Kroger’s own statement stands in contrast to Sankaran’s testimony. In a news release announcing the deal, Kroger expressly said the dividend was part of the transaction: “As part of the transaction, Albertsons Cos. will pay a special cash dividend of up to $4 billion to its shareholders.”

Voices of concern

Sumit Sharma of Consumer Reports. Via US Senate

The panel also featured expert witnesses called by the senators.

Sumit Sharma of Consumer Reports cast a doubtful tone on the merger. Sharma is a senior researcher for the non-profit consumer advocacy organization.

“Kroger and Albertsons claim this will benefit consumers. We are not convinced,” Sharma said. “The transaction will result in less competition which will be bad for consumers. It will merge the first and second largest supermarkets in a sector that is already highly concentrated.”

Sharma pointed to Kroger’s 2021 Fact Book, which lists top competitors. Albertsons is listed as one of the top two competitors in six of the top 12 Kroger markets.

“The consolidation will also reduce choices for consumers,” Sharma said. “The claimed benefits of the merger are uncertain.  Albertsons and Kroger acknowledge the uncertainty of any benefits of their own merger presentation.  Kroger states that (the merger) accelerates its go-to-market strategy. It is great for Kroger but not for its consumers.”

Sharma finished with what he believes the bottom line of the Kroger acquisition of Albertsons will be for shoppers.

“The most likely outcome of this merger between the two largest supermarket chains will be to lessen competition, lead to higher prices, fewer choices and worse supermarket and grocery access in some neighborhoods.”

‘Guardrails’ sought

Michael Needler, who owns the small regional grocery chain Fresh Encounter, said he was “agnostic” about the Kroger purchase of Albertsons. But he expressed other concerns.

“I am concerned that if guardrails are not in place, long-term competition and, thus, consumers could be harmed,” Needler said.

He said that during the pandemic, large chains – including Walmart and others – used their size to make demands from suppliers, which left smaller chains like his without key items. He said they also used “predatory pricing campaigns” to hurt smaller players.

“Many of my customers get coupons for free groceries from large competitors,” Needler said. “I don’t know of any other way to point out predatory pricing than buying your competitors’ customers with coupons for free groceries until they are out of business.”

Needler said he doesn’t want Albertsons plus Kroger to equal another Walmart.

“With the merger of Kroger and Albertsons, we fear the creation of another power buyer like Walmart, where the combined firm gains significantly more leverage over suppliers. What this really means is that they will extract funds from our suppliers, at our expense.”

Needler urged the committee to work with the FTC to increase enforcement of the Robinson Patman Act of 1936, which prevents larger chains from engaging in price discrimination against smaller suppliers.

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Don Day - BoiseDev Editor & Founder
Don Day - BoiseDev Editor & Founder
Don is the founder and publisher of BoiseDev. He is a National Edward R. Murrow Award winner and a Stanford University John S. Knight Fellow. Contact him at [email protected].

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