McMullen, Sankaran defend Kroger-Albertsons merger deal at Senate hearing

Lawmakers express concerns about reduced grocery competition and the $24.6 billion transaction’s potential impact on shoppers and workers.
Kroger Chairman and CEO Rodney McMullen explained the factors behind the merger deal with Albertsons to the Senate panel. / Photo: U.S. Senate

Rodney McMullen, chairman and CEO of The Kroger Co., and Vivek Sankaran, CEO of Albertsons Cos., on Tuesday made their case to proceed with the planned $24.6 billion merger of their companies at a Senate Judiciary subcommittee hearing in Washington, D.C.

McMullen and Sankaran were two of three retail chief executives—also including Michael Needler, CEO of independent grocer Fresh Encounter Inc., appearing for the National Grocers Association (NGA)—to participate in the Tuesday afternoon hearing, titled “Examining the Competitive Impact of the Proposed Kroger-Albertsons Transaction.” Also delivering testimony were Sumit Sharma, senior researcher of technology competition at Consumer Reports, and Professor Andrew Sweeting, chairman of the economics department at the University of Maryland, who gave insights on the consumer and antitrust implications of the proposed transaction.

“Over the last decade, the grocery industry has become increasingly consolidated, with the top four chains now making up more than two-thirds of all grocery sales. A lack of competition in the industry means higher prices and lower quality, and yet this proposed merger worth over $24 billion combines the two largest grocery store chains in the country,” Sen. Amy Klobuchar (D., Minn.), chair of the Senate Judiciary Subcommittee on Competition Policy, Antitrust and Consumer Rights, said in opening the hearing. “Today, we’re here to learn more about the proposed transaction, the status of competition among grocery stores and the impact that this merger could have on American families.”

Senate hearing on Kroger Albertsons merger-witness panel

The Senate witness panel (left to right): Rodney McMullen of Kroger, Vivek Sankaran of Albertsons, Sumit Sharma of Consumer Reports, Andrew Sweeting of the University of Maryland and Michael Needler of Fresh Encounter Inc. / Photo: U.S. Senate

Under the merger agreement, announced Oct. 14, Kroger would acquire rival Albertsons, forming a national supermarket operator with 4,996 stores, 3,972 pharmacies, 66 distribution centers, 52 manufacturing plants, 2,015 fuel centers and more than 710,000 associates across 48 states and the District of Columbia, serving a customer base of 85 million households annually.

The companies expect to finalize the transaction in early 2024, pending regulatory approval and other customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act. Wall Street analysts and other industry observers, though, have said a longer approval process is likely for such a huge deal—the biggest U.S. supermarket merger ever—and could last up to two years.

Changed playing field

McMullen noted that the merger transaction, in part, reflects big shifts in the competitive playing field for grocery retailing and food shopping behavior.

“The grocery industry has changed significantly throughout my career, and Kroger continues to evolve. When I joined Kroger, the average family bought most of their groceries during a weekly trip to their neighborhood store. Today, the industry is larger, more complex and more competitive, with near endless opportunities and options of where and how to shop,” McMullen told lawmakers and others gathered at the Senate’s Dirksen Office Building. "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, Walgreens and restaurants, for example. Notably, nearly every competitor I just named is non-union. Today, Kroger ranks fourth in total revenue behind Walmart, Amazon and Costco. And we compete with these companies to sell groceries. The combined company will remain at No. 4.”

By merging with Albertsons, Kroger will better position itself to compete with mass merchants and other chain retailers playing in the grocery arena, as well as deliver a stronger value proposition for shoppers, according to McMullen.

Amy Klobuchar-Senate hearing on Kroger Albertsons merger

In opening the hearing, Sen. Amy Klobuchar (D., Minn.) said, "The grocery industry has become increasingly consolidated." / Photo: U.S. Senate

“We work every day to deliver the high-quality products and value our customers want. We operate on razor-thin margins. This merger will give us the flexibility, national footprint and digital capabilities to compete more effectively,” he said. “Our commitment is to provide fresh, affordable food for everyone. This is especially important today, when inflation impacts so many families. We help our customers save money with low everyday prices, personalized promotions, fuel rewards and best-in-class Our Brands [private-label] products. This merger will allow us to compete even more. Our business model is built around lowering prices to attract more customers, rather than making higher margins on fewer customers. Our fundamental strategy is to lower prices, invest in associates and the customer experience, and support our local communities. We’ve been doing this for years, and when we do these things well, our shareholders benefit.”

The Kroger Co.’s family of store banners includes Kroger, Ralphs, Dillons, Smith’s, King Soopers, Fry’s, QFC, City Market, Owen’s, Jay C, Pay Less, Baker’s, Gerbes, Harris Teeter, Pick N’ Save, Metro Market, Mariano’s, Fred Meyer, Food 4 Less/Foods Co. in 35 states. Albertsons Cos.’ store base includes such banners as Albertsons, Safeway, Vons, Jewel-Osco, Shaw’s, Acme, Tom Thumb, Randalls, United Supermarkets, Pavilions, Star Market, Haggen, Carrs, Kings Food Markets and Balducci’s Food Lovers Market across 34 states and D.C.

The proposed merger will “help protect the local community grocery stores that people love,” Sankaran said in his testimony.

“Kroger-Albertsons stores will continue to be the staples of their local communities, the places where teenagers have their first jobs; kids pick out a special birthday cake from the baker; and the longtime cashiers, florists and butchers know customers by name and work for decades at our stores with good pay and benefits to provide for their own families,” he explained. “To understand why we at Albertsons believe a merger will help us continue to thrive in local communities, I want to reiterate what Mr. McMullen described in his testimony. The marketplace for groceries over the past decade has completely transformed, making the competition for consumers fierce. The best way to compete with megastores like Walmart and highly capitalized online companies like Amazon will be through a merger with Kroger. And even after this merger, Walmart, Costco and Amazon will have nearly three times the share of grocery sales as Kroger and Albertsons combined.”

Vivek Sankaran-Albertsons-Senate hearing on Kroger Albertsons merger

Albertsons CEO Vivek Sankaran told lawmakers, "The combined company will be the largest private-sector union retailer in the country." / Photo: U.S. Senate

Stakes for consumers and workers

Sen. Mike Lee (R., Utah), ranking member of the subcommittee, and other lawmakers pressed McMullen and Sankaran on whether Kroger-Albertsons would keep its commitments to consumers and workers post-merger.

“The companies assure us that this is the merger that will make everything better,” Lee said. “Of course, they haven’t explained how we can be sure that these commitments will actually be fulfilled, nor have they explained why the merger is necessary to begin with.”

In announcing the transaction, Kroger and Albertsons said they plan to reinvest $500 million in cost savings from merger synergies to lower prices at the shelf, and another $1.3 billion would be earmarked to upgrade Albertsons Cos. stores. The price investment reflects historical practices, with $5 billion invested since 2003 to lower pricing, Kroger said. That includes $130 million after the 2014 Harris Teeter acquisition and $110 million following the purchase of Roundy’s in 2017.

Kroger also expects to invest $1 billion to continue raising associate wages and benefits after the transaction closes, and the company reported it has invested a $1.2 billion in associate compensation and benefits since 2018.

“This transaction will secure union jobs,” McMullen said in the Senate hearing. “Since 2012, we've grown our unionized workforce by more than 100,000. We will not close any stores, distribution centers or manufacturing facilities or lay off any frontline associates as a result of this merger.”

Sankaran later noted, “The combined company will be the largest private-sector union retailer in the country and provide our employees with greater opportunities and options as we compete with non-union companies like Amazon and Walmart.”

UFCW press conference on Kroger Albertsons merger

Members of a half-dozen UFCW union locals gathered in D.C. for a press conference to voice their concerns about the merger before the Senate hearing. / Photo: UFCW

Earlier on Tuesday, six local unions of United Food and Commercial Workers (UFCW) held a press conference in Washington, D.C., to air their concerns about the Kroger-Albertsons merger to federal and state regulators.

“Our main concerns include the following: One, this merger is a threat to consumers because it will reduce competition and increase prices. The customers are always front and center because, along with the workers, customers make grocery stores successful,” UFCW Local 3000 President Faye Guenther said. “This merger is a threat to business, including farmers, along the food supply chain. We feed the United States together. This merger is a threat to essential workers who could lose their jobs and, for those remaining, have their wages and benefits further squeezed.”

Later in the day, leading into the Senate hearing, UFCW International President Marc Perrone called on Kroger and Albertsons to come clean about the merger’s potential impact on associates.

“Since the moment this proposed merger was announced, our union has stated that we would oppose any merger that undermines the wages, jobs, benefits and security of Kroger and Albertsons workers,” Perrone said in a statement. “We have repeatedly called on both Kroger and Albertsons to be fully transparent about this merger and to provide the information that every UFCW local and member deserves. Our members have already sacrificed much over these many years, and they need to have a comprehensive understanding about what this deal means for them, their families and the communities they serve.”

Key exchange on divestiture question

To address competitive concerns of regulators, Kroger and Albertsons said they plan to divest 100 to 350 stores into a stand-alone spinoff company dubbed SpinCo. Analysts also have noted the merger deal includes a 650-store divestiture ceiling, at which point the two grocers could reassess the agreement.

In the Senate hearing, Sen. Josh Hawley (R., Mo.) pressed McMullen and Sankaran on whether any store closings are planned.

“We do not plan to close stores as part of this merger,” McMullen said. “Zero?” Hawley replied. “Zero,” McMullen answered. “As CEO of the new company, Mr. McMullen makes those decisions,” Sankaran said when Hawley turned to him. “But as he said, he plans to close zero stores.”

Michael Needler-Fresh Encounter Inc-Senate hearing on Kroger Albertsons merger

Michael Needler of independent grocer Fresh Encounter Inc. noted the buying power that Kroger would gain with the addition of Albertsons. / Photo: U.S. Senate

McMullen added when Hawley asked further about store divestitures, “We will work with the FTC in terms of divesting stores to a viable competitor and, if that’s not successful, using the SpinCo structure as well.”

Consumer Reports’ Sharma said the merger, if cleared, would eliminate Albertsons as a competitor and as a key check on Kroger’s market leverage.

“Importantly, Kroger and Albertsons compete head to head and impose this competitive constraint discipline on each other. Kroger’s 2021 Fact Book lists Albertsons as one of its main competitors in five out of 10 of Kroger’s top markets, covering a total of 546 Kroger stores. Of its 49 top markets. Albertsons is listed as one of the main competitors in 14, covering 814 Kroger stores,” he told lawmakers. “To conclude, we are skeptical that the benefits of the deal, as claimed by the parties, will be realized. The most likely outcome of this merger between the two largest supermarket chains will be significantly lessened competition and lead to higher prices, fewer choices and worse supermarket and grocery access for consumers in some neighborhoods.”

Citing a 2017 FTC study on merger remedies, University of Maryland’s Sweeting stressed the design of divestiture packages in meeting antitrust standards. “An important finding was that divestitures are much more likely to maintain the pre-merger level of competition when an ongoing business is divested, rather than a more limited set of assets that might require continuing dependence on other firms,” he said.

The supply chain factor

Needler, a third-generation independent grocer who operates nearly 100 grocery stores in Ohio, Indiana, Kentucky and Florida, told the panel of lawmakers that he’s less concerned about the consolidation of two big chains like Kroger and Albertsons than about what their combined consumer packaged goods buying leverage will mean for the supply chain.
“Our view is this: America’s grocery sector is getting less competitive from increasing concentration and unchecked buyer power due to a lack of enforcement of the Robinson-Patman Act,” he said. “Let me be clear: We are agnostic on this transaction. We are not afraid to compete against anyone, no matter how big. What we oppose is the lack of constraints on buyer power, which thwarts our ability to compete in the first place."

The Robinson-Patman Act prohibits price discrimination by suppliers against retailers. NGA and independent grocers have highlighted how small food retailers are being squeezed by big players that use their scale to command more favorable supply terms, lower pricing, special product package sizes and first call on high-demand items.

“With the merger of Kroger and Albertsons, what we fear is the creation of another power buyer like Walmart, where the combined firm gains significantly more leverage over suppliers,” Needler said.



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