By Robert Brownlee
Kroger’s announcement on Oct. 14 that it will acquire Albertsons in the biggest grocery buyout in U.S. history landed at a time of historic concentration in the industry. The $24.6 billion purchase – along with assuming $5 billion of Albertson’s debt – will come close to knocking Walmart off its perch as the country’s largest grocer and bring Kroger’s share from 10 percent to 16 percent of the market with around 6,000 stores including affiliated brands.
But underneath the initial headlines was a detail that alarmed attorney generals in five states, a looming $4 billion dividend payout to Albertsons shareholders – amounting to one-fifth the price Kroger paid for the grocery chain, and 30 percent of Albertsons’ entire market capitalization. This maneuver could be a “massive improper giveaway to certain shareholders,” (.pdf) AGs from Arizona, California, Idaho, Illinois and Washington stated in an Oct. 26 letter.
What’s worse – the deal could imperil Albertsons as a business if the merger doesn’t go through. The AGs told Albertsons to hold off on a payout planned for Nov. 7, but the company said it can’t cancel the payout because of liability reasons which “expose Albertsons to significant legal and financial liability” as trading in the stock post-dividend is already happening.
Washington state has now filed a lawsuit to block the payout, accusing Kroger and Albertsons of violating antitrust laws and the Consumer Protection Act.
The reason this dividend payout is potentially bad for Albertsons is that the amount is roughly equal to the company’s total cash on hand. If it goes through, and U.S. courts then move to block the merger on antitrust grounds, then Kroger can argue that Albertsons will fail without cash to operate – wrecking the food supply chain. In other words, it’s an ultimatum. Even worse, Albertsons will have to borrow money to pay it out.
One of the big winners: private equity firm Cereberus Capital Management, which owns 29 percent of Albertsons.
"Paying out $4 billion before regulators can do their job and review the proposed merger will weaken Albertsons’ ability to continue business operations and compete," Washington Attorney General Bob Ferguson said. "Free enterprise is built on companies competing, and that competition benefits consumers. Corporations proposing a merger cannot sabotage their ability to compete while that merger is under review."
There are also concerns the merger won’t necessarily lead to good outcomes for consumers. Industry watchdogs cited the risk of reduced competition exacerbating rising food prices in markets dominated by a single mega-grocer. “There is no reason to allow two of the biggest supermarket chains in the country to merge — especially with food prices already soaring,” Sarah Miller of the anti-trust American Economic Liberties Project said. “This merger is a cut and dry case of monopoly power, and enforcers should block it.”
There is plenty of precedent for what Miller said. Big mergers from telecommunications to healthcare almost always precedes rising costs for services in part due to reduced competition. The same is true in the grocery industry, with consolidation leading to greater power to squeeze suppliers and impose greater pricing power over shoppers at the register. These price rises can also ripple throughout the entire food supply chain, affecting other companies which rely on the same suppliers, raising costs throughout the country.
Kroger says the Albertsons merger will bring $500 million in cost savings and $1.3 billion in new investments into Albertsons to lower prices, but these gains rarely last long if history is a guide. On average, mergers eventually lead to higher food prices, especially in highly concentrated markets according to the U.S. Federal Trade Commission (.pdf).
The grocery market is highly concentrated. Before the announcement 60 percent of the U.S. grocery market was controlled by five companies: Walmart, Kroger, Amazon, Albertsons – which also owns Safeway – and Ahold Delhaize. Kroger is especially acquisitive and today operates 28 different brands from City Market to Ralphs.
There’s also the risk of store closures, which the UFCW has a history of organizing to stop. When Ahold and Delhaize merged in 2014, the union mobilized and stopped the closure of eight Giant Food stores in Virginia and Maryland which the combined company planned to shut down.
“The proposed merger between Kroger and Albertsons has serious implications for hundreds of thousands of our UFCW members and America’s families who are more concerned than ever about inflation’s impact on the price of their food and groceries, prescription drugs, and gas,” the UFCW stated.
Local union presidents also challenged the merger. “The proposed merger of these two grocery giants is devastating for workers and consumers alike and must be stopped,” UFCW 3000 President Faye Guenther said. “Just as our UFCW workers stood together to negotiate landmark new contracts with both Kroger and Albertsons/Safeway within the last year across the western U.S., we will stand united to fight for access to nutritious food, a safe shopping experience, and investments in good jobs in our communities.”
UFCW 3000 represents more than 50,000 members in Idaho, Oregon and Washington.
The Essential Workers for a Democratic UFCW, a reform caucus, also called for the union to stop the merger. The National Grocers Association, which advocates for smaller community grocery operators, raised alarm about the potential for a “single supermarket giant gaining unprecedented dominance over the nation’s food supply chain.”
Kroger will likely come under pressure from the FTC to find a buyer for some of the Albertsons stores to prevent further consolidation in some markets or spin off a new company. Kroger said it’s willing to spin off as many as 600 stores into an independent firm, but such a move carries further risks.
In 2014, Albertsons bought Safeway, and to avoid antitrust litigation, sold 150 Safeway stores to Washington-based Haggen Food & Pharmacy. A year later, Haggen sued Albertsons for false representation and anti-competitive practices, alleging the company undercut its efforts to transition the new stores. But it was too late. Haggen declared bankruptcy and Albertsons bought some of those stores back at a lower price. Other stores closed. Workers lost their jobs.
"One of the things that will be incredibly important to us is making sure that the (spun out) stores, when we sell them, is making it into a viable, strong business from a competitive standpoint,” Kroger CEO Rodney McMullen said.
The UFCW meanwhile is poised to perhaps become the largest private sector union in the United States if the merger goes through – combining roughly 260,000 unionized workers at Kroger and 200,000 at Albertsons, surpassing the 350,000 Teamsters at UPS. That gives the UFCW potentially enormous sway in the decision. On the other side of the coin, potentially thousands of union jobs could be lost if Albertsons stores close as a result of divestiture after a merger like what happened to Safeway.
Meanwhile, a U.S. Senate antitrust panel will hold a hearing next month on the merger. Both Sen. Amy Klobuchar (D-MN) and Sen. Mike Lee (R-UT) said in a statement that they have “serious concerns about the proposed transaction.” Sen. Bernie Sanders (I-VT) said a merger would be an “absolute disaster” during a time of rising food prices as a result of corporate greed.
Then there’s the special dividend payout to Albertsons shareholders like Cereberus. If that goes through, and Albertsons is suddenly strapped for cash, then that’s less money to spend replenishing shelves, which means less inventory to stock, and fewer hours for workers. “It’s a bit like a private equity firm blood-letting someone after buying the person a life insurance policy the private equity firm then gets to collect,” wrote Matt Stoller of the American Economic Liberties Project. “It’s not a great incentive system.”
But there are ways for workers to stop it. When Albertsons merged with SuperValu more than a decade ago, union workers pressured the company to continue benefits with a “walk and work” picket – because workers had a say in the decision, too. And that can save someone’s livelihood, or if the deal goes through, prevent a disaster that ends with closed stores.