Kroger-Albertsons Merger Delayed By Lawsuits, Community Concerns

The proposed $24.6 billion merger deal between Kroger and Boise, Idaho-based Albertsons was first announced in October. The companies have a combined total of nearly 5,000 stores in 48 states. If approved, the combination would create a grocery giant with $226 billion in revenue (not counting divestitures) rivaling market leaders Walmart and Costco.

Both companies’ boards unanimously approved the agreement, which will also need regulatory approval.

The tie-up comes during a challenging time in the grocery industry. Supermarkets have raced to keep up as shoppers embrace new ways of restocking the fridge. Companies have had to invest in automation, employee training and more as consumers bounce between browsing store aisles, ordering home deliveries and using curbside pickup.

A statement from Kroger explains the company “plans to invest in lowering prices for customers and expects to reinvest approximately half a billion dollars of cost savings from synergies to reduce prices for customers.

“An incremental $1.3 billion will also be invested into Albertsons Cos. stores to enhance the customer experience. Kroger will also build on its recent investments in associate wages, training and benefits. Kroger has invested an incremental $1.2 billion in associate compensation and benefits since 2018. The combined company expects to invest $1 billion to continue raising associate wages and comprehensive benefits after close.”

One of the most remarkable aspects of this merger is the exponential expansion of the companies' national reach, which will enable them to tap into an extensive consumer base encompassing approximately 85 million households across the nation.

A statement from Kroger reads the merger will “provide significant synergies to reinvest and customers and associate benefits. The combined company expects to achieve approximately $1 billion of annual run-rate synergies net of divestitures within the first four years of combined operations with approximately 50% being achieved within the first two years following close.”

Store Divestiture Plans

If approved, the combination would create a grocery giant with $226 billion in revenue (not counting divestitures) rivaling market leaders Walmart and Costco.

The reach of 5,000 stores has antitrust regulators concerned. Kroger and Albertsons initially said they would divest between 100 to 375 stores to alleviate antitrust concerns. The companies later narrowed that range to 250 to 300.

But according to the Puget Sound Business Journal — citing reporting from the financial intelligence site Dealreporter — the companies might have to divest even more stores to get regulatory approval.

“Kroger will not close any stores, distribution centers or manufacturing facilities as a result of this merger, including stores that may need to be divested to obtain regulatory approval. No exceptions, no excuses. We are in the process of working with regulators to develop a thoughtful plan for store divestitures to ensure that any divested stores are sold to qualified operators with appropriate management experience, a sound business plan, strong balance sheet and the financial stability to continue to succeed and serve their communities.” - Kroger spokesperson

Pablo Garces, a credit analyst at S&P Global Ratings, says the divest could be "potentially closer to the 650-store divestment cap.”

Regulatory Delays, Lawsuits

Plaintiffs in a California lawsuit that seeks to stop the $25 billion mega-merger of U.S. grocery giants Kroger and Albertsons have offered “no coherent discussion of relevant legal standards,” according to the latest in a flurry of filings in the case brought by customers of the two chains.

The complainants have also “failed to allege a relevant market or anticompetitive effects,” Albertsons and Kroger lawyers contend.

Two of the three filings are against Albertsons and Kroger, while the third is against Cerberus, the shareholder singled out by others as a “primary beneficiary” of the special $4 billion dividend Albertsons has already paid out to shareholders ahead of the proposed $25 billion merger.

The complaining shareholders say Cerberus received a third of the dividend, and they want all of that money returned.

Cerberus counters in its motion that the plaintiffs “have painted an implausible, economically irrational conspiracy,” and have asked for relief that’s never been contemplated by the Clayton Act, which is the antitrust law the consumer lawsuit has relied upon for its claims.

Enacted in 1914, the Clayton Act was meant to bring more substance to existing federal laws that outlaw monopolies, cartels and trusts, which are seen as harmful to consumers.

Lack of competition leads to higher — not lower — prices, and the Clayton Act helps spell out that any merger or acquisition that substantially lessens competition is anti-competitive, as is any situation where particular voting securities or asset thresholds are met.

Cerberus’ filing echoes some of the claims made in Albertsons’ and Kroger’s individual motions, which contend generally that plaintiffs are merely revisiting complaints that have already been “thoroughly rejected” by four other courts in two different lawsuits.

That refers to a lawsuit filed by Washington state’s attorney general, and another filed by the attorneys general of California, Illinois and District of Columbia. Both suits were rejected by lower courts.

The Washington decision was upheld on appeal, while the other was vacated shortly after the judge in the case refused to prohibit Albertsons from paying out the $4 billion dividend.

Cerberus states, "Their assertion that Albertsons may become undercapitalized or more favorably positioned to defend against a hypothetical merger challenge does not meet the required standard."

However, the plaintiffs assert that there is already substantial evidence supporting their contention that the Albert-Krogerson merger will impede competition. Past court rulings have blocked lesser mergers based on smaller combined market shares compared to the Albert Krogerson deal.

For instance, the proposed acquisition of Shopping Bag Food Stores by Vons grocery, resulting in a market share of less than 8.9% in Los Angeles, was blocked. In contrast, Albertsons, having previously acquired Vons and Safeway, held over 20.6% of the Southern California market as of June 2017, making it the largest supermarket in the region, according to the plaintiffs.

Additionally, the plaintiffs suggest that the 2015 Safeway-Albertsons merger serves as a suitable precedent for predicting the likely outcome of the Albert-Krogerson deal.

“The divestiture formula that they are suggesting was used in the past by the FTC in connection with Albertsons’ purchase of Safeway, the result of which was a complete disaster, which the industry has acknowledged, as many of the divested stores eventually ended in bankruptcy and the so-called new competitor that was created was declared bankrupt,” plaintiffs wrote in their filing. “There is no legitimate reason for these plaintiffs to be forced to wait until some peculiarity or accommodation is struck between the FTC and these defendants. The law itself dictates that these plaintiffs are separate and apart and need not wait until the government acts.”

In fact, lawyers for the customers contend, Congress has done the exact opposite with the Clayton Act.

“Private enforcement of the Clayton Act was in no sense an afterthought,” plaintiffs wrote. “It was an integral part of the congressional plan for protecting competition. That the FTC may proceed simultaneously with Plaintiffs here is no basis to hold the plaintiffs’ claims are not ripe.”

Employee Relations

For nearly a year, Kroger employees nationwide have grappled with persistent payroll issues stemming from a glitch-ridden payroll system that remains unresolved, according to employee accounts. The lack of communication from corporate leadership has left many employees in a predicament, torn between enduring delayed paychecks or seeking alternative sources of income during the holiday season.

The newly-adopted payroll platform, MyTime, encountered a glitch resulting in numerous cases of late, partial, or missing paychecks. This ongoing problem has gained further attention as Kroger faces increased scrutiny over its proposed mega-merger with competitor Albertsons. In the midst of this, Kroger has once again erred in payroll, drawing complaints from workers.

In a recent incident highlighted by WCPO Cincinnati's Dan Monk, 50 bakery managers in Greater Cincinnati Kroger stores received incorrect bonus amounts as they were included for the first time in a new incentive program initiated by the company.

The consistent pattern of payroll errors at Kroger has led critics to question the approval of its proposed $24.6 billion merger with Albertsons, currently under review by the Federal Trade Commission. Kevin Garvey, president of Local 75 of the United Food and Commercial Workers union, expressed concerns regarding the merger, citing potential repercussions such as the loss of union membership and liabilities to trust funds, pension, healthcare, and notably, the significant impact on payroll.

Garvey emphasized, "You definitely don't want to mess with people's pay, right?" These persistent payroll issues raise valid doubts about Kroger's ability to manage its workforce effectively and call into question the potential approval of the merger.

Wages Study

A recent study conducted by the Economic Policy Institute reveals concerning implications for employees' wage negotiations in the proposed Kroger-Albertsons merger. The study warns that the consolidation of these grocery chains would result in increased employer concentration, ultimately leading to reduced wages for all grocery store workers in affected cities across the United States.

The analysis, which incorporates data on grocery store employment, earnings, and the specific store locations of Kroger and Albertsons, highlights several key findings. Firstly, approximately 746,000 grocery store workers in over 50 metropolitan areas would experience a decline in wages as a direct consequence of the merger. This decline would be felt by all grocery store workers in affected cities, regardless of their current employment with Kroger or Albertsons.

Furthermore, the study estimates that the merger's combined effect would lead to a significant total annual earnings decrease of $334 million for grocery store workers in the impacted metropolitan areas. Given that Kroger and Albertsons employ a substantial portion of the grocery store workforce, most of the wage losses resulting from the merger would negatively impact workers employed by other firms. On average, grocery workers in affected markets can expect a reduction of approximately $450 per year in wage income.

The study also identifies variations in the magnitude of earnings losses depending on the strength of union presence and labor market conditions. Areas with a robust union presence or tighter labor markets are likely to experience comparatively smaller declines in earnings. Conversely, regions with weaker worker bargaining power will face more pronounced wage reductions.

It is worth noting that the anticipated earnings losses represent a significant windfall for the employers. The decline in wages can be attributed solely to the shift in labor market power resulting from increased employer concentration. Quantitatively, this windfall amounts to approximately 2% of the combined profits of Kroger and Albertsons or three times the combined compensation of the companies' CEOs.

These findings underscore the potential consequences of the Kroger-Albertsons merger, particularly in terms of diminished bargaining power and wage suppression for grocery store workers. The study highlights the importance of carefully examining and considering the impact of the merger on employee well-being and income distribution.