Kroger & Albertsons: A Story We've Seen Before

I hope many folks reading this remember in 2014 when Safeway and Albertsons merged. More accurately, Albertsons, Safeway, and New Albertsons (it's a whole thing) were acquired by a private equity group led by Cerberus Capital Management (intentionally named after the three-headed dog that guarded the gates of hell).

After reading through coverage of the merger and the current FTC case against the deal, I've not seen a single article talking about how we've literally been here before, and it was irking me. Apparently I write when I'm irked, so here we go!

At that time, consolidating the grocery market was a concern; and after a review 146 stores were sold to another private-equity backed grocery company is ensure there was still competition in the market. Those living in the PNW would recognize that acquiring grocery chain: Haggen.

Reviewing how the Safeway/Albertsons merger went down is informative today, with a similar story playing out again with the proposed acquisition of Albertsons by Kroger. What better way to see how this might play out than to look at a similar situation involving many of the same players from just a decade ago?

The Sales Pitch

A review of the pinky-promises. Photo: Snohomish Safeway, one of the locations proposed for sale in the merger.

The pitch given to business media for the acquisition of Safeway in 2014 sounds, if nothing else, very familiar:

"Working together will enable us to create cost savings that translate into price reductions for our customers," Bob Miller, Albertsons' chief executive, said in a statement. "Together, we will be able to respond to local needs more quickly and deliver outstanding products at the lowest possible price, more efficiently than ever before."

Robert Edwards, the president and chief executive of Safeway, cited these cost savings to argue that the deal would pass regulatory muster. He said on a conference call with reporters that the "competitive position for the combined company" would allow it to reduce prices.^[1]

Similar language exists in the current proposal by Kroger to acquire Albertsons:

"The combination of Kroger and Albertsons Companies brings together two purpose-driven organizations to deliver superior value to customers, associates, communities and shareholders."^[2]

The idea that combining the operations of the 2nd and 4th largest-grossing grocery operating companies (something I'll take issue with in a second) would result in superior value for customers doesn't pass the smell test on its face, due to the inherent reduction in competition it would bring. Digging into the details will show it makes even less sense.

The companies are aware this doesn't jive, and have prepared a plan to divest somewhere around 576 locations (or ~14% of the total number total Albertsons and Kroger stores) in the markets with the largest overlap to ensure levels of competition remain constant on the local level.

These stores are proposed to be sold to C&S Wholesale Grocers, a wholesaler who has worked closely with Safeway for decades and was tied to attempted union-busting by Safeway in 2015 as part of the Safeway-Albertsons merger. This is fairly common in avoiding anti-trust scrutiny, and is also what happened during the Safeway/Albertsons merger.

During the Safeway/Albertsons merger, 168 stores were divested, with 146 acquired by the Bellingham, WA based Haggen. When this was announced in December of 2014 this was a 9x expansion^[3] of Haggen, taking them all across the west coast in one fell swoop. Albertsons would commit to assisting in the transition to ensure a continuity of competition.

Post-Merger

How the delivery didn't match the promise. Photo: A Fred Meyer store in Yakima, WA.

The final approval of divested stores were announced in January of 2015, with open dates starting in April. No one could have guessed just how badly the next 6 months would go.^[4]

The early reviews of Haggen in their new California regions weren't positive. The Orange Country Register reported one customer's experience as "underwhelming" and another summarized "If I want to pay more, I'm going to go to Whole Foods". ^[5]

Meanwhile, the newly combined Albertsons was consolidating their inventory and, according to a future lawsuit filed by Haggen, had over-charged for stock in the stores and lied about their profitability.

In July, Haggen announced large scale lay offs of hundreds of employees to reducing staffing at some stores, followed quickly by being sued by Albertsons for refusing to pay the full price of the inventory sold. ^[6]

The following month in August, stores started to close, with 4 announced initially. A number that was assumed to increase, and indeed grew to include 1/5 of all their stores.^[7]

Then, in August, Haggen sued Albertsons for $1 Billion for "coordinated and systematic efforts to eliminate competition," alleging that Albertsons had "made false representations to both Haggen and the FTC about Albertsons' commitment to a seamless transformation of the stores into viable competitors under the Haggen banner."

The full complaint lays out several ways in which Haggen alleged Albertsons ensured that their roll out would fail, including: stopping maintenance and advertising for the stores they would be divesting early to cause a tail off in consumers and increase the cost of conversion, removing fixtures and inventory that should have been included in the sale, launching aggressive ad campaigns in regions where Haggen stores were opening, and "Providing inaccurate, incomplete and misleading price information to Haggen about products on transferred Store shelves, causing Haggen to tag products with inflated prices and causing customers to conclude that Haggen was price gouging on products that, just 48 hours earlier, had been priced much cheaper".

Only days after bring the lawsuit against Albertsons, Haggen entered bankruptcy protection. By the time the dust settled, Albertsons had settled the lawsuit, and had acquired the profitable stores from the Haggen bankruptcy auction. Many of the divested stores ended up back under an Albertsons banner, and even many core Haggen stores were now owned by Albertsons.

A year after the the divestiture, there was now even less market competition than these regions had started with, and thousands of workers had their lives turned upside down through multiple sales, closures, and uncertinity.

Playing With The Lens

Micro vs. macro competition.

I've seen multiple business sources comparing Kroger and Albertsons against Walmart, Costco, and Amazon. This is a deeply disingenuous comparison. At the largest level Walmart, Costco, and Amazon all operate large amounts of their business internationally. They also sell more diversified products, categories, and methods than Kroger or Albertsons. These aren't apples to apples comparisons.

I've also seen talk of consumers "shift to delivery." I don't doubt that this is happening, and that in many markets consumers will have the choice between these services. That said, you have to live VERY close to a Walmart to get grocery delivery. I live near 4 Walmarts (10, 11, 15, and 17 miles away) and am out of Walmart's delivery radius. Many suburban and rural consumers are not going to have competitive choices.^[8]

Although Albertsons and Kroger may see many competitors across the US, competition is a local thing that depends on the specific region. It's likely a shock to no one that grocery stores don't set prices on a national basis. Even Walmart charges different prices store by store. Any reduction of competition, no matter how small, in an individual region will cause lower price competition for consumers in that region.

Interestingly, Kroger has complained in the past that grocery deflation and competition were eating into their profits, with CNBC reporting Credit Suisse called it a "Grocery Price War." Odd how the idea that competition making prices (and profits) go down was a given back in 2016. This admittance would seem to undermine their present arguments about consumer value.

This hasn't been unnoticed by the FTC, who published a report showing large grocers like Kroger used the last 4 years to cover up dramatic increases in their profit margin under the guise of inflation. As of the time I'm writing this, the Kroger/Albertons deal is months beyond its expected approval, and the FTC along with multiple states' attorneys general have filed a lawsuit to stop the deal.

Meanwhile, planning proceeds, with recent news about which Washington locations the parties intend to sell as part of the deal. I have personally set foot in some of these locations, and the lack of recent investment was apparent.

Hence my current opinion: this is history repeating itself. It's not even a new recording; it's a full-on re-release of the original song. If history is any indication, stopping this deal is likely the best outcome for everyone except private equity (which, let's face it, means it's the best outcome overall).