The Biggest Supermarket Merger That Wasn’t

0:05One of the biggest corporate dramas of the year played out recently inside a sweltering courtroom in Oregon. Our colleague Patrick Thomas was there covering the trial. And, you know, it's a smaller, a little bit of a smaller courtroom, not accustomed to these kind of high-profile antitrust trials. And it got really hot in that courtroom. I mean, it was, everybody's got to pack together in the back benches. And it was, yeah, it would get pretty toasty. The case? The Federal Trade Commission was suing to block a merger between the country's two largest supermarket chains, Kroger and Albertsons. At a high level, it was about the largest grocery store deal of all time.

0:53And if these two companies combining were going to mean higher food prices for consumers. The deal would have been worth$20 billion, and it would have created a mega grocery store operator. This week, months after the FTC filed its suit, a judge finally ruled on the case. The federal judge has blocked the merger of grocery giants Kroger and Albertsons after a three-week hearing. It's a deal that didn't check out.

1:27And so you would think that the judge's ruling here, no, you cannot push through with this merger, would be the end of the story. But was it? Of course not. Shortly after the judge made this decision, Albertsons decided they were going to sue Kroger for billions of dollars.

1:47Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Thursday, December 12th.

2:01Coming up on the show. The supermarket mega merger that wasn't.

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2:54Albertsons. Kroger operates more than 2 ,700 supermarkets across the country, which means if you shop at a Ralph's on the West Coast, a Mariano's in the Chicago area, or a Harris Teeter in the Southeast, you're shopping at a Kroger-operated store. And then on the other side of this, you have the second biggest supermarket operator, Albertsons, which is a little bit more known on the West Coast. The name is a little bit less known, But, you know, think of Safeway, a storied name like that that falls under the Albertsons company. A Kroger-Albertsons merger would have created a$200 billion company with about 4 ,500 stores across the United States.

3:36Back in February, the FTC sued to block this deal under antitrust law. What was the FTC's case in trying to block this deal in the first place? So the FTC's case essentially is you can't take the number one and the number two biggest supermarket, put them together and not expect there to be a loss in competition in the market and not expect consumers to feel that. And it would give Kroger enough dominance where they could raise prices unchecked. But Kroger and Albertson said, hold up. We may be the largest supermarket chains in the country, but we're still small fries compared to some mega corporations that sell groceries, especially Walmart.

4:21The company's central case is that they're in trouble because Walmart is actually the biggest seller of groceries in the United States by a lot. If you bought these kinds of groceries at Walmart, you could save on average over$700 a year. Well over 20 % of the grocery market share goes to Walmart, and Kroger's only 9%. So people really go to Walmart for groceries. And their argument is we have to be on the same level as Walmart when it comes to scale and buying power. Kroger says if you want lower grocery prices, we need to be on that level. The trial began in August. Lawyers for Kroger and Albertsons had a star witness, Kroger CEO Rodney McMullen.

5:14Mr. McMullen references a store in Dixon, Tennessee in the 1990s. And when he saw a Walmart open near that particular town, and the sales of the Kroger in that town just plummeted after the fact. And he referenced that in court as being kind of a seminal moment for him seeing like, wow, look at these stores like a Walmart, these discount kind of stores that can undercut supermarkets. So if you're keeping score, Kroger sells 9 % of all groceries in the U.S. Albertsons sells 5%. And Walmart sells well over 20%. So even if Kroger and Albertsons were to combine, they still wouldn't match Walmart in grocery sales.

5:58And McMullen wasn't just worried about Walmart. There's also Amazon. One of the scenes he brought everybody through was in 2017, Amazon's purchase of Whole Foods was, as he called it, a watershed moment for the industry. Them doing this big deal and Amazon putting their buying power together with Whole Foods to basically making Amazon a competitor to Kroger, which scared him. He keeps a copy of the local business journal in his office to just remind him of that deal and that Amazon is out there. And did Albertsons say anything about competitors like Walmart and Amazon? Albertsons sees a little bit more of an existential threat.

6:46Albertsons testified in court shortly after Mr. McMullen did, saying, look, we kind of need this deal because we see bigger threats on the horizon to our business, that we're financially sound right now, but two to three years from now, we don't think we can even compete to the level Kroger is in terms of lowering prices and getting market share and competing against these Walmarts. But a federal judge wasn't buying it. On Tuesday, Judge Adrienne Nelson of the U.S. District Court in Oregon ruled against the deal. So she came down on the side of the FTC with a pretty emphatic no to this merger, saying this was something that would erode competition and ultimately lead to higher prices for consumers.

7:35And that this merger was not going to happen under her watch. In her decision, Nelson said the chains clearly compete against each other in a way that benefits consumers, and that the proposed merger would remove that competition. The ruling effectively killed the merger. The supermarket giant said they would stop pursuing the deal. But now, there's a new round of finger-pointing. A new twist in the attempted Kroger-Albertson's merger a day after it was blocked by a judge. Now it looks like Albertsons is going to sue Kroger. That's after the break.

8:26Less than 24 hours after Judge Nelson ruled against the Kroger-Albertsons deal, Albertsons sued Kroger. And while it isn't rare for parties in a failed merger to sue one another, the speed at which Albertsons filed its suit surprised Patrick. I mean, this legal fight is, it's, Albertsons is suing them for, I mean, billions of dollars. And that is a significant chunk of money for a company like Kroger that sells a lot of people's foods, as well as Albertsons and the livelihood of Albertsons. What is it that Albertsons is alleging? So Albertsons, they have two kind of main things they're alleging here.

9:09Number one, they're saying Kroger decided not to give them the termination fee. Basically, when these two companies decided we're going to merge as part of their merger agreement, Kroger said that if this doesn't happen, we're going to pay Albertsons$600 million. Albertsons is alleging that Kroger tried to stiff them, more or less, and not pay the fee, and they're suing for that. And that Kroger breached the merger agreement by not doing everything in their power to make this go through with regulators. Basically, Albertsons argues that Kroger should have worked harder to show that the deal wouldn't be anti-competitive.

9:52As part of the proposed merger, Kroger planned to sell off stores where there was market overlap. But Albertsons says that Kroger should have offered to sell more stores, that the stores they agreed to sell should have been more profitable and that it should have picked a more successful third-party company to sell the stores to. Kroger says the claims are baseless. It says that Albertsons was the one who repeatedly breached their agreement and that the suit is an attempt to deflect responsibility.

10:23So, okay, with this lawsuit now happening, Albertsons suing Kroger, Where does this leave Kroger and Albertsons? Well, Kroger has said that there's not someone as big or transformational as an Albertsons out there. So they may do some other wonkier things like share repurchases or put money back towards their stores or supply chains, try and go in on their own. And analysts generally feel that Kroger is in healthy enough shape where they will be okay. they're not going to get the same earnings potential or the same transformation they would have had buying Albertsons. They won't get that. That's more or less where it leaves Kroger.

11:08What about Albertsons? Albertsons, it's far more uncertain given that in court, like their CEO on the stand painted a much more doom and gloom picture about their future as a company. But he said in two to three years, they might have to consider layoffs and store closures and that they really needed this deal to happen. So it's more uncertain what's going to happen to them. So the FTC sued because they were worried that this merger was anti-competitive. And the judge agreed. But if Albertsons is right, and in a couple of years, they wind up closing a bunch of stores, wouldn't that also limit consumer choice?

11:49Certainly. That could limit consumer choices. You could have a situation where Albertsons decides to start shedding stores and you do have fewer options. And instead of being owned by a Kroger, which promised to invest a billion dollars annually in lower prices, you don't get that and you just lose your option. The ruling didn't just deal a blow to Kroger and Albertsons. It could also empower big retailers like Amazon and Walmart. Because the FTC argued that while those companies do sell groceries, they aren't in direct competition with traditional supermarkets. And Judge Nelson agreed. So for companies like Amazon and Walmart, does this situation pave the way for them to become even bigger threats to the likes of Kroger and Albertsons?

12:37Could they buy up other grocery stores? Is that still an open channel for them? They certainly could. Walmart's got a lot of power in the industry, and they've got a balance sheet deep enough to experiment in other ways in grocery that Albertsons can't. Walmart can do that. Amazon, could they do more deals in grocery in addition to Whole Foods that they did in 2017 that Mr. McMullen told us was a watershed moment? They certainly could. That's speculation. But there are some in the industry who have told me that they do expect Amazon to be a buyer if they want it to be. We don't know that for certain, but they wouldn't be shocked if Amazon did more grocery deals to try and establish more of a brick and mortar presence.

13:24And that would be essentially what Mr. McMullen on the witness stand warned us about. One contextual piece that we kind of touched on early in the conversation is that this all happened under the Biden administration's FTC, which has been pretty strict about mergers in the past four years. Would a merger like this have had a better chance under a Trump administration? You know, that's a great question. I had plenty of conversations with folks who did kind of wonder out loud if it would have been better to wait two years and see if they could have waited this out. We'll never know the answer to that.

14:08What does this story tell us about the nature of the supermarket industry today? Yeah, the supermarket industry, it's a low margin business. They operate on really, really tight margins because they're always trying to make up even just a cent here, a cent here on different items. Their pricing strategies have to be so precise in order to make a profit. I think over the course of this, we've learned a lot about how our food is priced and how supermarkets actually function. I think Albertsons called it a zero-sum game in grocery. If you are the high-priced guy in town and they can get a deal somewhere, they will leave you very quickly.

14:50And these companies have to figure out how to formulate against each other. And it's an example of just how quickly things can change if you take your eye off the ball. Yeah. It sounds like it's like the supermarket industry is more cutthroat than we maybe as consumers imagined. Yeah, I would definitely say so. They're fierce competitors that spy on one another and try to get the best deal on certain products and sue each other after$20 billion mergers don't happen. You know, they're going to try and get their money back. Ultimately, it might take some time, but consumers will be the judge on how this ultimately impacted their food prices over the next couple of years.

15:36Maybe we'll remember this being a situation where our prices never went up and a win for the people, or maybe what the companies had predicted will come to pass.

16:01That's all for today, Thursday, December 12th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Dave Michaels and Jinju Lee.

16:15Thanks for listening. See you tomorrow.