Kroger and Albertsons want to build a grocery empire. The last supermarket mega-merger backfired

New York
CNN Business

“Here we go again,” Christine Martinez thought last month when she learned Kroger and Albertsons planned to merge in a deal worth about $25 billion.

Martinez lost his pharmacy technician job after the previous supermarket mega-merger: Albertsons’ $9 billion tie-up with Safeway in 2014.

The deal has since become a cautionary tale of what can go wrong when two supermarket giants merge. Now the fallout from that troubled transaction rests on this latest, even bigger merger proposal. The Senate Judiciary Committee is holding a hearing Tuesday afternoon to examine the potential impact of the Kroger-Albertson merger.

Back in 2014, Martinez was working at a Safeway subsidiary in Valencia, California. “It was really great company,” he said. “The morale was very high. They were interested in our needs. We can depend on our salaries.”

But things changed after Albertsons and Safeway merged.

To win the deal’s approval from antitrust regulators, Albertsons and Safeway agreed to sell 168 stores to buyers approved by the Federal Trade Commission. The companies’ divestment plan resolved the FTC’s competition concerns in communities where the two chains had overlapping stores, which would have given the new company a dominant market share.

With the FTC’s blessing, Haggen, a small supermarket chain with just 18 locations in the Northwest, bought 146 of the former Albertsons and Safeway stores, including the one where Martinez worked.

Problems appeared quickly.

Haggen overhauled the Valencia store and rebranded and rebranded. Sales slowed and the company raised prices. The company cut working hours and laid off employees. Workers began to be paid weekly instead of weekly.

“The tension with Haggen was at an all-time high,” Martinez said. “I think about how difficult it is for my family. It takes me back to a time I don’t like to remember.”

Martinez’s store was closed. He and dozens of his colleagues lost their jobs.

His store wasn’t the only place Hagge had trouble managing. The grocer essentially expanded more than eight times overnight and couldn’t accommodate the stores it was buying.

Less than a year later, Haggen filed for bankruptcy and closed some locations. Ironically, Albertsons bought back dozens of the same stores it had previously sold to Haggen in bankruptcy court at a lower price.

Martinez found a new job as a pharmacy technician at the Kroger-owned Ralphs supermarket.

Now he worries that Kroger will drop Ralphs as part of its merger with Albertsons. Recap of Haggen 2015 contract.

“It brought back a lot of fear and anxiety,” she said. “My colleagues are worried. They hear that Kroger will have to back down. Everyone is worried that this will be their store.”

The Albertsons-Safeway merger and subsequent Haggen bankruptcy show that divestitures and other concessions required to win FTC approval sometimes fail. And while these tools are designed to promote competition, they can have unintended consequences.

“It was a bellyache,” said corporate restructuring attorney Robert Feinstein, who represented Haggen’s unsecured creditors during the bankruptcy proceedings.

In fact, Lina Khan, the current chair of the FTC, is skeptical of divestitures as an effective tool to promote competition. He even criticized the FTC’s handling of Albertsons’ deal with Safeway as a prime example of divestment restrictions.

In a 2017 law review article he wrote before joining the FTC, Khan said the agency’s approval of Haggen’s debarment “[hard] understand’ and ‘spectacular’ failure.

“Even a casual observer could have predicted that Hagge would have a hard time expanding its storefronts,” Khan said. “The skeptics have been proven right.”

He added that Albertsons buying back some of the Haggen stores from the bankrupt company was “the cruelest irony and a harsh rebuke to the FTC.”

Kroger and Albertsons say the merger, which they expect to complete in 2024, will help them compete with larger chains and benefit shoppers, employees and local communities.

The two companies believe there is a “clear path” to receiving regulatory approval, they added.

Kroger wants to merge with Albertsons to better compete with larger chains.

“We expect to divest stores in certain areas and will work with the FTC to obtain approval for the transaction,” Kroger CFO Gary Millerchip said in a call with analysts last month.

Kroger and Albertsons plan to cut stores to address antitrust concerns that the merger would stifle competition in local markets they overlap.

One way they can do this is to create a new, independent company out of 100 to 375 existing locations. This new entity will be distributed to the shareholders of Albertsons.

The new company will be “a nimble competitor with quality stores” with strong management. “We think it’s a really clean option in the sense that it’s potentially a faster way to package a strategy around divestitures,” Millerchip said.

But it’s not yet clear whether the stores that will be missed will survive in the grocery industry.

If those places are weak or offloaded to a buyer who can’t manage them, it could be a repeat of Haggen’s rapid collapse, antitrust experts warn.

“The big question the FTC has to ask is how is this different from what they’ve promised before,” said Christine Bartholomew, who teaches antitrust law at the University at Buffalo School of Law.

Kroger and Albertsons say they need to grow to compete with larger chains. But it’s unlikely that a new, smaller spinoff could successfully address the same issues, he said.

Carpinteria, Calif., city manager Dave Durflinger said the FTC can’t get it wrong. Supermarkets are an economic anchor in small towns and support hundreds of jobs. Closures can cause serious gaps in food access.

Durflinger knows this all too well. In 2015, Haggen bought the Vons grocery store in Carpinteria (then owned by Safeway) as part of a divestment of Albertsons and Safeway.

“Things immediately went south. There were few shelves. They just couldn’t keep up,” he said. “In a short time it stopped being an attractive store.”

The store closed within months, and it “caused a lot of concern in the community,” he said.

Another chain, Haggen’s, closed, bought the location out of bankruptcy and has since transformed it. But Durflinger said the experience “shows how vulnerable small communities are to mergers and losing economic vitality.”

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