Rekubit Exchange:Will the feds block a grocery megamerger? Kroger and Albertsons will soon find out

Will America's two largest grocery store chains get to become one?Rekubit Exchange

That's the question before U.S. regulators, who are deciding whether to block Kroger's $24.6 billion purchase of Albertsons. Several state attorneys general, too, have signaled they might sue to halt the deal.

At stake is a shakeup of the U.S. grocery landscape, where the companies say they face stiffening competition from Amazon, Walmart, Costco and even dollar stores. Employees, state officials and some lawmakers have argued the tie-up would reduce options for shoppers and workers, farmers and food producers.

Kroger, the biggest U.S. supermarket operator with 2,719 locations, owns Ralphs, Harris Teeter, Fred Meyer and King Soopers. Albertsons, the second-largest chain with 2,272 stores, owns Safeway and Vons. Kroger employs about 430,000 people; Albertsons 290,000.

The chains overlap particularly in Western states. The companies tried to assuage regulators' concerns about diminishing grocery competition in those markets by agreeing to sell up to 650 stores as part of the deal.

However, antitrust experts in the Biden administration in the past have expressed skepticism about whether divestitures can sufficiently protect competition — on prices, jobs or terms for suppliers, for example. The regulators have also pushed for tougher scrutiny of megadeals, making this merger a high-profile test.

The Federal Trade Commission has been reviewing the proposed deal for over a year and is expected to make its call as early as this month. A lawsuit to stop the deal would not be a shocker. In May 2023, Kroger CEO Rodney McMullen said the grocery chains "committed to litigate in advance" if federal regulators or state attorneys general rejected the deal.

Combining forces to compete with Walmart

Ohio-based Kroger and Idaho-based Albertsons say together, they'd be in a stronger position to compete against Amazon online and Walmart in physical stores. The latter is the nationwide leader in groceries, selling more than Kroger and Albertsons combined.

"This merger will help protect the local community grocery stores that people love," Albertsons CEO Vivek Sankaran said in his testimony at a Senate antitrust hearing in 2022.

The companies also argue that together they would be able to lower prices and pay higher wages. They emphasize that they offer union jobs, in contrast to their rivals.

Yet, the United Food & Commercial Workers Union, which represents more than 350,000 workers across the two grocery chains, opposes the merger. At public forums around Colorado, for example, workers noted it could become more difficult to negotiate a union contract with an even bigger, more dominant employer.

"The areas [our members] are concerned with are what happens to competition and food prices," UFCW International President Marc Perrone said, adding that his members also worried about the long-term prospects for their current collective bargaining agreements.

Will selling off stores satisfy regulators?

Grocery competition historically gets assessed on a local level: Will shoppers in a given area have fewer options after the merger? Trying to address this, Kroger and Albertsons in September agreed to sell at least 413 stores in locations where they overlapped to C&S Wholesale Grocers, a supplier company.

C&S agreed to buy retail locations in Arizona, California, Colorado and Wyoming, as well as some private brands, distribution centers and offices. The company said it was "committed to retaining" the stores' existing workers, pledging to recognize the union workforce and keep all collective bargaining agreements.

Perrone said his union welcomed this decision, but remains concerned about the merger's approval hinging on the sale to the much-smaller C&S:

"Can they operate efficiently and be competitive to where the customers, over the long haul, will stay with them?" he said.

Many antitrust experts in recent years have questioned the effectiveness of such divestitures.

For instance, when Albertsons merged with Safeway in 2015, the FTC required it to sell off 168 stores as part of the deal. Within months, one of its buyers filed for bankruptcy protection and Albertsons repurchased 33 of those stores on the cheap.

"Over time, there has been some skepticism about how well divestitures work," said Kathleen Bradish, acting president of the American Antitrust Institute, which advocates for tougher scrutiny of mergers. "The divestitures that were deemed acceptable in the past may not be acceptable [now]."

Indeed, federal antitrust regulators last year updated their guidelines for policing mergers to include, for example, greater focus not only on how deals affect prices or consumer choice but also suppliers or workers.