Kroger-Albertsons divestiture deal could ‘backfire’ on Kroger, UFCW analyst says

Kroger says buyer will be ‘a fierce competitor.’

Credit: Nick Graham

Credit: Nick Graham

CINCINNATI — A financial analyst for the United Food & Commercial Workers Union has been trying to poke holes in a divestiture plan announced in September by the Kroger Co. and Albertsons Cos. Inc.

John Marshall has shared his research with the Federal Trade Commission, hoping it will try to block the biggest acquisition in Kroger’s history.

“We were very concerned when we heard this proposed divestiture to C&S was going to be made at an extremely low price,” Marshall said. “What purchasing these assets at below the real estate value offers them is essentially a guarantee that they can make money even if they fail as a retailer. That’s the concern.”

It’s been more than a year since Kroger announced a $24.6 billion plan to combine the nation’s two largest supermarket chains into one 5,000-store giant.

It argued the bigger company would reduce prices and boost wages for workers, while competing more effectively against larger rivals, including Walmart and Amazon.

Critics countered with claims that Kroger and Albertsons will gain too much market clout – particularly in cities where the two chains are now competitors - leading to higher prices and lower pay for grocery workers.

The companies were hoping to quiet their critics with a Sept. 8 announcement that C&S Wholesale Grocers LLC would purchase 413 stores and eight distribution centers from Kroger and Albertsons — if the FTC approved their proposed merger.

In a press release announcing the deal, Kroger CEO Rodney McMullen called C&S “a well-capitalized buyer who will operate as a fierce competitor and ensure divested stores and their associates will continue serving their communities in the ways they do today.”

A solid divestiture plan could be the key to completing the Kroger-Albertsons merger, said Felix Chang, professor of law at the University of Cincinnati.

“The argument that will win is that the divestiture (will) offset any concerns about reductions in competition, about increases in concentration,” said Chang, who teaches antitrust law at UC and Ohio State University. “But I think now there is perhaps a skepticism toward divestitures that might not have existed in the past.”

FTC Chair Lina Khan has been outspoken in her criticism of divestitures as a remedy for antitrust concerns.

The International Center for Law & Economics said that kind of talk puts Khan “on a collision course with the law.” Its Oct. 17 white paper predicts the FTC will lose if it challenges the Kroger-Albertsons merger.

“Only one supermarket merger has been challenged in court since American Store’s acquisition of Lucky Stores in 1988: the Whole Foods/Wild Oats merger in 2007. Over the last 35 years, the FTC has allowed every other supermarket merger and most retail-store transactions to proceed with divestitures,” said the report.

One of the divestiture plans Khan has criticized in the past was the 2015 sale of 168 stores by Albertsons. The FTC approved that sale as a remedy for antitrust concerns in Albertsons’ purchase of the Safeway chain. But that deal ended in bankruptcy for Haggen, a regional grocery chain that was owned by a Florida-based private equity firm known as Comvest.

Marshall said the Haggen deal shares one thing in common with the proposed C&S deal: Both offered the buyer a significant bargain.

“We know the deal partners at Comvest said to the lead partner, ‘How can we handle this significant increase in capacity?’” Marshall said, citing court documents from Haggen’s bankruptcy. “And the lead partner said, ‘The real estate value is worth more than we’re paying. It’s too juicy to pass up.’”

Marshall is a chartered financial analyst who spent most of his career working for unions, including his current job as capital strategies director for UFCW Local 3000 in Spokane, Wash.

“We don’t want to take these 413 stores that are community grocery stores where thousands of our members work and have somebody take a risk” of store closures, Marshall said. “C&S is a grocery supply company. They don’t operate a lot of retail stores. There’s a question about whether they have the managerial expertise to do that.”

Marshall cites several additional concerns about C&S, including its “well-documented record of eliminating thousands of union jobs” and an acquisition history that includes buying stores “only to sell some of them off to other retailers after saddling them with supply agreements.”

He also questions whether C&S has ulterior motives for buying Kroger and Albertsons locations.

“It’s definitely a concern that C&S and Rick Cohen in particular … may see another opportunity here to acquire real estate in key locations to turn what are existing grocery stores into dark stores where they could do fulfillment for e-commerce delivery,” Marshal said.

Rick Cohen is the owner and executive chairman of C&S. He’s also the CEO of Symbotic, a publicly traded warehouse automation company that has a deal with Walmart to build 42 regional distribution centers. That would give Walmart the same kind of robot-powered warehouses that Kroger has been building with UK-based Ocado since 2018.

“This deal could end up backfiring and undermining Kroger’s competitive position,” Marshall said.

C&S did not respond to the I-Team’s questions about Marshall’s analysis. Kroger released a statement:

“Kroger joining with Albertsons will mean lower prices and more choices for more customers in more communities, higher wages, and more industry-leading benefits for associates, securing union jobs and expanded opportunities for farmers and suppliers, all of which ensures competition across the industry. The C&S divestiture plan builds on these commitments by ensuring zero stores will close as a result of the merger, all frontline associates will remain employed, all existing collective bargaining agreements will continue, and associates will continue to receive industry-leading benefits alongside bargained-for wages. The only parties who would benefit if this merger is not completed are large, non-unionized competitors such as Walmart and Amazon.”

About the Author