Kroger and Albertsons vs. the FTC: Here’s what to expect in merger trial set to start Monday

PORTLAND, Ore. -- A legal showdown that could reshape the American grocery landscape is about to unfold in Portland, where the largest supermarket merger in U.S. history hangs in balance.

Starting Monday, Kroger and Albertsons will face off against regulators seeking to block their proposed $24.6 billion merger. A hearing that could determine the fate of the deal, set in a Portland federal courtroom, is expected to last three weeks.

The Federal Trade Commission’s challenge to the blockbuster merger, joined by Oregon and eight other states, is broadly seen as a test of the commission’s emboldened efforts to rein in corporate consolidation. It also comes in an election year where both Republican and Democratic candidates are trying to win over consumers miffed by high grocery prices.

But the outcome could also have real and dramatic effects in Oregon, where Kroger, the corporate parent of Fred Meyer and QFC, and Albertsons, which owns Safeway, compete head to head for customers and workers.

“Both companies have a pretty big presence in the Portland and Oregon markets. If this merger were to be successful, it would have a direct impact,” said Mohsen Manesh, associate dean of faculty research and programs at the University of Oregon School of Law. “Whether that impact is good or bad depends on who you believe.”

The Federal Trade Commission is seeking a preliminary injunction that would prohibit the grocery giants from closing the deal before the agency has the chance to argue its case in its internal court.

If a federal judge grants an injunction that would delay the deal’s closing, Kroger and Albertsons are likely to abandon the deal altogether, experts say, though the companies have vowed to exhaust any available legal options before giving up.

That sets high stakes for Kroger and Albertsons, which announced their plans to merge in October 2022 and aimed to close the deal by early 2024.

The influential decision falls to U.S. District Judge Adrienne Nelson, a former Oregon Supreme Court justice appointed to the federal bench last year by President Joe Biden.

Manesh said that both the government and the grocery giants need to make their case in a way comprehensible to a judge with little background in the specialized fields of economics and antitrust law.

“It’s not every so often that federal district judges here in Oregon get an antitrust lawsuit on their docket,” he said, “and when they do, there’s a real learning curve.”

In July, Nelson convened an expert tutorial in court, where each party designated an expert to provide her an “objective and neutral” economics lesson.

That, Manesh said, “reflects a judge who’s very careful in taking this case very seriously.”

Consumers take spotlight

The Federal Trade Commission has argued Kroger’s acquisition is likely to reduce competition and lead to higher prices, reduced quality and fewer choices for consumers in “hundreds of communities” where they closely compete.

Kroger and Albertsons, though, have vigorously defended the tie-up as benefiting shoppers. The companies have pledged, if the merger is approved, to spend $1 billion cutting grocery prices, another $1 billion raising worker wages and benefits and $1.3 billion on improvements to Albertsons stores.

And Kroger and Albertsons have a deal to sell off 579 stores to preserve competition in markets where they overlap. The stores, including 62 in Oregon, would go to New Hampshire-based C&S Wholesale Grocers, which will pay $2.9 billion for them. The sale also would include distribution centers in Arizona, Colorado, Utah and Washington state and a dairy plant in Denver.

[18 Alaska Carrs Safeway stores targeted for divestiture in Kroger-Albertsons merger]

While Kroger and Albertsons have stores in markets where they don’t compete directly with each other, there are some states — such as Oregon, Washington, California and Colorado — where there’s significant overlap.

Research shows grocery chain mergers can benefit consumers when the buyer adds territory, Herbert Hovenkamp, an antitrust expert and law professor at the University of Pennsylvania. Better distribution and efforts to win over customers can bring low prices. Kroger, which has expanded through many mergers and consolidations over the last four decades, including its purchase of Fred Meyer in 1998, has a record of keeping prices low, Hovenkamp said.

But the research doesn’t look as good for consumers in areas where newly combined chains used to compete, Hovenkamp said.

“Where the merger eliminates active competition between two stores, then the result is higher prices,” Hovenkamp said.

The Federal Trade Commission has argued that Kroger and Albertsons’ competition in the Portland area and across Oregon benefits consumers in terms of pricing, product quality and service.

The argument that the merger would hurt consumers might seem straightforward, but the dynamics of the grocery industry might make it more difficult for regulators to prevail.

The grocers are expected to argue that they’re not just competing with each other, or even with other supermarkets.

“Kroger and Albertsons are also arguing that they’re not just competing against each other, they’re competing as Trader Joe’s, Amazon and the like,” said Manesh of the UO law school.

Labor leverage at issue

Regulators also contend that a merger of the companies, whose enormous workforces are largely unionized, could reduce the leverage employees have in negotiating for better wages and working conditions.

Antitrust experts say regulators’ focus on the Kroger and Albertsons workforces marks the first time an agency has challenged a merger based on the argument it would harm a unionized labor market.

But workforce-focused antitrust arguments are not entirely untested. Two years ago, a federal court sided with the U.S. Department of Justice’s move to block the world’s largest publisher, Penguin Random House, from buying its rival Simon & Schuster for $2.2 billion, arguing that the merger would hurt authors by reducing competition for their books — and the authors’ potential earnings.

Ultimately, that could be as persuasive a legal argument as the effect on consumers, Hovenkamp said.

“There’s not a lot of legal precedent for harm to labor markets, but … the statute is indifferent,” Hovenkamp said. “The law applies equally to sales of groceries and to suppression of wages.”

In the government’s original complaint, regulators alleged that, in 2019, Kroger and Albertsons “successfully coordinated” in negotiations with Portland union workers that led to less favorable wages and working conditions for employees.

Kroger’s Fred Meyer is locked in contract negotiations with its grocery union. A week before the trial, the United Food and Commercial Workers Local 555 authorized a strike on Portland area stores — and yanked its prior endorsement for the merger. (The umbrella UFCW, other UFCW locals and the Teamsters union had already opposed the merger.)

Hovenkamp said union support or opposition generally hasn’t played a role in antitrust cases, though that could play out differently in a case where competition for labor takes center stage.

New competitor’s fitness challenged

Kroger and Albertsons plan to satisfy anticompetition concerns by introducing a new competitor — its handpicked buyer, C&S Wholesale Grocers — to the regions where they overlap.

But that plan has raised alarm bells in the Pacific Northwest, which has been through a major grocery merger before. In 2015, when Albertsons took over rival Safeway, it sold 146 of its surplus stores to Washington-based grocer Haggen.

A year later, the overextended Haggen filed for bankruptcy and abandoned the expansion, eventually selling some stores back to Albertsons for a much cheaper price. Other stores closed for good.

Kroger has said that C&S, which supplies grocery stores nationwide, is in a much better position to absorb all the new stores than Haggen was.

But regulators have pointed to the Haggen debacle as a reason for skepticism over Kroger’s Albertsons acquisition, and antitrust experts say that history could hold sway at trial.

The government is betting heavily on discrediting C&S, the proposed divestiture buyer. In court filings, the Federal Trade Commission argued that the divestiture plan to C&S is “fatally flawed.”

C&S is a wholesaler in the food business, the FTC contends, but with limited experience running stores — especially those that also sell general merchandise. (Fred Meyer is among the most invested in general merchandise of Kroger’s brands, but no Fred Meyer stores are expected to be transferred to C&S.)

“The problem is that the divestiture is inadequate, because C&S is basically a wholesaler and an inexperienced retailer,” said Steven Salop, an economist and antitrust law professor at Georgetown University. “The divestiture is a bunch of cats and dogs in multiple states that is not enough to create a viable entity.”

C&S, he said, is also a much smaller company for whom adding hundreds of stores would be a major undertaking.

“This divestiture would increase their size by orders of magnitude,” Salop said. “And the FTC is going to give the judge that example of what happened to Haggen.”

Regulatory agencies under the Biden administration have toughened their scrutiny of proposed mergers, and Salop said that’s particularly true of companies’ go-to answer for antitrust concerns: selling off parts of their business.

“What’s going on now is that agencies are saying they didn’t bring enough cases and took weak settlements in the past,” Salop said, “and so now they’re not going to do that anymore.”

Experts watching closely

As the government makes its twin arguments that the merger would have harmful anticompetitive effects on the grocery market and on the labor market, Salop said it only needs to prevail on one or the other to win its case.

“The antitrust laws with respect to mergers puts a huge burden on the companies,” Salop said.

Hovenkamp said the Federal Trade Commission is likely to succeed if they can show that a merger between Kroger and Albertsons may lessen competition in some geographic areas — not all — and lead to higher grocery prices.

“If the FTC can identify some areas like that, and if the parties cannot fix them with some divestitures,” he said, “then I think the FTC has a chance of getting an injunction.”

“The law is stacked in favor of the FTC because they only need to show that the merger will be unlawful in some section of the country, and it doesn’t matter if the merger would be pro-competitive in other parts of the country,” Hovenkamp said.

Salop said, however, said courts in previous cases have applied a much higher burden on the government.

If the Federal Trade Commission prevails, the court will place a preliminary injunction, blocking the merger until the agency can fully review the case in its in-house administrative court.

If Kroger wins, it can go ahead with its merger — for the most part. It would still have legal challenges in Washington and Colorado, where the companies face state lawsuits.

The two companies have repeatedly promised a robust fight. The companies stated in their original merger agreement that they “shall take any and all actions” to challenge “any decree, order, judgment, or injunction” that blocks the deal.

Kroger on Monday, for example, sued the Federal Trade Commission in federal court in Cincinnati, arguing that the agency’s administrative law proceedings are unconstitutional. The supermarket giant relied in part on a June Supreme Court ruling that curbed the power of regulatory agencies to use in-house courts and judges.

Hovenkamp said Kroger’s lawsuit represents a test case that “could have a major impact, if Kroger wins.”

“It’s kind of a Hail Mary pass, but it’s probably worth filing a brief and see if it goes anywhere,” Hovenkamp said. “Statistically, I think it has a low chance of success.”

As for the upcoming three-week hearing in Portland, antitrust experts largely declined to make predictions about how the case would go.

“The thing about antitrust,” Salop said, “is that there’s a lot of uncertainty.”