Federal and state judges block merger of Kroger and Albertsons, citing threat to competition

A federal judge in Oregon blocked Kroger’s $24.6 billion acquisition of grocery rival Albertsons on Tuesday, marking the possible end of what would have been the largest supermarket merger in U.S. history.

In issuing a temporary injunction, U.S. District Judge Adrienne Nelson said allowing the two giants to combine would reduce competition, raising the cost of food and other staples for millions of Americans. The chains rank as the nation’s second- and fourth-largest grocers by sales, respectively.

“The Court finds that both qualitative and quantitative evidence shows that defendants engage in substantial head-to-head competition and the proposed merger would remove that competition,” Nelson wrote in her decision. “As a result, the proposed merger is likely to lead to unilateral competitive effects and is presumptively unlawful.”

While Kroger attorney Matt Wolf had said during the trial’s opening arguments that an injunction would effectively end the merger, Nelson said Tuesday her “order in no way forces them to do so, and leaves open the possibility that they may pursue the merger at a later date should it be deemed lawful in the administrative proceedings.”

The ruling is a decisive win for the Federal Trade Commission, which under the Biden administration has cracked down on megamergers on antitrust grounds. The FTC, joined by eight states and the District of Columbia, argued that allowing the Kroger-Albertsons deal to go forward would give consumers - who have already seen grocery prices surge by 22 percent over four years - even fewer choices.

Kroger owns more than 2,700 stores under 20-plus banners, including Harris Teeter, Ralphs and Fred Meyer. In addition to its namesake locations, Albertsons includes Safeway and Vons among its 2,200 stores in 34 states and the District of Columbia.

[Kroger and Albertsons propose selling Carrs Safeway grocery stores in Alaska as part of $24.6 billion merger plan]

Kroger’s stock price was up 5.1 percent by market close, while Albertsons dropped 2.3 percent.

The federal judge’s ruling “protects competition in the grocery market, which will prevent prices from rising even more,” said FTC spokesman Douglas Farrar in a statement to The Washington Post. “This statement win makes it clear that strong, reality-based antitrust enforcement delivers real results for consumers, workers, and small businesses.”

A judge in Washington state also ruled Tuesday to block the merger on a separate legal challenge from Attorney General Bob Ferguson. At the hearing, King County Superior Court Judge Marshall Ferguson (no relation to the attorney general) said “the evidence convincingly shows that the current competition between Kroger and Albertsons stores is fierce in the State of Washington.”

The judge’s ruling “is an important victory for affordability, worker protections and the rule of law,” said the attorney general. “We went to court to block this illegal merger to protect Washingtonians’ struggling with high grocery prices and the workers whose jobs were at stake.”

There is also a pending decision from a judge in Colorado. It was not immediately clear how the injunctions would affect the Colorado case, but Seattle University law professor John Kirkwood said Tuesday’s decisions can only bolster its case against the merger.

Kroger and Albertsons said in statements they were “disappointed” by the two decisions and that they will evaluate their options.

The judges overlooked “the substantial evidence presented at trial showing that a merger between Kroger and Albertsons would advance the company’s decades-long commitment to lowering prices, respecting collective bargaining agreements, and is in the best interests of customers, associates, and the broader competitive environment in a rapidly evolving grocery landscape,” said the Kroger statement.

‘No guarantee’ of lower prices

When the deal was announced in October 2022, the combined companies presented it as the best way to lower prices and better compete in a rapidly diversifying grocery space dominated by Walmart - by sales and locations - while club stores, dollar stores and value retailers like Aldi and Lidl are rapidly expanding and eating up the $1 trillion-a-year market.

Albertsons executives warned during the three-week trial in U.S. District Court in Portland that without a merger, they will not be able to lower prices and may be forced to consider store closures and layoffs. Kroger executives had promised to invest $1 billion to lower prices.

But the FTC - along with Arizona, California, D.C., Illinois, Maryland, Nevada, New Mexico, Oregon and Wyoming - argued that a merger would have a ripple effect felt by customers, employees and suppliers across the country. And it rejected the Kroger pledge to lower prices as not legally binding and hard to enforce.

Nelson agreed, concluding that the plans pitched by Kroger and Albertsons for price investments “are neither merger-specific nor verifiable, so there is no guarantee that they will result from the merger or that they could not be achieved in the absence of the merger.”

The court can give “limited weight to a nonbinding promise made during these proceedings,” she added.

Another point of contention was the companies’ divestiture plan. To appease regulators, they struck a $2.9 billion deal to sell 579 locations in 18 states and the District to C & S Wholesale Grocers, which supplies independent grocery stores and owns about two dozen supermarkets under the Piggly Wiggly and Grand Union banners. Kroger would sell its Haggen banner to C & S, and C & S would license the Albertsons banner in California and Wyoming and the Safeway banner in Arizona and Colorado.

Nelson sided with regulators that C & S was ill-equipped to successfully run the stores.

“There is ample evidence that the divestiture is not sufficient in scale to adequately compete with the merged firm and is structured in a way that will significantly disadvantage C & S as a competitor,” she argued. “The deficiencies in the divestiture scope and structure create a risk that some or all of the divested stores will lose sales or close, as has happened in past C & S acquisitions.”

An additional sticking point during the trial was how the FTC defined a supermarket, and by extension which other chains are considered direct competitors. Regulators argued the market for Kroger and Albertsons excludes stores like Aldi, Dollar General, Amazon and its subsidiary Whole Foods and Costco, which was the number three grocery seller last year. (Amazon founder Jeff Bezos owns The Washington Post).

“The grocery market is far more diverse, far more competitive … than the grocery market described by the FTC,” said Scott Moses, the head of grocery, pharmacy and restaurant investment banking at Solomon Partners.

The judge agreed with the FTC’s argument that Kroger and Albertsons are one-stop-shop destinations - a unique shopping experience where customers can buy a birthday cake at the bakery, pick up prescriptions at the pharmacy and get freshly-sliced turkey from the deli counter. They have no membership fee, are not considered specialty health food stores and offer an array of options such as choices of snack-sized, standard-sized and family-sized bags of chips.

Federal regulators - joined by industry groups and think tanks - also warned that a combined Kroger-Albertsons behemoth could indirectly threaten the viability of independent grocery stores in addition to its effects on competition and prices. The rapid expansion of dollar stores, the growing power of big-box retailers and supermarket giants and the rise of dynamic pricing at those stores are causing further strain on stores that are often the only option for fresh food in poor rural and urban communities.

When the major chains leverage their size and influence to dictate the price they pay suppliers, wholesalers and producers in turn charge them higher premiums to make up the difference, said FTC Commissioner Alvaro Bedoya. With no other alternatives, owners passed those premiums to consumers.

Other legal challenges

The final days of the FTC’s case overlapped with separate merger challenges from the state of Washington, which began Sept. 18, and Denver, which kicked off on Sept. 30.

The companies did not say Tuesday whether they would proceed with their cases in light of the federal judge’s ruling.

Colorado Attorney General Phil Weiser applauded Nelson’s decision, calling it was “a victory for consumers, workers, and farmers.”

“We are optimistic that this illegal merger will be permanently blocked,” he said, adding he looks forward to the state judges’ ruling.

Because multiple suits are at stake, the verdict is the first major ruling in what experts are calling an “unusual, if not unprecedented” scenario, said Michael Keeley, a partner and chair of the antitrust practice at law firm Axinn, Veltrop & Harkrider. Normally, state attorneys general join the federal government rather than launching their own suits. But in this instance, the tie-up could enter uncharted territory if the Colorado judge rule in favor of the merger.

“I can’t think of a time when you’ve ended up with potentially competing judgments coming out of even one state court,” Keeley said.

The impact a failed merger will have on the companies could unfurl over the next few years, said Pablo Garces, a retail analyst at S&P Global. Nontraditional grocery stores have for decades been growing “at the expense of traditional grocery … like Kroger and Albertsons.”

“It’s hard to see a scenario where that doesn’t continue,” he said.

If Kroger and Albertsons plan to continue to fight the case, the next step would be the FTC’s administrative court, where an in-house judge would rule whether the merger is anticompetitive. But that case could be in jeopardy: A lawsuit filed by Kroger contends the review is unconstitutional, citing a recent Supreme Court decision that limited the use of in-house legal proceedings at the Securities and Exchange Commission.