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Thoughts on the Kroger, Albertsons merger (Part 3)

Here’s who the deal doesn’t benefit

2016 Rob Close.JPGRob Kaufelt was the owner of Murray's Cheese Shop in Greenwich Village, which he sold to Kroger Supermarkets. Today there are over 1,000 Murray's cheese shops across the land. Prior to that, he pioneered upscale supermarkets as President of Mayfair Supermarkets (Foodtown), and specialty foods at Kaufelt's Fancy Groceries. He lives in New York City with his wife and three children.

My take on the pros and cons of Kroger’s purchase of Albertsons is of course irrelevant. FTC Chair Lina Khan will have the final word. If the deal does succeed, it will be the first national grocery chain since the once-great, late A&P.

Instead let’s ask, “Cui bono?” Who benefits? 

We can assume it’s a good deal for the principals, or they wouldn’t propose it. If the stock rises, it will be good for shareholders, and higher profits are generally good for the C-suite salaries if things work out. 

We can assume it’s good for the banks and law firms who are paid handsomely to lend the money and advise both buyer and seller. The list of banks lending the money, and the law firms doing the deal (with a big breakup fee if it falls apart), are a “who’s who” of Wall Street. 

However, credit ratings agency DBRS Morningstar determined that the purchase will have a “net negative effect on Kroger’s overall credit risk profile,” citing both the new debt and the risks of integration and execution. 

The parties proposed selling 100 to 375 stores to head off antitrust concerns (that number may now be even higher, according to recent reports), but at the FTC, Khan has expressed prior qualms about divestitures as an antitrust remedy. As Reuters reported, “Khan has cited the failure of divestitures in a previous supermarket merger involving Albertsons and Safeway as a reason for the agency to be skeptical.” 

To recap that debacle, in 2015 Albertsons bought Safeway for $9 billion, winning FTC clearance by selling 146 stores to Haggen for $300 million. Months later, Haggen filed for bankruptcy. Who bought dozens of those shops? Albertsons. 

Six local United Food and Commercial Workers (UFCW) unions representing more than 100,000 Kroger and Albertsons workers oppose the deal. Citing the Safeway purchase, Judy Wood, a cake decorator at a California Albertsons, recalled, “We were told by the management team that there was nothing to worry about…I am now hearing the same message from management again.” 

Produce groups who supply consumers with fruit, vegetables, and nuts are not only opposed, but sound sincerely worried for their livelihoods. “The buying power of the newly combined Kroger entity cannot be understated,” produce groups told the FTC. “Growers and shippers are ultimately price takers and are constantly struggling to achieve better than breakeven pricing from retailers.”  

The produce groups also explained why shoppers, too, should care if the merger goes through: “Eliminating major competitors from the marketplace never leads to reduced prices for the consumer. Rather, food costs will only go up.” 

As for me, it’s déjà vu. 

In the 1980s, when the bankers at the now defunct investment bank Bear Stearns approached my father, Stanley Kaufelt, about taking his grocery business private, it seemed like a bad idea to both my brother, a Wall Street attorney, and me, the grocer. Mayfair Foodtown had strong sales, healthy profits, and a rising share price. 

But Dad was sold on the idea and the deal went through. Instead of the fat return promised, Mayfair’s new debt crippled growth, and the company was eventually sold to Ahold. 

If Kroger buys Albertsons, regional chains won’t be able to compete on price and will continue to be absorbed. What makes them special will disappear with them. Towns that lose competition between stores will see prices rise and people put out to pasture in a drive to cut costs. A giant company can punish towns that displease it — as Kroger did in California, showing local politicians what it thought of covid hazard pay. 

Store employees will suffer most, in my opinion. A few years ago, on a family vacation in Colorado, we stopped for lunch at a Kroger King Soopers. The kids squealed when they saw the Murray’s Cheese colors and familiar treats. They pointed to the grainy 1925 sepia photo of the Kaufelt family in front of the old shop in Perth Amboy, New Jersey. 

Then the manager, who had been to Red Jacket training in New York, came to me crying. Her hours had been so sharply cut that it was causing her serious financial distress.Could I do anything? Sadly no – I had already sold the business. I left in a funk. 

According to a large survey of supermarket workers conducted by the Economic Roundtable, more than 75% of Kroger workers are food-insecure. “They run out of food before the end of the month, skip meals, and are hungry sometimes. Kroger workers’ exceptionally high rate of food insecurity is seven times greater than the U.S. average.” 

Lest we forget, this is food. My last 30 years in grocery were spent in the world of farmers and chefs, but I also found plenty of quality foods produced at scale. Industrial food, by contrast, is based on the worst farming practices, the lowest prices to farmers, the thinnest margins for the distributors, and the cheapest ingredients.

According to the National Grocers Association, more than 60% of American grocery sales are concentrated in just five companies: Amazon, Walmart, Kroger, Albertsons, and Ahold Delhaize. If the merger goes through, Kroger and Walmart combined would control nearly half.

That would create what economists call an oligopoly (a few giant sellers) and an oligopsony (a few powerful buyers), which undermines fair prices for both consumers and producers, and drives down wages for workers. In many communities, there may be no competition for the only supermarket in town. Or worse — no store at all.

This is part three of a three part series — click to read parts one and two

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of Supermarket News

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