Kroger and Albertsons say they need to merge to compete with Walmart. Claire Kelloway argues that what they really want is Walmart’s monopsony power, and permitting mergers on these grounds will only harm suppliers, workers, and consumers.

As grocers Kroger and Albertsons wait for the Federal Trade Commission (FTC) to approve or challenge their proposed merger, company executives and grocery industry commentators have doubled down on the merging parties’ defense that this deal is necessary for them to compete with retail giants Walmart, Amazon, and even Costco.

While Walmart and Amazon are domineering retail competitors, permitting more massive mergers is not the best way to level the playing field. The merger of Kroger and Albertsons won’t help them to compete with giant retailers in the increasingly important online market, at least not in isolation. The companies also overstate the merger’s potential efficiencies. The unstated truth is that most of Kroger-Albertsons’ cost savings will come from its elevated monopsony power, or the market power to demand lower prices from suppliers and labor. Rather than promise more competitive prices for consumers, this merger will only lead to lower prices for farmers and grocery workers, more grocery consolidation, and diminished choice and food access for consumers. Antitrust enforcers should block the proposed merger and use existing laws and authorities, namely the Robinson-Patman Act, to help grocers compete with Walmart and Amazon instead. 

Kroger and Albertsons face two primary disadvantages relative to Walmart or Amazon. The first is market share. Walmart sells 25% of all groceries in the United States to Kroger’s 8% and Albertsons 5% (Amazon only has 1%). A larger market share can give firms monopsony power to demand lower prices from suppliers, because suppliers become more reliant on accessing their larger customer base. In addition to having smaller market shares compared to Walmart, both Kroger and Albertsons are growing slower than Walmart, especially when it comes to online sales. This brings us to the second disadvantage.

The online grocery industry is expected to grow at over three times the rate of overall grocery sales. Kroger and Albertsons say they need to combine resources to compete with Walmart and e-commerce giant Amazon. Though Amazon sells just 1% of all groceries and its Whole Foods and Amazon Fresh ventures have been lackluster at best, it sells nearly 21% of online groceries.

Relatedly, Kroger and Albertsons also want to compete with Walmart and Amazon for advertising dollars. This year, brands will give retailers an estimated $45 billion to use their troves of customer data to place targeted ads in online stores and beyond. So-called “retail media” advertising is only expected to grow. Last year, Amazon captured 37% of this lucrative retail ad spending.

On these two fronts, Albertsons and Kroger argue their merger would allow them to better compete in the traditional brick-and-mortar grocery market and the emerging online grocery market. For one, combining their customer base could help Kroger and Albertsons attract more retail media dollars. Second, the merger could help their grocery delivery business by lowering their overhead ratio. Specifically, it would help direct more throughput into the companies’ costly, automated, delivery-focused warehouses (that is, if they consolidate logistics). To put it in the language of economists, Kroger and Albertsons argue their merger captures economies of scale, the efficiencies of which they can then pass on to consumers in the form of lower prices.

There is some merit to both claims, but both ultimately fail as a merger defense. First, combining Kroger and Albertsons won’t solve all the chains’ e-commerce concerns. As the American Antitrust Institute highlighted in a letter to the FTC, if Kroger or Albertsons wanted to expand their e-commerce business, they’d buy an e-commerce-focused company (as competitors like Walmart and Target have in recent years). Instead, the companies will combine two similar sets of brick-and-mortar-focused assets that each require more e-commerce investments and improvements.

Second, merged operations will achieve far fewer cost-saving efficiencies than the two companies currently advertise. Kroger and Albertsons claim their merger will save them $1 billion over four years and a full 50% of those savings will go to lower prices for consumers. Never mind that the FTC found in a study that grocery mergers generally lead to higher, not lower, prices. The question is, how will Kroger-Albertsons pull this off?

With two of the largest grocery networks in the country, Kroger and Albertsons already benefit from considerable economies of scale, self-distribution infrastructure, and large private label businesses. Consolidating central headquarters and administrative staff won’t get them to $1 billion in savings. It’s also not clear that this merger will deliver dramatic new productive efficiencies to Kroger and Albertsons’ supply chains, especially since integrating systems will bring some challenges and inefficiencies.

But by consolidating more customers and sales under one roof, the deal will give Kroger more bargaining power over suppliers. The primary, and perhaps only, rationale behind this merger is that a combined Kroger and Albertsons will have more monopsony power to squeeze suppliers for lower prices, as Walmart can. That is where most of the savings will come from.

The anticompetitive risks to suppliers of combining two large direct competitors supersedes whatever potential efficiencies exist under merger law. The Supreme Court and lower courts have repeatedly rejected the efficiencies defense for an otherwise illegal merger. The regional loss of direct competition for grocery customers plus the harms to suppliers and workers are more than enough to block this deal.

The Kroger-Albertson merger does not just pose short term harms but also highlights the long-term harms of permitting mergers for the sake of building monopsony power. No grocer will be safe unless they merge to the size of the biggest player. Remaining grocers, especially regional independent grocers (responsible for about 33% of all food sales in the U.S.), will need to pursue their own mergers to survive. However, we know that larger, centrally operated grocery chains have done a poor job serving rural communities and communities of color, which are more likely to rely on independents for full-service groceries. These types of chains also have a poor track record of working with smaller or regional suppliers, which drives consolidation among brands and shuts out new competitors.

Competing in this way is illegal, though virtually unenforced. The Robinson-Patman Act was designed to prevent this very type of arms race, where retailers get ahead by extracting lower prices from suppliers through brute bargaining power. Critically, the Robinson-Patman Act allows suppliers to offer lower prices if it genuinely costs less to supply in bulk, such as by lowering shipping costs by filling a full truck. But it prevents large retailers from demanding lower prices simply because they represent a substantial portion of a suppliers’ business that they cannot afford to lose. Enforcing this law would do a better job of leveling the playing field, not just for Kroger and Albertsons but for independent grocers across the country that could obtain more fair pricing.

Ironically, proponents of the Kroger-Albertsons merger argue that the two firms need to come together to protect their unionized workforce from the downward competitive pressures of growing non-unionized chains. But here too, merging is not the best way to protect union workers.

For one, the United Food and Commercial Workers union which represents Kroger and Albertsons workers will lose the ability to pit its two largest grocery shops against each other in bargaining. The union will have less leverage dealing with one massive employer, according to a new study. Kroger and Albertsons will also feel less pressure to compete to secure workers, which could lower the quality of their job offers. Kroger and Albertsons promise that they’ll invest in workers and preserve stores and their jobs. But even if a merged Kroger-Albertsons does keep this jobs promise (a big if) it couldn’t control the fate of the stores it sells off. For example, dozens of divested stores closed in the aftermath of the 2015 Safeway-Albertsons and 2016 Ahold-Delhaize mergers.

Second, merging doesn’t change grocers’ incentives to compete by undercutting their workers. Walmart has a particularly dismal history of abusing its market power to mistreat its employees and engage in union busting. Instead of approving the merger, the FTC should level the playing field. It should also make clear that union busting is an unfair method of competition using its Section 5 authority. The FTC’s new partnership with the National Labor Relations Board bodes well in this regard.

Competition policy at its best should direct companies to compete in ways that serve the public interest rather than the short-term interests of investors. It should also incentivize companies to get ahead on genuine, productive innovation and effective management. Policies that neutralize abusive buyer power and ban competing on the backs of working people achieve these goals, while permissive merger policy does not. The proposed Kroger-Albertsons merger promises only to harm suppliers, workers, and consumers. The FTC must block it.

Author Disclosure: The author works for the Open Markets Institute, which receives funding from foundations such as the Lumpkin Family Foundation, William and Flora Hewlett Foundation, Wallace Global Fund, Omidyar Network, and Open Society Foundations.

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