Much of the conversation of the proposed Kroger-Albertsons merger has focused on the risks to consumers. However, the merger also poses serious implications for the grocers’ upstream suppliers, particularly smaller regional firms.
In October 2022, grocery chain Kroger announced its intention to acquire competitor Albertsons for $24.6 billion. Kroger’s proposed purchase of Albertsons would be the largest grocery acquisition in history, as these chains operate nearly 5,000 stores and 66 distribution centers across the nation and employ over 700,000 associates. The deal is still pending approval from the Federal Trade Commission (FTC), but it faces vocal opposition from industry groups, including the National Grocers Association and the United Food and Commercial Workers International Union, as well as numerous state and consumer groups.
While much of the criticism of the proposed merger focuses on consumer prices and the risk that they may increase post-merger, significantly less attention has been paid to the suppliers of these stores, including growers, shippers, manufacturers, distributors, and wholesalers. There are several potential upstream economic impacts worth considering as the FTC reviews this and other large mergers in the food industry. As would be the case with any retail merger, the suppliers for these chains can be expected to face some degree of uncertainty, transition costs, and coordination challenges. In a previous study, my co-authors and I found statistical and anecdotal evidence that the 2014 Safeway-Albertsons merger resulted in uncertainty, lost revenues, and lower prices received for California specialty crop growers. There are concerns about the economic post-merger viability of smaller suppliers, given the size and scale of the proposed merger and the buying power it would grant Kroger-Albertsons to demand cheaper prices from them. In European grocery markets, which are typically more concentrated than those in the United States, several studies have found that large buyers negatively impact sellers, particularly smaller ones.
Indeed, Kroger and Albertsons have touted their ability to leverage their combined scale to reduce their costs as an avenue for delivering lower food prices and better value for consumers. Suppliers will have an incentive to reduce their prices if doing so will land them on the shelves of Kroger-Albertsons’ roughly 5,000 stores. Though wholesale prices are proprietary information and protected by trade secrets, it is well understood that national retailers such as Walmart and Costco garner favorable prices from suppliers, largely due to their market share and visibility among U.S. households.
The extent to which Kroger-Albertsons can drive down wholesale prices will be largely a function of the asymmetry in size when dealing with manufacturers. Currently, both retail chains buy from several large vendors and manufacturers, predominantly consumer packaged goods (CPG) companies. Vendors such as Kellogg or PepsiCo with national or international markets will be comparable in size to Kroger-Albertsons, if not larger, and will likely not be affected substantially by the increased buying power derived from the merger. But smaller suppliers, such as regional manufacturers, produce distributors, and specialty food companies, will find themselves relatively much smaller than Kroger post-merger. The economic importance of the firms potentially affected is substantial. The Specialty Food Association, which represents artisan food companies that tend to be smaller and independent, includes over 3,500 corporate members, representing hundreds of thousands of jobs and more than $194 billion in revenues as of 2023. Theory and evidence indicates that these smaller firms will be forced to offer their products at lower prices if they wish to remain on Kroger-Albertsons’ shelves. Lower prices received for vendors, particularly during a time of rising supply chain costs, could significantly reduce profitability and viability. According to CSIMarket, food processing companies have an average operating margin of 5.2%, meaning that their capacity to reduce prices is already constrained.
As such, to the extent that Kroger achieves lower wholesale prices, this could result in a secondary impact throughout markets that is commonly known as the “waterbed effect.” If suppliers reduce their prices to get on the shelves of Kroger-Albertsons’ stores, they are then motivated to recover their profit margins via transactions with other buyers. Thus, the merger may result in higher wholesale prices for smaller retailers and wholesalers who don’t command the monopsony power to demand lower prices from the suppliers, again affecting smaller companies to a greater extent than larger companies.
Smaller suppliers face disadvantages beyond price that may jeopardize their operations. Previous grocery merger events suggest that Kroger and Albertsons will gradually align their respective product offerings over time, streamlining the purchasing process across retail banners for both national brands and private labels. Smaller vendors and manufacturers without the capacity to service both Kroger and Albertsons stores post-merger face the prospect of losing their respective accounts, resulting in uncertainty and the loss of substantial revenues. The more constrained a supplier is in terms of total output, the higher is the likelihood of being unable to supply the newly merged chains. For example, a small produce grower cannot expand land area and ramp up production to meet the demand of a significantly expanded buyer on a short time horizon. This was cited as a problem for specialty crop growers in the wake of the Safeway-Albertsons merger.
One way in which smaller retailers may respond to problems of scale and monopsony power is to consolidate themselves. Consolidation has been a key transformative process for the entire food supply chain, from seeds to groceries, for the past several decades in the U.S. In U.S. grocery, the four-firm concentration ratio increased from 35% to 65.1% between 1990 and 2019. While the merits and drawbacks of consolidation can be discussed and debated, it seems likely that the Kroger-Albertsons merger will encourage the consolidation process among grocery suppliers. We should expect to see an uptick in consolidation among manufacturers, distributors, and wholesalers following the Kroger-Albertsons merger, which in turn will incentivize consolidation among agricultural producers, brokers, transportation providers, and other upstream segments of the food supply chain.
The specific nature of the proposed Kroger-Albertsons merger offers one unique opportunity for smaller suppliers. Kroger has already announced a divestiture of 413 supermarkets throughout the U.S. to C&S Wholesalers, the largest grocery wholesaler in the U.S. by revenues. Depending on the FTC’s evaluation of the merger in 2024, the size of the divestiture may increase. C&S currently has a very limited physical footprint in grocery retail, and this divestiture has many throughout the industry wondering whether C&S will operate these stores directly or sell them to other retailers once they have left the Kroger banners. Most large national grocery chains purchase directly from brand manufacturers, but wholesalers such as C&S sell primarily to smaller chains and independents. Should C&S choose to sell some or all of the acquired supermarkets, their strongest economic incentive is thus to sell to smaller grocers, who will then be C&S customers. Despite the numerous merger-related concerns that are especially acute for smaller suppliers, the merger may ultimately expand the market for smaller suppliers via the introduction of independent supermarkets in select geographic markets.
The literature on the impact of mergers in the food retail market is scarce, but there is enough evidence to raise concerns about the potential harms the Kroger-Albertsons merger poses to upstream suppliers. The FTC would do well to study the likely impact the Kroger-Albertsons will have on upstream suppliers in addition to the labor and price inflation concerns that are currently receiving the most attention.
Author Disclosure: The author works on USDA-funded grants pertaining to food retailing. He conducts economic-impact research in collaboration with the California Grocers Association Educational Foundation, and he partners with the Food Marketing Institute to write and speak on food price inflation and supply chain issues.
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