The Kroger Co. has taken a big step toward the largest acquisition in its history by certifying to the Federal Trade Commission that its $24.6 billion deal with the Albertsons grocery chain substantially complies with antitrust rules.
An attorney for the grocery chains told Scripps News Cincinnati that the companies “certified substantial compliance on Nov.15.” By law, that triggers a 30-day timeline in which the FTC must accept the deal or sue to block it. However, the parties can delay a final decision to continue negotiations.
It’s been more than a year since Kroger announced plans to combine the nation’s two largest supermarket chains into a 4,500-store giant. It argues the bigger company will reduce prices and boost wages for union workers, while competing more effectively against larger rivals, including Walmart and Amazon.
Critics countered with claims that Kroger and Albertsons will gain too much market clout – particularly in cities where the two chains are now competitors — leading to higher prices and lower pay for grocery workers.
And that’s why some think an economic theory known as the waterbed effect could influence the outcome, said Eric Fruits, an antitrust expert and senior scholar for the International Center for Law & Economics in Portland, Oregon.
“If you sit on one part of a waterbed, that part sinks down and then another part rises up,” Fruits said. “As a large firm pushes down prices that they pay, other firms pay higher prices. And so there’s this argument that through this waterbed effect, other firms might be harmed.”
Fruits was the co-author of an Oct. 17 white paper that predicts the FTC will lose if it challenges the merger in court. The waterbed argument is one reason he thinks the FTC will lose.
“The waterbed effect is mostly theoretical,” Fruits said. “There’s never been a demonstration of it in grocery markets. The U.K. has subjected at least two mergers to waterbed type scrutiny and found that there is no waterbed effect.”
But that doesn’t mean it can’t be a winning argument, said Felix Chang, a University of Cincinnati law professor who teaches antitrust law.
“I think regulators are really interested in … the effect of concentration in certain markets, particularly upon labor and upon sellers,” Chang said. “Grocery stores are really, really, important purchasers for manufacturers, for farmers. And the larger the purchaser, the more market power it has.”
Chang said the FTC has signaled its concerns about market concentration in a set of proposed merger guidelines published in July.
Guideline 8 says mergers “should not further a trend toward concentration." Guideline 5 says mergers “should not substantially lessen competition by creating a firm that controls products or services that its rivals use to compete.”
While the guidelines are not law and yet to be finalized, they could signal a willingness by the FTC to challenge the Kroger-Albertsons deal with new legal arguments.
“It’ll be a really interesting test case if it really is going to be challenged in the court,” Chang said.
Kroger and Albertsons have addressed the FTC’s concerns about concentration with two main arguments:
- It will preserve competition by selling at least 413 stores to C&S Wholesale Grocers, a $30 billion company that sells grocery products to about 7,500 stores nationwide.
- The grocery industry has radically changed in the last 20 years in a way that threatens traditional supermarket chains.
That second argument is detailed in a 56-page report by Scott Moses, a managing director at Solomon Partners. He was retained by the companies to explain how online sales and national discount chains have stolen market share from supermarkets since 2003.
Twenty years ago, 10 of the top 15 grocery sellers were supermarkets, he wrote. But now, 10 of the top 15 are national retailers or discount chains like Walmart, Costco, Amazon and Dollar General.
“Just like department stores before them, supermarket grocers are under siege from national/discount operators,” Moses wrote. “There’s more grocery choice and competition than ever before.”
