On Feb. 26, the Federal Trade Commission (FTC) sued to block Kroger’s $24.6 billion acquisition of Albertsons, which would result in the merger of two giants in the grocery industry.
Charged with enforcing antitrust practices and safeguarding consumer protection, the FTC argued that the merger of the two supermarket companies would lead to higher prices for consumers and lower wages for both companies’ employees.
Kroger and Albertsons have rejected the FTC’s claims, arguing that blocking the merger would actually raise grocery prices, harm employees and empower other retail titans and grocery giants such as Walmart, Amazon and Costco.
“The Kroger-Albertsons merger would create the potential for the combined firm to lower both its distribution costs and the prices it pays wholesalers to acquire its products,” said John Mayo, the Elsa Carlson McDonough Chair of Business Administration and executive director of the Center for Business and Public Policy at the McDonough School of Business. “If this were to happen, the combined Kroger-Albertsons, with its reduced costs, could become a more formidable competitor to these large competitors.”
The pending lawsuit comes amid more intense scrutiny from President Biden on the rising cost of groceries and “shrinkflation” — the idea that consumers are receiving fewer chips, cookies and other grocery staples for an inflated price tag.
To better understand the economic forces in the grocery store — and why grocery prices have increased — read Mayo’s take on the FTC’s lawsuit, how a merger could affect prices in your grocery store and the other tools the federal government has at its disposal to ease the effects of inflation.
Ask a Professor: John Mayo on the Supermarket Industry
John Mayo is a professor of economics, business and public policy at the McDonough School of Business.
What’s the reasoning behind the FTC’s move to block the merger of Albertsons and Kroger?
The proposed merger between Kroger and Albertsons is a very large transaction, valued at $24.6 billion. The FTC believes that the merger will lead to higher prices, lower quality and harm to the workers of these two companies.
Are there reasons why the general public might be especially interested in how this merger proposal and its challenge play out?
The merger comes against a backdrop in which post-pandemic grocery prices increased rapidly, and, in some cases, package sizes have shrunk — the so-called shrinkflation that has drawn President Biden’s ire. This has made consumers especially sensitive to the possibility that prices might continue to elevate unduly going forward.
Is there anything novel about this merger challenge?
The traditional focus of antitrust enforcers has been solely on ensuring that consumers are not harmed by anticompetitive mergers. In this case, the FTC is adding a new criterion that it believes is appropriate to block a merger — namely, that employees of the merged firm may face lower wages.
If this argument is accepted by the courts, it would potentially pit the interests of consumers against the interests of employees. For instance, an easy way for Kroger and Albertsons to ensure that employees are not harmed and to appease the FTC would be to guarantee that the post-merger firm will raise its employees’ wages. But this would drive the firm’s costs up and put upward pressure on post-merger prices; the very thing that antitrust enforcement has traditionally sought to prevent.
Is there reason to believe that the merger will raise the price of groceries for Americans?
This will be a key point of contention if this case proceeds to trial. Economic theory indicates that mergers in highly concentrated industries can lead to higher prices. This same theory suggests that mergers in less concentrated industries are often innocuous, and may lead to lower prices. The empirical evidence that specifically examines the grocery store industry has found exactly this: grocery mergers in local markets that have few competitors that dominate the local market often lead to post-merger price increases, while mergers in unconcentrated grocery markets have experienced price decreases. For instance, in large cities such as New York, Philadelphia and San Francisco that have an abundance of competitors, grocery store mergers have been found to reduce prices, while in smaller communities such as Fort Smith, Arkansas, Muskogee, Oklahoma, and Topeka, Kansas, with a concentration of fewer competitors, grocery mergers have led to higher prices.
How do you see the merger affecting the competitive landscape?
The grocery store industry has undergone considerable changes in recent years with the entry and massive growth of Walmart, Costco and Amazon. The Kroger-Albertsons merger would create the potential for the combined firm to lower both its distribution costs and the prices it pays wholesalers to acquire its products. If this were to happen, the combined Kroger-Albertsons, with its reduced costs, could become a more formidable competitor to these large competitors. That said, in some local markets where Kroger and Albertsons are the dominant competitors today, there is reason for concern that, absent restructuring the merger, the competitive landscape could deteriorate.
Is there a way, short of blocking the proposed merger, to restructure the deal so that consumers could benefit?
This may be possible. Kroger and Albertsons have proposed divesting hundreds of their stores in local markets where the two firms are the only, or are among only a few, competitors to another grocery store company, C&S. C&S is a large grocery wholesaler that currently services several thousand retail grocery outlets. C&S would use the divestiture of Kroger and Albertsons stores to enhance its retail presence. Although the FTC is skeptical of C&S’s ability to compete at the retail level, the divestiture and subsequent retail operations of C&S have the prospect of mitigating the feared loss of competition from the merger and would allow any cost reductions realized by the merged company to stimulate competition in the grocery industry.
Aside from the FTC’s efforts, are there other tools that the Biden administration might use to help keep grocery prices down?
The supply chain in the food industry is characterized by a hodgepodge of policies that affect the prices of a number of common food items. For instance, decades-old governmental price-support policies act to artificially elevate the prices of common dairy products including cheese, non-fat dried milk and butter. Similarly, Depression-era statutes actually exempt agricultural and fishermen’s cooperatives from what otherwise would be illegal cartel formation that act to raise the prices of agricultural and fish products. At a time when Americans are especially concerned with the high prices of groceries, eliminating these price-elevating governmental policies may present “low-hanging fruit” for helping ensure that grocery products are affordably priced.
