Kroger Goes From Supermarket to Superpower

A week ago, Kroger and Albertsons, the two largest supermarket companies in the United States, announced a massive merger that would impact people across the country. It will impact workers whose jobs may be in jeopardy in the name of increasing corporate efficiency, consumers whose food may be more expensive as a result of lower competition in areas where both chains maintain a presence, farmers and other suppliers whose margins could be squeezed by worse contracts by a grocery superpower with disproportionate bargaining power, and local grocers who likely will be unable to compete against enormous economies of scale.

This is, obviously, a complex story. And when stories are complex, the media tends to drop the ball. Surprisingly, there is a fair bit of generally good coverage--for instance, local outlets like The Seattle Times and Arizona's ABC15 did good reporting on how the people of Seattle and Phoenix would be particularly impacted, while some national outlets provided solid coverage of the general situation like here from The New York Times, here from NPR, and here from The Washington Post. And, as usual, our pals at The American Prospect provided insightful coverage that hit on under-reported aspects of the merger like its interaction with unions. There's also this interesting story from The Wall Street Journal that looks at the merger from the perspective of how it will profoundly affect digital marketing.

Sometimes what is absent is as important or more important than what is present. And sometimes the easiest form of hackery that any writer could fall into is hackery by omission, failing to dig quite deep enough to uncover the whole picture.

To start, let's talk about the details of the proposed merger. The simple version is Kroger will buy Albertsons for around $20 billion while also taking on Albertsons' $5 billion in debt. This has generally been reported as a purchase price of roughly $25 billion. Technically more complicated, but a fair description.

Where it gets trickier is below the headline figures. As Matt Stoller reported on his Substack "Big", one provision is a $4 billion dollar dividend to be paid out by Albertsons this coming Monday. That is one-fifth of the price Kroger will pay to acquire the company. It's 30% of the firm's entire market capitalization of roughly $15 billion. And this is a dividend, not a stock buyback. At least in a stock buyback, there's something coming back in return. With a dividend, the existing stockholders will get a huge payday off the bat. As my CEPR colleague Eileen Appelbaum pointed out, this is draining the company's coffers in a way that could deliberately make them less competitive.

Basically, as Eileen points out, this dividend could well jeopardize Albertsons' financial health, which then opens up the possibility that Kroger can argue to the Federal Trade Commission (FTC) that the merger has to go through or the second largest American supermarket chain will fail, potentially causing food supply havoc. Even in a less extreme version, Kroger can argue that it can't be causing that much excess concentration if its competitor is struggling to make ends meet anyway. The corporate lawyers will be able to say, "Look, if we don't have really strong economies of scale, like what the merger will achieve, we can't stay in business." Far less realistic arguments have been vindicated by conservative judges lately.

The biggest payday from the dividend will go to Cerberus Capital Management, a private equity firm named after the dog that stands guard in the ancient Greek underworld of Hades, not exactly inspiring confidence in their magnanimity. Cerberus owns 29% of Albertsons, which means they stand to get around $1.16 billion. And, again, they get that payout in a couple of days, regardless of the end result of the merger. It's not like they won't already make a killing if the sale goes through. As Forbes reported, Cerberus will get $7.1 billion if the sale goes through.

The wildest part of all of this is that pretty much everyone missed it. No mention of it in any of the major papers. That is, to put it mildly, nuts. This is a story that could literally impact the availability of food and other basic necessities across the country and the key to that story is something that reporters have nothing to say about.

There's another key part of the deal that is also intended to head off FTC regulation. Kroger and Albertsons included a divestiture in the initial deal, which is unusual; generally, corporations will agree to divestitures in consent agreements with the antitrust regulators. This maneuver is basically designed to make the companies look very reasonable in the event that the deal goes to court to settle an FTC challenge. In brief, the companies would spin off a company with between 100 and 375 stores to act as a competitor.

Here's the problem: the FTC tried this with the last big grocery merger when Albertsons bought Safeway. The companies offloaded more than 100 stores to a regional chain in the Pacific Northwest, Haggen. But that firm couldn't handle the massive increase in logistical complexity and management responsibilities, going bankrupt in short order. Albertsons then bought back a few dozen stores (I'd bet the best ones they offloaded) at a massive discount. For more on this, check out David Dayen's article in the Prospect. The Times actually did include this key context in their coverage, but this writer couldn't find any mention of it in the Journal or Post.

According to Kroger's CEO, they are also open to selling off additional stores in specific markets to avoid concentration. But the way that these seemingly good-intentioned financial arrangements actually play out is hugely undercovered.

If large papers and corporate news outlets care about providing any level of serious insight into the deals that they report on, they can't drop the ball like this when it comes to key details that shape what the merger's impacts will actually be. Albertsons is about to ship off nearly a third of its market cap to line Wall Street pockets in a dividend that may well bankrupt the company, but the merger is being treated as a run-of-the-mill transaction. The divestiture details are troubling and warrant far more scrutiny from major outlets.

Hopefully, we get some more reporting on what divestiture would likely look like from a ground level. But missing bombshell news in the opening week of the story, when it is the most novel and attention-grabbing, hardly inspires confidence.