Kroger, the second-largest grocery chain in the country, announced plans last Friday to merge with Albertsons, the fourth-largest grocery chain. If approved, the $25 billion deal would rank among the largest corporate combinations in U.S. retail history — but that's a big if.
The proposed merger comes at a sensitive time for corporate consolidation. With inflation at a 40-year high and recession fears gaining steam, lawmakers are signaling that the deal will get close scrutiny, and that the question of prices will be front and center.
"My gut reaction is that this is going to be a challenge," said John Clear, director at Alvarez & Marsal Consumer & Retail Group and former purchasing manager for Lidl. "The political reaction on both sides of the aisle has been pretty strong, stronger than I expected."
Some progressive legislators, who have long kept a critical eye on big corporations, have already raised concerns. Senator Bernie Sanders (I-Vt.), for instance, tweeted that the deal would be an "absolute disaster," while Senator Elizabeth Warren (D-Mass.) bemoaned the lack of competition in the grocery industry.
On the other side of the aisle, top Republicans have also stressed the need to protect consumers.
"I will do everything in my power to ensure our antitrust laws are robustly enforced to protect consumers from anticompetitive mergers that could further exacerbate the financial strain we already feel in the grocery store checkout aisle," Senator Mike Lee (R-Utah) said in a statement.
In the announcement of the merger, meanwhile, Kroger said the combined company would actually be better equipped to lower prices.
"Kroger has a long track record of lowering prices, improving the customer experience and investing in its associates and communities," the company stated. "Consistent with prior transactions, Kroger plans to invest in lowering prices for customers and expects to reinvest approximately half a billion dollars of cost savings from synergies to reduce prices for customers."
Kroger's argument? The merger would give it a much larger supply chain, creating efficiencies and giving it leverage over suppliers. The counter-argument? Corporate consolidation historically can also have the exact opposite effect on prices, as competition dwindles.
"From a business optimization and supply chain standpoint, there will be a lot of benefits," Clear said. "But on the pricing side for the consumer, the national knock-on effect of having less competition is that there are fewer people to keep you in check."
In this June 26, 2019, file photo a customer exits a Kroger fueling center in Flowood, Miss. Two of the nation’s largest grocers have agreed to merge in a deal that would help them better compete with Walmart, Amazon and other major companies that have stepped into the grocery business. Kroger on Friday, Oct. 14, 2022 bid $20 billion for Albertsons Companies Inc., or $34.10 per share. (AP Photo/Rogelio V. Solis, File)
Alí R. Bustamante, deputy director of education, jobs, and worker power at the Roosevelt Institute, a think tank that advocates for greater corporate regulation, noted that corporations will often claim that prices will come down as a result of a merger.
"When any large merger or acquisition is proposed, you often see that higher wages and lower prices are touted as a key rationale for why the Federal Trade Commision should approve the deal," he said. "But in terms of prices, we just don't see that corporate concentration is substantially leading to lower prices. In fact, it's been quite the opposite for Walmart."
Bustamante pointed to recent research from J.P. Morgan showing that Walmart raised its food prices more than Target, Kroger, and Albertsons in the third quarter.
Of course, Walmart already has the lowest grocery prices in the industry, and Clear explained that in many ways this deal is a response to that cost pressure. "Walmart is already so big, and they're only getting bigger, so you need to compete with them at scale," he said.
The bigger question, he added, is how exactly Kroger goes about trying to compete with Walmart. If it tries to win on price, this could have an immediate benefit for consumers. But if it focuses more on quality and in-store experience, as it has historically, prices could stay put. Clear said the latter path is more likely.
"There might be some impact on pricing in the short-term to gain customers, but I don't think they're going to go as hard after price in the long-term as they would need to compete with Walmart, which would be the biggest benefit for customers," he said.
In addition, regulators can test Kroger's claims against the results of other recent acquisitions, such as Amazon's purchase of Whole Foods, which Clear said has not brought down prices.
"There is a lot of hand-waving about offering lower prices, when in reality there is very little incentive for Kroger post-acquisition to offer lower prices," Bustamante said. "We're seeing, right now, record profits across just about every industry, and the exorbitant use of mark-ups."
In 2021, Kroger's CEO Rodney McMullen even made a widely publicized comment about how inflation was good for the grocery business as it would allow them to pass along price hikes to the consumer and "customers don’t overly react to that."
Whatever the impact on prices, the deal is likely to further fuel the fire of consolidation in the industry, according to Stewart Samuel, global insight leader at grocery research firm IGD.
"Market consolidation is bound to accelerate with a wave of deals as competitors aim to scale up their operations," he said.