(Bloomberg) -- Kroger Co. Chief Executive Officer Rodney McMullen said he keeps a 2017 article from the Cincinnati Business Courier on his desk with the headline: “How Amazon is Crashing Kroger’s Party.”
The clipping is a reminder, McMullen told a federal judge on Wednesday, that Amazon.com Inc. is a “creeping competitor” to the country’s largest supermarket chain, much like Walmart Inc.
“Everyday it reminds me Amazon is going to be a bigger competitor tomorrow than they are today and we can never forget that,” McMullen testified in Portland, Oregon, as part of the Federal Trade Commission’s lawsuit to block Kroger from buying grocery rival Albertsons Cos. “Amazon is going to be a bigger competitor in five years and 10 years than they are today.”
Higher Prices
Antitrust enforcers allege the $24.6 billion deal would combine the two largest traditional supermarket chains, leading to higher prices for consumers and lower wages for workers. As Kroger’s first witness to take the stand in its defense, McMullen sought to show that his company faces plenty of competition.
The Albertsons purchase “gives us national coverage and lets us compete better against Costco and Amazon and Walmart,” he said. “Together we believe we can do things we can’t” separately.
Albertsons CEO Vivek Sankaran, who took the stand after McMullen, said agreeing to a deal with Kroger was “the most consequential decision” of his career. Since taking over as head of the grocer in 2019, Sankaran has sought ways to cut Albertsons costs, but said “there’s always a limit to what we can do.”
The tie-up will make Kroger and Albertsons “not as big as Walmart but big enough” to help the grocers “change the growth trajectory,” said Sankaran, who was previously at PepsiCo Inc., before helping take Albertsons public in 2020.
Under Sankaran, Albertsons has focused on selling more fresh, higher-quality foods by relying on a wider network of suppliers. The company continued to centralize how its divisions buy products and remodeled stores, while growing its private-label business and investing in e-commerce. The Boise, Idaho-based company also expanded its offerings of local-specific groceries – what Sankaran has said makes Albertsons unique.
Walmart Supercenter
Supermarkets paid little attention to Walmart in the 1980s when it launched, thinking it was just a retailer, McMullen said. But the Arkansas-based company soon became the largest US seller of paper goods, then diapers and pet food, he said. Grocery stores didn’t really start thinking of Walmart as a competitor until it opened supercenters where it sells food items alongside retail goods, McMullen said.
By then it was too late. When Walmart opened its first supercenter in Dixon, Tennessee, in the 1990s, McMullen said, it captured between 30% and 35% of Kroger’s sales in that area overnight. The rapid rise of Walmart and Amazon are part of the transformation of the grocery business where McMullen has worked for the past 46 years, the last decade as Kroger’s CEO.
After growing up on his family’s farm in Kentucky and joining Kroger as a part-time bagger in the late 1970s, he worked his way up to chief financial officer in his 30s. As CEO he has led the company through the emergence of online shopping, the pandemic, a period of historic inflation and an almost two-year odyssey to close what would be the biggest US grocery deal.
“When I joined, A&P was the largest grocery retailer,” McMullen said Wednesday. “They don’t even exist today.”
At Kroger, McMullen has flexed his dealmaking muscles to help the grocer gain scale and compete. He and his team helped lead various deals such as Fred Meyer Inc., Roundy’s Inc. and Home Chef, among others.
As CEO, he has pushed the Cincinnati-based grocer to diversify operations beyond the four walls of its stores. McMullen has said Kroger competes for food spending against a range of businesses from restaurants to dollar stores.
Analytics, Advertising
Kroger expanded into data analytics and advertising, and signed a deal with Ocado Group Plc in which the UK company would build warehouses for online orders. Along with the rest of the grocery sector, Kroger has been beefing up its private-label and prepared food offerings to draw more shoppers. Today, it is one of the largest sellers of sushi and a major producer of milk in the US.
If the deal with Albertsons goes through, Kroger has promised to invest $1 billion annually in cutting prices, McMullen said Wednesday. While acknowledging that the promise isn’t legally binding, McMullen said the company has made the pledge publicly and to investors and would suffer reputational harm if it pulls back. He also denied the FTC’s contention that the deal would give Kroger the ability to raise prices.
If we raised prices “we would lose a significant amount of business to Aldi, Costco, Walmart and others,” he said.
Albertsons, which started as a single store, has had a windy history. Private equity firm Cerberus Capital Management took a stake in the company almost two decades ago. After acquiring Safeway, the grocer tried to go public but canceled its plans due to soft market conditions in 2015. It tried again to go public after buying Rite Aid Corp. in 2018, but pulled that deal due to investor pushback. Less than two years after going public, Albertsons began exploring strategic alternatives to improve value for shareholders.
Albertsons’ Sankaran said in his testimony that if the acquisition doesn’t move forward, he will need to make some “tough decisions” that could include layoffs, closing stores or seeking another acquisition partner. Under questioning by the FTC, he acknowledged that Albertsons is financially sound and had profits of $4.3 billion in its last fiscal year.
“We are developing early perspectives” about options if the deal doesn’t go through, Sankaran said. “I don’t have a plan today to take action tomorrow.”
(Updates with comments from Albertsons CEO beginning in sixth paragraph.)
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