(Bloomberg) -- At the heart of the federal government’s fight to block Kroger Co. from buying Albertsons Cos. for $24.6 billion is an existential debate about how Americans buy their groceries today.
The Federal Trade Commission and the grocers have defended their case over the past three weeks to a federal judge, who is expected to decide the outcome of the largest US grocery deal in the coming months. In addition to industry experts, executives from Kroger, Albertsons, Amazon.com Inc., Walmart Inc., Target Corp. and other retailers have testified about how they view the sector and operate their businesses. A hearing on the government’s request for an injunction blocking the acquisition is expected to wrap up on Tuesday.
In wide-ranging testimony delving into everything from egg prices to the proposed divestiture of hundreds of stores, the agency and companies have battled over how to define a grocery store and which businesses are included in the sector. The question will be key to the judge’s decision, a watershed moment for both the two biggest US grocers, who argue they need to join forces as consumer habits shift, and antitrust enforcers who have taken a tougher approach on big deals under the Biden administration.
FTC’s Case
The FTC argues Kroger’s acquisition of Albertsons would combine the two largest “traditional supermarkets,” which offer a “one-stop” shopping experience where customers can get everything from fresh produce to pet food. They have offered as evidence dozens of internal emails and spreadsheets showing the two constantly price-check against each other and refer to the other as their primary competitor.
Antitrust enforcers have long focused on grocery markets and established certain variants within the industry. They argue that traditional supermarkets like those owned by Kroger and Albertsons are distinct from other food retailers because of the size of the stores and the product assortment.
The FTC, which sued to block the deal in February, argues that larger Walmart and Target stores compete in that market. Not included in the agency’s definition are dollar stores, convenience stores, e-commerce operations like Amazon and Instacart Inc., and club stores that require membership fees and offer large quantities of an item, such as Costco Wholesale Corp. and Sam’s Club, owned by Walmart. Limited assortment stores like Trader Joe’s and Aldi are also excluded.
As far back as 2007, the FTC has argued that premium or organic supermarkets, such as Whole Foods Market, are different from traditional grocers since they have higher prices and primarily focus on organic or natural products.
Modern Market
The grocers say the concept of a traditional supermarket is “antiquated” and no longer describes how people shop. Customers can buy staples like milk and eggs everywhere from Walmart and Dollar General Corp. to Costco and Amazon. They argue that the better way to understand food buying today is as a “MULO+ omnichannel” world – an industry term that describes multiple outlets, methods or channels for food buying that include in-store or online.
“Most grocery executives in the country are hyper-focused on what non-traditional segments are doing to take share from them,” said John Clear, a senior director in the consumer and retail group at consultancy Alvarez & Marsal Holdings LLC who previously worked at Lidl US LLC.
Dollar stores experienced significant growth after the great recession in 2008, and ongoing inflation has further shifted consumers’ spending to value-focused retailers such as Costco, Aldi and Trader Joe’s. While these operators are opening stores faster than traditional grocers, he said, people aren’t going to many more retailers today than they did a few years ago.
Kroger and Albertsons announced their deal almost two years ago, saying it would help them compete better against bigger rivals. Albertsons started about six months ago measuring its market share using the MULO+ metric that includes Amazon and Costco, Chief Executive Officer Vivek Sankaran testified in court. Albertsons’ share dropped under this metric.
“People don’t consume more just because they buy from somewhere else,” he said.
Kroger CEO Rodney McMullen testified that Albertsons is among many competitors for the grocer and that Walmart is the grocer’s “No. 1 competitor.” Kroger checks prices of some products at Walmart daily. Kroger tracks Walmart more closely than Albertsons, partly because Albertsons’ prices are 10% to 12% higher than Kroger’s prices.
McMullen, who grew up in Kentucky and Ohio and has worked at Kroger for over 40 years, painted a picture of a grocery consumer who has a range of options to choose from. While it’s more convenient for busy shoppers to buy food in one store, consumers don’t always do so, he said.
Kroger has made various changes as competitors have expanded their grocery offerings. The company started carrying larger-pack products in response to club stores, he said, and beefed up its organic food assortment. It’s seeking to further lower prices partly as Aldi and Lidl expand.
Grocery Strategies
Other retailers offered a rare glimpse into how they view the sector and think about growth. Walmart, the biggest food seller in the US, which started selling groceries in the late 1980s, was a recurring character in testimony.
Marc Lieberman, vice president of merchandising and operations at Walmart US, said club stores and discounters vary from traditional supermarkets, but that Costco and Aldi are competitors in grocery.
“There are so many more players today,” than there have been historically within food retail, said Joe Feldman, an analyst at Telsey Advisory Group.
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