Have you shopped at a Haggen supermarket lately?
No?
Then you should be very skeptical of the proposed merger of Tucson’s two biggest grocery chains — Albertsons, which also owns Safeway, and Kroger, which owns the Fry’s supermarkets.
Together, the two chains dominate the Tucson market and only have Walmart left as major competition. By my count, there are six Albertsons and 13 Safeway stores in the Tucson area, and there are 13 Fry’s stores. Under this proposal, all 32 supermarkets would be under the same ownership, though some would undoubtedly be closed or spun off — more on that in a second.
It’s easy to imagine the decrease in competition and increase in prices that could result from Albertsons, Safeway and Fry’s stores all being owned by one company.
But of course, the company says that won’t be the case. In an announcement, it says “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.”
If you read that sentence carefully, you’ll see three wiggle words and a buzzword. The words “plans,” “expects” and “approximately” mean there is no commitment from the merged company to actually pass along $500 million in cost savings. And that wouldn’t necessarily mean much to customers of such a giant company anyway.
Then there’s the buzzword “synergies.” Time and again it has been trotted out as a reason to expect cost savings from a mega merger. Time and again, those savings have failed to materialize.
But that’s not the only promise Kroger is making to the beleaguered consumer, who has been paying more than 10 percent more for food thanks to persistent inflation.
Kroger and Albertsons will also spin off hundreds of supermarkets out of the approximately 5,000 combined stores belonging to the two companies, Kroger said in the announcement. It nicknamed the new company that will operate the stores “SpinCo.”
“The establishment of SpinCo, which is estimated to comprise between 100 and 375 stores, would create a new, agile competitor with quality stores, experienced management, operational flexibility, a strong balance sheet, and focused allocation of capital and resources to provide customers with continued value and quality service and associates with ongoing compelling career opportunities.”
This should sound familiar to Tucsonans. Albertsons did something similar when it bought Safeway in 2014, selling 146 stores in the West to a small supermarket operator from Washington state, Haggen.
The idea was to satisfy anti-trust regulators that competition would remain in markets like Tucson even after Albertsons and Safeway merged. Haggen was intended to preserve some competition with its one store on West Speedway and two stores on East Broadway.
Instead, these spun-off stores were an utter fiasco. The two on East Broadway closed within three months, and Albertsons took back the store on West Speedway. Employees and shoppers were thrown into turmoil.
This is not at all unusual in big mergers, Ron Knox of the Institute for Local Self Reliance told me. He pointed to the merger of Hertz and Dollar Thrifty rental car companies in 2012. They were forced to spin off Advantage Rent A Car in order to preserve market competition. It flopped within a year.
“The problem with this remedy is that the merging companies who provide the remedy have a natural interest in the remedy not succeeding,” said Knox, a senior researcher at the institute, which conducts research and advocacy to advance local control against large corporations. “If it succeeds, that means where’s a new viable competitor in the market.”
So these spinoffs often fail, as the merged companies want, but then the mergers proceed.
“You can’t undo the harms that happen in these mergers,” Knox said. “If the remedy that the company puts forward goes south and these things fail, which they do oftentimes, there’s no way to undo whatever was lost.”
While an increase in consumer prices is typical after mergers like this, it's not necessarily the case with this one, said Alice Bonaimé, an associate professor of finace at the UA's Eller College of Management who focuses on mergers.
"Historically, mergers generally lead to higher consumer prices," Bonaimé said in an email. "This is especially true when the merging companies sell similar products and operate in the same region" -- like Kroger and Albertsons in Arizona.
However, she noted, three factors may mitigate against that. One is the planned emphasis of the new company on increasing store brands, another is the increasing competition from Amazon, and the last is the likely skepticism of regulators.
"Modern anti-trust regulators are more likely to force divestitures (selling off stores) in regions where both grocers are present," she said.
In Tucson after the Albertsons-Safeway merger, some competition was preserved, at least: There were still all of the Fry’s stores left to compete with Albertsons and Safeway.
This merger, of course, would do away with that, except for whatever competitor SpinCo comes up with — undoubtedly small and weak enough to be squashed like Haggen.
Now, you might think that these food retailers deserve a little sympathy. After all, they’ve had to deal with inflation, too, figuring out how to continue making money while their own prices are soaring.
Kroger, for one, has succeeded wildly and does not deserve our sympathy. The company made almost $1 billion in profit ($954 million) just in the second quarter of this year. That’s a 14% increase from the $839 million in the same quarter in 2021.
Inflation has given them a windfall, and near-monopoly market dominance would make Kroger’s position even better.
The merger would also be a massive win for Cerberus Capital Management, the private equity firm that is biggest shareholder of Albertsons, netting the company billions, Forbes reported. And the individual executives would make away with millions for engineering the merger.
So, while the companies’ executives are claiming the merger would be good for consumers in places like Tucson, it’s pretty apparent who it would be best for — executives and shareholders.
This is the kind of merger that antitrust regulations are built for. The Federal Trade Commission should reject it quickly and decisively on behalf of suffering consumers.
And they definitely should not be tricked into accepting any new version of Haggen as a short-lived facsimile of competition.
