As Kroger and Albertsons push to advance the biggest supermarket merger in U.S. history, the companies’ chief executives have argued that joining forces would lead to price cuts for shoppers.
Rodney McMullen, CEO of Kroger, which owns Fred Meyer and QFC, said joining forces with Albertsons, the parent company of Safeway, would allow the combined company to drive groceries prices down by $1 billion annually and better compete with massive retailers like Walmart, Amazon and Costco.
“The day that we merge is the day that we will begin lowering prices,” McMullen testified in a Portland federal courtroom on Wednesday. He argued that Albertsons prices today are 10% to 12% higher than his company’s and that combining the two companies would “help get Albertsons’ prices closer to Kroger’s prices.”
Monday marks the beginning of what is expected to be the last of three weeks of federal court testimony on the merger and whether it would harm or enhance competition. Proponents of the marriage and regulators who are scrutinizing it have offered sharply different views.
While being questioned about Kroger’s promise to drop prices, McMullen acknowledged it was not legally binding, but said the company’s reputation would be harmed if walked back on its pledge.
McMullen also rejected the FTC’s argument that a merger would allow Kroger to raise prices. He argued that the company is incentivized to cut prices to compete successfully against other supermarket giants that have carved out increasingly significant portions of the grocery market.
Albertsons CEO Vivek Sankaran backed up McMullen’s arguments in testimony last week. He argued that combining with Kroger would result in operational efficiencies and buying power that would translate to lower costs for the combined company. Those cost savings would be passed down to consumers, he testified.
A merger “fundamentally gives the two companies the capacity to find the money” to offer better prices, testified Sankaran, who stands to receive a $43 million golden parachute if the merger is approved.
The issue of grocery food prices has played a big role in the ongoing hearing, where state and federal regulators are seeking to persuade U.S. District Judge Adrienne Nelson to issue an injunction that would temporarily block the merger until a full trial on the merits can be conducted.
The Federal Trade Commission and attorneys general from nine states have argued that in the states where Kroger and Albertsons compete today, the two companies match each other on price, quality, promotions and services. That rivalry between the two grocers to keep prices down benefits shoppers, regulators say, and would go away if the two merged.
In courtroom proceedings, the regulators have tried to show that the grocers’ promises of lower food prices to the tune of $1 billion per year are without caveats.
For one, Kroger and Albertsons executives have said that the price cuts would only affect Albertsons stores and that the estimated $1 billion in lower prices wouldn’t occur until four years after the merger, if it’s allowed.
Under questioning by an FTC attorney, McMullen acknowledged that the company’s pledge for lower prices are relative — lower than without the merger, he said, but perhaps higher than today. McMullen acknowledged that other factors can impact grocery prices, such as inflation and costs related to production, distribution and supply chains.
McMullen acknowledged that Kroger didn’t have complete visibility into the inner workings and financials at Albertsons to fully detail savings from scale and operational efficiency, but said his prediction was based on Kroger’s experience with prior acquisitions.
Stuart Aitken, Kroger’s chief marketing officer, testified Wednesday that the company may not always spend the funds it sets aside to reduce grocery prices if Kroger needed to pay out shareholders.
Aitken also said if the anticipated cost savings from operational efficiencies turned out to be lower than expected, the company would be obligated to inform its board and potentially reconsider holding back on investments.
Aitken also acknowledged that Kroger’s promises of price reductions as a result of a merger with Albertsons would be applied to 28 products initially. Ninety days after the merger, he said, price cuts would be applied to 650 products.
Josh Hinerfeld, a retired food industry veteran who led a food processing company and produce distributor in the Pacific Northwest, said that a merger between two large grocery companies like Kroger and Albertsons would give the combined company more purchasing power to drive down suppliers’ prices.
“If the two merge, they’ll probably be a consolidation of their sourcing operations at some point,” Hinerfeld said. “With fewer retailers available for suppliers, the stakes increase. As a supplier, you’re losing bargaining power because there’s not many options to sell to, so you just have to suck it up.”
Hinerfeld said that if Kroger were to acquire Albertsons, the combined company would have more clout when negotiating contracts with suppliers, which could mean getting lower prices and other concessions, such as extended payments terms and discounts.
“What ends up happening when the suppliers can’t compete against bigger, fewer retailers is that it encourages consolidation among the suppliers,” he said. “So if you’re in a kind of a fragmented supply chain with consolidation on the buyer end, you’re essentially going to see consolidation play out with the suppliers.”
He said many small producers rely on suppliers to get their products on grocery shelves.
“There’s so many people’s livelihoods who are at stake, who work for these suppliers,” he said.
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