BOMBSHELL: Potential Criminal Activity Revealed in the Kroger-Albertsons Merger

With two antitrust suits filed and a big one on the way, this merger is on life support. And enforcers discovered what could be criminal collusion.

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Today I’m writing about the $24 billion Kroger-Albertsons supermarket merger, which is, to put it mildly, in trouble. I haven’t written about this deal in depth since late 2022, because it looks like a standard problematic big merger. It’s a private equity arrangement where the executives will get rich, consumers will pay higher prices, workers will endure lower wages, and there will be worse quality in the food system. There will be a trial where the Federal Trade Commission will argue before a judge that it should be blocked, and it’s semi-random how judges interpret the Clayton Act. I said that in late 2022, and little had changed.

But fascinating things have happened over the last few months. Most notably, enforcers found what looks like criminal behavior by Albertsons and Kroger to suppress worker wages, and are actually doing something about it beyond just challenging the merger.

But first, let’s go over the stakes of the deal itself. The Kroger-Albertsons combo is massive:

Kroger and Albertsons are both monsters, and the two of them combining would create the second largest chain in the country, after Walmart, with 15% of the national grocery business. Kroger/Albertsons would employ over 700,000 people, have over $200 billion in revenue and more than 40,000 private label brands, and own and operate brands such as Safeway, Ralphs, Smith’s, Harris Teeter, Dillons, Fred Meyer, Vons, Kings, Haggen, Tom Thumb, Star Market, Jewel-Osco, and Shaw’s.

There are already 30% fewer grocery stores than there were a few decades ago, because of consolidation. And that’s a problem. Large chains “not only secure better prices for goods than their smaller counterparts, but can also increase prices faster than costs, contributing to inflation.” This merger will worsen the situation, as “suppliers, consumers, and workers will all feel the pressure from Kroger/Albertsons, and since suppliers buy from farmers, farmers will feel it too, at least indirectly.” There are also data implications, since both firms have large data stores and seek to grow their targeted advertising business.

Kroger and Albertsons both argued that their deal will increase efficiencies and lower prices. So far, that argument hasn’t worked. Since this merger was announced, most labor unions turned against it, and so have a lot of politicians concerned about the shuttering of stores or higher prices. (UFCW Local 555 just endorsed the merger, largely due to fear that if this deal doesn’t go through the firms will shutter a bunch of stores. That said, UFCW Local 555 is an outlier who has angered their own members with the move.)

The Federal Trade Commission, which has jurisdiction over supermarkets, hasn’t filed a case yet but is likely to oppose the merger soon. Two separate state attorneys general - Bob Ferguson in Washington state and Phil Weiser in Colorado - filed complaints in their states, meaning there will be state-level trials. They make the standard claims of higher prices, less choice, and lower quality, and Weiser adds an interesting wrinkle by noting that consolidation harms supply chain resiliency by ending fair prices for local produce, like Colorado Palisade peaches.

The procedure here is a bit unusual. Most mergers involve one large set of enforcers all working together in one trial. Because of suits by Colorado, Washington, and (soon) the FTC, this one is three separate trials. Kroger and Albertsons basically have to win them all to complete the combination, a sort of death by a thousand cuts theory on how to scuttle a deal. But it’s not the procedure so much as what’s in the state complaints that is so interesting.

Merger investigations are in-depth examinations of firm strategy, with lawyers poring through millions of emails turned over as part of the review process. Usually, these documents include employees writing embarrassing things like, “You are basically creating a monopoly in grocery with the merger . . . It’s like AT&T and Verizon wanting to merge,” or executives saying “We are being bought by our enemy,” or musings on how a deal can’t possibly be approved because it would create a “monopoly.” Albertsons wrote internally that where there’s less competition it can hike prices and “margin up” and Kroger similarly noted it can pursue a “different price strategy” in those circumstances. All of those things are in the complaints, and executives will be asked about them. But that’s standard for a merger trial.

No, what’s amazing is what they found independent of the merger itself. The Colorado Attorney General Phil Weiser published evidence in his complaint that the two firms routinely colluded to not hire each other’s workers in order to suppress wages and break their unions. This dynamic was particularly bad in early 2022, when unionized workers at a Kroger supermarket chain, King Soopers, went on strike after their contract expired. And let’s be clear, these firms hate unions. Kroger executives, for instance, had previously considered “closing” unionized stores in Washington state “for a period of time to make them nonunion.”

Why didn’t Kroger shut down union stores temporarily? The answer is competition. If they had done so, rivals would have taken their customers

A different path, rather than shutting stores, was to work with a rival to collude against workers, which is what Albertsons and Kroger did. And there are emails. This isn’t surprising, though it’s always shocking to read stuff this blatant. On January 9, 2022, the SVP of Labor Relations at Albertsons, Daniel Dosenbach, wrote his counterpart at Kroger, Jon McPherson, who was the VP for Labor & Associate Relations at Kroger, and pledged not to hire any striking workers. Here’s the email he sent:

After Dosenbach sent this email, another Albertsons executive, Brent Bohn, forwarded it to the executive team, writing "let's make sure the Denver team understands the below two things" - meaning the wage-fixing and non-solicitation agreements. He concluded with, "Please don't forward the email."

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Other executives, such as President of Albertsons Denver Division Todd Broderick confirmed the agreement in an interview with the FTC. He also told higher ups about the agreement not to “hire [King Soopers'] employees and not actively solicit their pharmacy customers,” including Chief Operating Officer Susan Morris.

At Kroger, the agreement was widely known. McPherson told CEO Rodney McMullen, CFO Gary Millerchip, General Counsel Christine Wheatley, SVP of Operations Mary Ellen Adcock, Chief People Officer Timothy Massa, and President of the King Soopers and City Market Division Joe Kelley. It wasn’t the first instance of such a promise, there were records of agreements elsewhere at different times. In other words, there’s fairly good evidence of a conspiracy of all the executives in both firms working together to steal money from their workers. That said, Kroger denies there were any such agreements, and I’m not 100% sure, as it’s not clear from the emails that Kroger participated in the no-poach and non-solicitation agreements, or if it was a one-way promise. In the complaint Weiser, asserts it was an agreement. I suspect we’ll learn more when the FTC files.

So that’s the wage-fixing and non-solicitation activity.

There’s another aspect of the deal revealed by Washington Attorney General Bob Ferguson, whose complaint was unsealed, that will make it much harder to complete the merger. Kroger and Albertsons are trying to avoid monopolization claims by selling off stores where there are geographic overlaps, with the idea that they aren’t going to reduce competition because there will still be rivals in local markets. That is, even though the two firms will get bigger, supermarkets don’t compete at a national level, they compete in a few mile radius for shoppers, and if a third party buys the stores where there are overlaps, then the deal is kosher.

So Kroger and Albertsons will sell 413 stores to a company called C&S Wholesale Grocers, which is a distributor in the food industry. What Ferguson found is that C&S has a track record of buying and closing supermarket stores. And in this case, the firm seems to have little intention of keeping the stores it is acquiring open. I bolded the relevant part below.

Neither Defendants nor C&S have provided binding commitments that would ensure that C&S will continue to operate and invest in the divested stores. To the contrary, C&S’ internal documents suggest that it is not committed to operating all of the stores it hopes to acquire from Defendants. When commenting on a draft press release relating to the Proposed Transaction in September of this year, C&S’ former CEO commented to current CEO, “Do we have to say that we won’t close stores? (the ‘all’ is a problem’) – the trick is that they stay open as they transition but then what? Are we committed to this?”

There’s a lot more, of course. C&S isn’t a retailer, it has never operated a grocery store in Washington, it doesn’t have the IT systems ready to go, it doesn’t have an array of private brands necessary to make its retail operations profitable, and it doesn’t seem to have much interest in actually competing.

This dynamic, of a likely failed divestiture in a giant supermarket merger involving a private equity giant, has happened before, with the same company, Albertsons, in “one of the swiftest, most spectacular corporate crash-and-burns in recent history.” Washington state residents remember it bitterly. Here’s Ferguson:

Indeed, the proposed divestiture bears a striking resemblance to Albertsons’ failed divestiture of stores in connection with its 2015 acquisition of Safeway. In order to address competition concerns regarding that merger, Albertsons and Safeway divested 146 stores, including 26 stores in Washington, to Haggen, a Washington-based regional supermarket chain. Haggen lacked the infrastructure to rapidly expand to a multi-state, national grocery retailer and struggled immensely to operate the divested stores. Six months after the divestiture, Haggen was forced to lose 127 stores (14 of which were in Washington)2 and lay off thousands of workers (more than 1,130 of whom had worked in Washington).

Albertsons sabotaged the stores it was selling to Haggen. It “overstocked stores so products spoiled, and understocked others so customers complained about a lack of product. It reduced advertising for the stores it was selling before Haggen took over. And it kept the customer data from loyalty rewards programs, so Haggen couldn’t use that information in advertising.” But the truth was, Haggen was buying the divested stores for the real estate, which was worth more than the stores themselves, as “executives knew they could make money selling off the property even if the stores went bankrupt.”

And that’s similar here, with a $1.9 billion purchase price to C&S for a set of stores whose “real estate alone is worth at least $2 billion” along with five distribution centers “worth at least $400 million.” So the divestiture intended to make the deal competitive doesn’t seem to work. And even if there weren’t so much evidence the C&S side deal was intended to fail, it would still be conceptually absurd. If Kroger and Albertsons believe that scale fosters efficiency, and that will bring down prices, then why does it make sense to create a much smaller third party competitor?

So what now? Is this just going to be another merger trial? No. In this case, Colorado AG Weiser isn’t just asking to block the merger, but to fine both firms $1 million apiece for their agreement to not solicit each others’ customers or workers.

That’s not a lot of money for these firms, and certainly wouldn’t scare any CEO in and of itself. But if a judge does actually find Kroger and Albertsons liable for collusion, then it opens the door to class action follow-on litigation. Indeed, Kim Cordova, the president of UFCW Local 7, said her union has already filed unfair labor practices with the National Labor Relations Board after this information came out, and is considering suing directly.

And who knows what the Department of Justice Antitrust Division will do? They do have a track record of trying to address criminal behavior around wage-fixing, though I imagine the evidence will determine if they pick it up since the bar for criminal liability is much higher. Either way, it’s an ugly precedent. Already, engaging in a merger is a highly risky endeavor, and if you can’t get your deal through, you often lose your job. Now enforcers have opened up the possibility of finding other wrongful corporate behavior in the course of a merger investigation. And that’s yet another reason not to do M&A.

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cheers,

Matt Stoller