The FTC's Trial on the Kroger-Albertsons Grocery Merger

The FTC's Trial on the Kroger-Albertsons Grocery Merger from the opinion pages of the Wall Street Journal this is pic watch the Federal Trade Commission goes to court this week as it tries to block the grocery Mega merger of Kroger and Albertson's but as FTC chair Lina Khan stretching antitrust law and buying into Joe Biden's narrative about greed flation plus con's legal record gets worse is another federal court blocks her sweeping ban on non compete agreements welcome I'm Kyle Peterson with the Wall Street Journal we're joined today by my colleagues columnist Alicia Finley and editorial board member man UK barua opening arguments began on Monday in a federal court in Portland Oregon after the FDC moved in February to block Kroger's $25 billion takeover deal for Albertson's the news stories say that this would be the biggest Supermarket merger in history the fdc's Chief trial Council in her opening statement arguing that it would eliminate the competition the Choppers and workers depend on in one Fell Swoop Alicia if these companies combined they would have something like 5,000 stores in 48 states under brands that include Ralphs Harris Teeter Safeway Vons juwel Osco some of those names might be familiar depending on what part of the country listeners are living in but it would be about 133% of us grocery sales overall so maybe start with the competitive environment What is prompting Kroger to pursue this merger and what are the company's Executives hope to do look I think most listeners out there are pretty familiar with the various alternatives for shopping for groceries and then you've seen increased competition especially from Dollar stores where you can actually buy produce now believe it or not from these 99 Cent Stores or dollar stores you've had an entry from Aldi which is a foreign company offering discounts you have grocery Outlets uh and other kinds of warehouse stores then you've had Walmart come in and it's also increased its offerings of groceries Amazon on other online uh deliverers Fresh Direct you've had really increased competition over the last decade even you were starting to see some of these new entrance before that in terms of trer Joe's and people shop at different places they shop around I mean just to give you an illustration and I was counting you know my family and we probably shop at about 10 different grocery stores or warehouses or one place or another and we kind of substitute Goods right and so if we if prices rise at one place we will go to another place and so there's really been Fierce competition as a result you've had a lot of these traditional supermarkets like uh Ralph's is the Kroger store around us Albertson's losing a market share to these lower cost or lower priced Alternatives and so the goal of this merger is to actually help take advantage of economies of scale so that you could actually leverage your negotiating power with these wholesalers and also Implement some other kinds of efficiencies that can help make them more these Source more competitive versus these lower cost Alternatives that Americans are increasingly shopping at just to provide a comparison this combined would have about 133% of the US Grocery Market that's the figure I cited a moment ago Walmart alone According to some of these news stories is about 22% of American Grocery sales and man one of the first places I look when I am reading these kinds of antitrust lawsuits is how The Regulators are defining the market because that plays a huge role in their argument about how this could be anti-competitive and fascinating here that there defining the market as for supermarkets and excluding nons Supermarket retail offerings and I will go through some of these here this is from the fec's complaint it excludes Club stores Costco Sam's Club because they require membership fees have larger package sizes rotate their product assortments also not included premium natural and organic stores such as Whole Foods and Sprouts Farmers Market the FTC says those focus on a distinct set of customers with higher prices it excludes dollar stores which have a narrower range of grocery product SKS it excludes e-commerce retailers like Amazon which uh the FTC again says it's a very different customer experience but man when you start to slice the market in this fashion it looks to me like it is pretty easy that you can come up with an argument whether the court is going to accept that in the end or not is a different question but you can come up with an argument that this Albertson's Kroger merger would create a large company if you're excluding from your calculation Costco Sam's Club Al the little Whole Foods Amazon and all these other places where as Alicia explains consumers pick and choose where they shop from right well defining the market is the vital first step in any antitrust suit because if you're alleging that the companies who you merger you're trying to block are going to have an unfair competitive Advantage you have to be able to show that they're able to leverage their size in a way that's going to allow them to jack up prices on consumers and so an aggressive Federal Trade Commission like the one that we see under Lena Khan's leadership is always going to try to define the market as narrowly as possible so that they can exaggerate the size of the parties who they're suing relative to the entire market and so Alicia of course and U well laid out the massive size of the grocery Market it's not just traditional full service supermarkets like Kroger and Albertson's but there are many many different types of stores and consumers are free to shop among all of these types of places and that Limits The Power of any individual vendor in that market but lenina con knows that being able to prove her case against Albertson and Kroger requires her to intentionally misconstrue that market as being much smaller than it is in fact and this has been a habit of the FTC you saw in their lawsuit last year against Amazon they basically were suggesting that Amazon has exaggerated pricing power in US retail because they have about 37% of the entire e-commerce Market but of course that overlooks the fact that Amazon is competing against traditional brick and mortar sellers with the vast majority of goods that they're selling and they only control about 7% of all of us retail altogether so it's just another example of something that's been a huge habit for lenina con trying to shrink the market so that she can make it seem like the parties she's suing have way more power than they actually do HK tight we'll be right back in a Commercial Break [Music] moment welcome back another interesting piece of this FDC complaint against Kroger and Albertson's is that it is Anti-Trust focused in part not on consumers but on workers I think people who have paid some attention to antitrust cases may have heard that it is focused on the consumer welfare standard the yard stick for what is anti-competitive is generally what is good for buyers and shoppers but fascinating here that in the FTC complaint It also says that this merger would lessen competition for labor and specifically for union labor here's a line from the FTC Kroger and Albertson are the two largest employers of Union grocery labor in the United States in many states they both negotiate with the same local unions they're often the only two or two of few Union grocery employers the proposed acquisition is presumed likely to lessen competition and thus is presumptively illegal Alicia what do you make of this as an argument is this a stretching of traditional Anti-Trust law and isn't it somewhat in tension with the argument that this merger is going to raise prices on consumers because if part of the effect that the FTC wants to have here is competition between these two chains unions playing them off each other trying to get wages up trying to benefits up for grocery workers that's going to get passed on in prices to the eventual Shoppers and consumers well I think you're getting to the part of the there are numerous contradictions in this lawsuit so first of all this is actually an unprecedented theory that because Under The Clayton Act are antitrust laws you're looking at the market and you're looking at competition for Commodities or lines of Commerce workers are actually explicitly are defined or excluded Under The Clayton Act from that and that was in in order to able workers to unionize so that would not workers uh unionization would not be considered antitrust violation now here in this lawsuit they're alleging that it's going to limit competition for grocery union workers they're not even workers in general and that's the the reason because of that is grocery stores obviously compete not just with each other but various other companies for workers whether that be fast food companies uh other retailers the competition for workers is is much more even more broad than there is for groceries so she narrowly defines the the labor market for grocery unions and this is also a very funny and ironic theory in that she alleges or the FTC alleges that what will happen or traditionally has happened is that the United Food Workers Union has been able to play the grocery markets off of each other collective bargaining so it all go to like say like a safe way and say well if you don't give us this we're going to strike and urge uh all of our customers to go elsewhere I don't think that that's actually an effective strategy labor strategy anymore because of all this increased competition but they have done that in in the past and that has allowed them to secure uh higher wages and benefits now the FTC argues well if these companies are allowed to combine the unions will no longer be able to use that strategy effectively to raise their uh or increase their bargaining power and raise their wages and benefits But the irony here is that one of the reasons why they're seeking to merge is because their labor costs have rendered them less effective on prices I mean especially Albertson Albertson's prices are actually about 10 to 12% higher than Kroger's prices they're various reasons for that but their prices are higher than other uh competitors and so they're now trying to seek to merge to take advantage of economies of scale that they can't take advantage of or they can't reduce their labor cost too much and they'll say that they actually view their higher labor cost in their unionized Workforce as a benefit because they have better employee retention but they're emerging because they need to shape cost somewhere and through economies of scale efficiencies you know more being able to leverage their power Market power to to get better discounts with suppliers they were able to reduce those costs so it's actually in a way the their unionized workforces over the last decade have really driven this consolidation among supermarkets the other thing that strikes me here man is that it seems that the FTC is buying into and perpetuating this narrative from the Biden Administration that consolidation and greed flation and corporate mergers are what has been responsible for the price increases that have made voters and consumers very unhappy over the past four years again this is a line from the FTC complaint over the past four years grocery prices have risen significantly the increase in prices has meant that more and more Americans are reportedly struggling with the cost of putting food on the table and that is undoubtedly true if you go look at the CPI inflation figures grocery prices are up and I think grocery stores are maybe where consumers and voters feel inflation most acutely but there's one culprit for that and that is the the inflation that was fueled by the pandemic and then the Biden administration's gusher of federal money particularly that 2021 bill after he came into office the journal's editorial on the opening of this FTC trial says that grocery prices were up by about 13.4% in the decade before the pandemic and that compares to about 19% overall which means that groceries were running behind Trend and and it seems to me man that this is one more piece in the Biden administration's narrative that they are not really to blame for the inflation that has made people so unhappy and it's the grocery store's fault right I think we can all think of the economic address that KLA Harris made in North Carolina last week where she said that she wanted to ban price gouging particularly at grocery stores but essentially across the entire economy because her Theory and President Biden's Theory and the theory of a lot of Democrats in Washington today is that the run up in prices that we've seen in different sectors isn't caused by any underlying inflation but actually just by corporate greed that you've had Executives deciding that they want to jack up prices and Lena Khan now adds her heft to that theory by suggesting that corporate consolidation mergers in different Industries has allowed these companies to gain that pricing power that allows them to increase prices but this is easily disproved if you look at the underlying numbers because all the costs for every single one of these industries whether it's fossil fuels or groceries or any of the other areas where American consumers have seen prices increase rapidly since 2021 you can see that the producer price index has risen at times by more than the Consumer Price Index profit margins have shrunk in a lot of Industries and these prices are increasing because these companies have no choice but to raise up their prices because their own inputs have become much more expensive than they were as a consequence of under Supply and so lenina con is definitely taking part in bolstering that narrative that corporate greed is to blame rather than any kind of underlying inflation and it makes sense that KLA Harris is trying to shift blame because she knows that's one of the biggest liabilities she faces politically [Music]