There’s a big problem with the Kroger-Albertsons supermarket merger | CNN Business

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When Christine Martinez found out last month that Kroger and Albertsons were planning to merge in a deal worth nearly $25 billion, she thought, “here we go again.”

Martinez lost her job as a pharmacy technician following an earlier supermarket mega-merger: Albertsons’ $9 billion combination with Safeway in 2014.

That deal has since become a cautionary tale of what can go wrong when two supermarket giants merge. Now, the fallout from that troubled transaction hangs over this latest, even bigger merger proposal. The Senate Judiciary Committee is holding a hearing Tuesday afternoon to consider the potential impact of the Kroger-Albertson merger.

In 2014, Martinez was working for a subsidiary of Safeway in Valencia, California. “It was a very good company,” she said. “Moral was very high. They cared about our needs. We could rely on our paychecks.

But things changed after Albertsons and Safeway got together.

To gain approval for the deal from antitrust regulators, Albertsons and Safeway agreed to sell 168 of their stores to buyers approved by the Federal Trade Commission. The plan to divest the businesses addressed the FTC’s competition concerns in communities where the two chains had overlapping stores, which would have given the new company a dominant market share.

With the FTC’s blessing, Haggen, a small Northwestern supermarket chain with just 18 locations, bought 146 of the former Albertsons and Safeway stores, including the one where Martinez worked.

The problems appeared quickly.

Haggen revamped the Valencia store and changed branding and labels. Sales slowed and the company raised prices. The company reduced working hours and laid off employees. Workers began to be paid biweekly, instead of weekly.

“Tensions with Haggen were at an all-time high,” Martinez said. “I think how hard it was for my family. It takes me back to a time that I don’t like to remember.

Martinez’s store has closed. She and dozens of her colleagues lost their jobs.

His store wasn’t the only place Haggen had trouble managing. The grocer grew more than eightfold essentially overnight and was unable to absorb the stores it acquired.

Less than a year later, Haggen filed for bankruptcy and closed some sites. In a bizarre twist, Albertsons bought back dozens of the same stores it previously sold to Haggen in bankruptcy court – at a lower price.

Martinez found a new job as a pharmacy technician at a Kroger-owned Ralphs supermarket.

Now she fears Kroger is selling Ralphs as part of its merger with Albertsons in a repeat of the 2015 Haggen deal.

“It brought back a lot of fear and anxiety,” she said. “My colleagues feel anxious. They hear that Kroger is going to have to divest. Everyone is afraid that this is their store.

The Albertsons-Safeway merger and subsequent Haggen bankruptcy show that the divestments and other concessions needed to gain FTC approval sometimes fail. And while these remedies are designed to promote competition, they can have unintended consequences.

“It was a belly flop,” said Robert Feinstein, a corporate restructuring attorney who represented Haggen’s unsecured creditors in the bankruptcy proceedings.

In fact, current FTC Chair Lina Khan has been skeptical of divestments as an effective tool to promote competition. She even criticized the FTC’s handling of Albertsons’ deal with Safeway, pointing to it as a prime example of the limits of assignments.

In a 2017 law review article she wrote before working at the FTC, Khan said the agency’s approval of the assignment to Haggen was “[hard] understand” and a “spectacular” failure.

“Even a casual observer could have predicted that Haggen would have a hard time expanding his windows,” Khan said. “The doubters were right.”

It was “the cruelest of ironies and a scathing rebuke to the FTC” that Albertsons bought some of the Haggen stores from the bankrupt company, she added.

Kroger and Albertsons say their merger, which they plan to complete in 2024, will help them compete with big chains and benefit shoppers, workers and local communities.

Both companies believe they have a “clear path” to obtaining regulatory approval, they added.

“We expect to proceed with store divestitures in certain areas, and we will work cooperatively with the FTC to obtain clearance for the transaction,” Kroger Chief Financial Officer Gary Millerchip said in a call with officials. analysts last month.

To address antitrust concerns that the merger will stifle competition in local markets where they overlap, Kroger and Albertsons plan to divest stores.

One way they can do this is to create a new standalone company made up of 100 to 375 of their current sites. This new entity would be subsidiary to the shareholders of Albertsons.

The new company would become an “agile competitor with quality stores” with strong management. “We think it’s a really clean option in the sense that it could potentially be a faster way to get the strategy in place around disposals,” Millerchip said.

But it’s not yet clear whether ditch stores can be viable in the cutthroat grocery industry.

If those pitches are weak or offloaded to a buyer who can’t handle them, it could be a repeat of Haggen’s rapid collapse, antitrust experts warn.

“The big question the FTC should be asking is how does this differ from what it previously promised,” said Christine Bartholomew, who teaches antitrust law at the University at Buffalo Law School.

Kroger and Albertsons say they need to grow to compete with the big chains. But a new, smaller spin-off is unlikely to successfully meet those same challenges, she said.

Dave Durflinger, city manager of Carpinteria, Calif., said the FTC can’t afford to be wrong. Supermarkets are economic anchors in small towns and support hundreds of jobs. Closures can lead to serious gaps in access to food.

Durflinger knows this only too well. In 2015, Haggen purchased a Vons grocery store (owned by Safeway at the time) in Carpinteria as part of the Albertsons and Safeway divestiture.

“Things immediately escalated. Shelves were rare. They just couldn’t keep up,” he said. “It stopped being an attractive store in a short time.”

The store closed within months, which “created a lot of anxiety in the community,” he said.

Another chain bought the shuttered site from bankrupt Haggen and has since turned it around. But the experience, Durflinger said, “illustrates how vulnerable small communities are to mergers and loss of economic vitality.”