Inside Kroger-Albertson’s would-be merger: ‘Do we have to say that we won’t close stores?’

SEATTLE – When Kroger and Albertsons promised to preserve competition under their proposed merger by selling 413 stores, including 104 in Washington, some wondered whether the buyer would be required to keep those stores open.

Apparently, so did the buyer, C&S Wholesale Grocers.

That’s according to new filings in Washington state’s Jan. 16 lawsuit to stop the $25 billion merger of Kroger, which owns QFC and Fred Meyer, and Albertsons, which owns Safeway.

“Do we have to say that we won’t close stores?” Bob Palmer, outgoing CEO of New Hampshire-based C&S Wholesale, asked last year about plans to buy the 413 locations, according to newly unredacted passages in the state’s suit.

In the passage, Palmer appears to concede that the stores will “stay open” during the sales process, “but then what?” he asks.

“Are we committed to this?”

Palmer’s questions are among numerous entries in the suit that had been redacted over concerns they contained proprietary information about Kroger, Albertsons or C&S Wholesale.

Last week, at the request of the Washington Attorney General’s Office, a King County (Washington) Superior Court cleared around a dozen of the redacted statements for release and amended version of the suit was filed.

No bombshell revelations emerge in the cleared passages, which cover such issues as the competition between Kroger and Albertsons, the companies’ attitudes toward unions and whether C&S Wholesale has the capacity to run hundreds of additional stores.

Instead, the passages provide a fuller picture of Washington’s case against the merger, which state Attorney General Bob Ferguson claims would result in higher prices and fewer choices for consumers in Washington, even with the sale of stores to C&S Wholesale.

Washington was the first government to sue to block the merger. Colorado filed its own case against the merger Feb. 14, and the U.S. Federal Trade Commission is expected to file its own long-awaited suit as early as next week, with several other states joining in, according to Bloomberg.

Last week’s unredacted passages may also resonate with consumers, labor groups and others in Washington who appear to share Ferguson’s skepticism about the merger, which would have an especially large impact in the state.

Washington has a disproportionately high number of Kroger and Albertsons locations and would see the largest number of stores “divested” to C&S Wholesale in 17 states and Washington, D.C. as part of the regulatory approval process.

Ferguson’s case against the merger has two broad components, said Doug Ross, an antitrust expert at the University of Washington School of Law.

Combining Kroger and Albertsons is “anticompetitive” because the two retailers are currently each other’s main competition in many of markets, the Attorney General’s Office contends. That competition is what currently pressures the retailers to keep prices low.

Further, selling 413 locations to C&S Wholesale fail to preserve that competition because C&S lacks the capacity to operate those stores competitively, the Attorney General’s Office argues.

The newly unredacted portions “add color” to both those arguments, Ross said.

For example, according one passage, a top QFC executive “has stated unequivocally that Safeway/(Albertsons) is QFCs No. 1 direct competitor.”

According to internal company documents, Kroger “has recognized that areas with diminished competition are areas where it can pursue a ‘different price strategy’ and raise prices,” another passage contends.

The same holds for Albertsons, which “also recognizes that when its stores face less competition, it can take the opportunity to raise prices and ‘margin up,’ ” reads a related passage.

Reached for comment, Kroger and Albertsons didn’t respond to specific details in the unredacted passages, but offered broad rebuttals against the state’s arguments, including that merger would raise prices for consumers.

“This merger will provide customers with lower prices and more choices while increasing access to fresh food across America,” said an emailed statement from Kroger.

A C&S Wholesale spokesperson noted the company’s “more than 105 years of food industry experience and a track record as a successful grocery retailer.”

A focus on unions

Several of the unredacted passages touched on another sensitive topic: how the merger would affect hundreds of unionized stores.

The suit contends that without competition from Albertsons, Kroger “would have an increased incentive to close stores to reduce union participation.”

According to an unredacted passage, “a 2021 labor strategy document prepared for Kroger recommends that Kroger pursue, over the long-term, a strategy to ‘reduc(e) the percentage of Kroger associates represented by organized labor.’ ”

“That strategy includes ‘deterr(ing) union campaigns,’ ‘opening more nonunion operations,’ and ‘shutting … union represented locations,’ ” according to an unredacted passage.

Another unredacted passage notes that “C&S has a history of not renewing union contracts and shifting operations to nonunion shops.”

C&S Wholesale said Tuesday that it “has been a union employer for several decades, with both unionized and nonunion employees across the U.S.,” and noted that it “has committed to honoring all collective bargaining agreements including industry-leading benefits and retaining frontline associates” at divested locations.

Kroger said the merger would “secure the long-term future of union jobs,” and noted that “while the national grocery industry lost union jobs – Kroger grew unionized jobs by more than 100,000 since 2012.” An Albertsons spokesperson said the merger would “strengthen good-paying union jobs.”

The Albertsons spokesperson also pointed out that the proposed merger was recently endorsed by United Food & Commercial Workers Local 555, which represents grocery workers in Oregon, southwest Washington, Idaho and Wyoming.

That endorsement contrasts with several national and local union organizations that have opposed the merger.

On Tuesday, UFCW Local 3000, which represents Kroger and Albertsons employees in Washington, northeast Oregon and North Idaho, released a statement listing various labor groups opposed to the merger.

Concerns about the buyer

The newly unredacted passages also highlight Washington state’s contention that selling hundreds of stores to C&S Wholesale won’t create a viable competitor to a merged Kroger-Albertsons.

The state contends that because C&S is primarily a wholesale operator, with only a few dozen retail grocery locations nationally, and none in Washington, it lacks the capabilities to ensure the successful operation of stores it buys from Kroger and Albertsons.

Unredacted passages offer more specifics. For example, Kroger and Albertsons rely on large IT systems to run their retail operations, while C&S lacks the same IT capability and will need a long time to get one in place, the state argues.

Unredacted passages highlight another concern – that when C&S acquires retail locations, its strategy “where possible” is to sell them to its existing wholesale customers.

Further, neither C&S nor Kroger or Albertsons have offered any “binding commitments that would ensure that C&S will continue to operate and invest in the divested stores,” attorneys for the state argue.

A C&S spokesperson said the C&S’s “strong operational focus and deep financial resources will position it to successfully operate and continue to grow and create healthier communities for years to come.”

‘Move to the rear of the line’

Ross, the UW antitrust expert, says C&S Wholesale’s perceived capabilities will be a key issue in the attorney general’s case.

“The critical part is going to be whether (C&S) can step into the shoes of Albertsons and run a real competitor,” Ross said, adding that “the newly unredacted portions of the complaint don’t shed much light on that.”

Redactions aside, Ross also wonders whether events may overtake Washington’s legal strategy, which has already drawn scrutiny by experts for filing before the Federal Trade Commission had taken action.

If the FTC does file its own suit next week and other states join that effort, as is expected, Washington may feel pressured to drop its own case.

“Probably in the short run Washington won’t abandon its suit,” Ross said. “But I would expect the federal suit to move fast and the Washington suit … to move to the rear of the line.”