On February 26, 2024, the Federal Trade Commission (FTC), alongside Attorneys General from eight states and the District of Columbia, initiated legal action to block Kroger’s $24.6 billion acquisition of Albertsons. The complaint raises traditional concerns typical of challenges to mergers of horizontal competitors, but it also raises two notable arguments that showcase the Biden Administration’s signature approach to antitrust—first, the FTC alleges harm to competition for union grocery labor, and second, it rejects the companies’ proposed divestitures and treats them as irrelevant to the merger review.
The FTC’s much-anticipated complaint1 marks the culmination of a nearly 18-month review of the merger, which was first announced in October 2022. The proposed merger between what the FTC calls the two largest “traditional” supermarket chains in the U.S. would add Albertsons’s more than 2,200 supermarkets and 1,700 retail pharmacies to Kroger’s current portfolio of more than 2,700 supermarkets and 2,200 retail pharmacies.
Largest Proposed Supermarket Merger in U.S. History
The complaint asserts antitrust concerns that the merger would substantially lessen competition across several localized geographic areas where the supermarket chains directly compete through individual stores, resulting in potential price increases for grocery and household products for local consumers.2 The FTC defines the relevant product market as “traditional supermarkets and supercenters,” which it describes as “convenient ‘one stop shopping’ for food and grocery products” with a large assortment of SKUs.3 By choosing this narrow category of grocery retailers, the FTC explicitly excludes “club stores,” “limited assortment stores,” “premium natural and organic stores,” “dollar stores,” “e-commerce retailers,” and “grocery delivery services” from its definition of the relevant market, thereby excluding stores such as Sam’s Club, Aldi, and Whole Foods as competitors to the parties.4
In addition, the FTC also asserts that the merger will substantially lessen competition for union labor, as it claims that the two stores compete aggressively to hire and keep workers in overlapping market areas. This argument will require federal courts to determine the viability of one of the new theories of harm in the recently released Horizontal Merger Guidelines: can two companies that use the same type of labor merge even if the workers have other options for employment?
The FTC’s complaint also flatly rejects the relevancy of the parties’ proposed divestitures of 413 stores to C&S Wholesale Grocers. The FTC called the proposal a “hodgepodge” remedy that fails to address competitive issues, claiming that C&S cannot successfully operate the divested stores. But this skepticism is at odds with the record from courts reviewing merger challenges in this administration. In recent cases including JetBlue/Spirit, Microsoft/Activision, Assa Abloy/Spectrum, and UnitedHealth/Change, courts have all credited the merging parties’ arguments that post-merger commitments should be incorporated into the court’s analysis of whether the antitrust harm alleged by the agency really will come to fruition.
Both theories about harms to the labor market and the proposed divestiture reflect the FTC’s continued efforts to develop merger case law in a more interventionist direction.
The FTC Tests Its Labor Market Theory Under Antitrust Laws
This case marks the first time either antitrust agency has relied on the fact that workers are unionized to claim that other employers would not effectively compete to hire from the talent pool. According to the FTC, Kroger and Albertsons are the two largest “union grocery store operators” in the country, with over 700,000 combined employees that are members of unions, predominantly United Food and Commercial Workers (UFCW). Based on the parties’ internal documents and market studies, the FTC concluded that Kroger and Albertsons “compete aggressively” for the same workers in the local geographic areas where the stores overlap. The FTC states that the merger would create a monopsony because the parties’ combined share of union grocery labor exceeds 65 percent in each relevant geographic area.
The FTC argues that competition between grocers for union grocery labor should be analyzed as a distinct labor market that does not include non-union jobs. The complaint asserts that unionized workers strongly prefer to remain with union employers, where they are protected under multiyear collective bargaining agreements (CBAs) which provide specified protections and provisions for wages, pension benefits, health insurance, and time off. Union workers could lose these benefits and protections if they moved to a non-union grocery employer and accordingly, the FTC describes the relevant market as union grocery labor.5
Without active head-to-head competition between Kroger and Albertsons for union grocery employees, the FTC asserts that unions would be unable to leverage favorable CBA terms from one employer against the other. The FTC claims that management from both companies closely monitored each other’s negotiations with local labor unions and often conceded to higher wages and better working conditions to avoid losing talent to the other grocer. Additionally, the FTC claims that the “primary leverage” that distinguishes union employees is “the ability to credibly threaten a strike.” When union workers of one store strike, customers and some employees shift to shopping at and working for the competing supermarket. The FTC includes as an example a UFCW Local 7 strike in Colorado where Kroger’s employees encouraged shoppers and employees to shop at Albertsons until Kroger eventually agreed to offer higher wages and safety protections for its workers. UFCW Local 7 then leveraged the agreement with Kroger to secure better terms from Albertsons.
This case marks the first time a judge will be asked to declare that retail workers are limited to only one industry for their future employment and that, even within that same industry, non-union employers do not compete with union employers for the same workers under the antitrust laws. Any ruling in favor of the FTC’s labor market definition in this case will be an important victory for the antitrust agencies as they look to expand the reach of the antitrust laws to address a wider variety of social concerns than just consumer welfare.
The FTC Rejects a “Hodgepodge” Divestiture Remedy
In September 2023, Kroger and Albertsons announced the plan to divest 413 stores and several distribution centers, offices, and private label brands across 17 states and D.C. to address prospective antitrust concerns about specific geographic areas. Additionally, Kroger and Albertson’s proposed a buyer of these assets, C&S Wholesale Grocers, owners and operators of the Piggly Wiggly grocery store franchise among other retail assets. The FTC’s complaint rejects the parties’ proposed divestiture outright. The FTC criticizes the divestiture as inadequate but never states which geographic areas remain a concern after accounting for the divestiture. The complaint characterizes the divestiture package as a “hodgepodge” of non-viable stores and “castoff assets,” and alleges that the divestiture does not solve the competitive issues posed by the transaction.6 The FTC’s complaint claims that the divested assets are not financially or logistically capable of “substantially replacing” Kroger or Albertsons because C&S will not have enough assets, distribution centers, technology, pharmacy resources, or employees to successfully compete. In the FTC’s words, the divestitures will require C&S to create “a brand-new supermarket on the fly” at 80 percent of the divested stores.
Particularly interesting in the FTC’s rejection of the proposed divestiture is the FTC’s characterization of Albertson’s history of acquisitions and divestiture remedies, in which the FTC played a significant role. The FTC cites Albertsons’ “track record” of ineffective divestiture remedies, including in connection with its merger with Safeway.7 There, to obtain the FTC’s approval, Albertsons divested 168 stores in the Pacific Northwest to a small regional grocer, Haggen Inc., whose rapid expansion resulted in bankruptcy only months later. As part of Haggen’s bankruptcy proceedings, the FTC had no choice but to allow Albertsons to repurchase several stores it had just divested.8
The FTC continues the recent (unsuccessful) trend of the agencies arguing that divestitures should be ignored altogether in consideration of the prima facie case. The better approach, several courts have ruled, is to analyze how the competitive landscape will look after the merger and divestitures and ask whether the new landscape is substantially less competitive as compared to the pre-merger status quo. Ultimately, the FTC’s analysis of the divestiture remedy in this case shows that it is undeterred by recent court rulings and will continue to force parties to litigate over divestiture proposals that they consider imperfect. The takeaway for parties considering deals with horizontal overlaps is clear: seek early advice from antitrust counsel about the possibility of an upfront divestiture plan and consider structuring the deal in light of the possibility that the parties will need to litigate over the divestiture.
If you have any questions about this client alert or how these recent merger enforcement trends could affect your company, do not hesitate to reach out to Maureen Ohlhausen, Beau Buffier, Ben Labow, Michelle Hale, Taylor Owings, or any member of Wilson Sonsini Goodrich & Rosati’s antitrust and competition practice.
[1] Complaint. The Kroger Company and Albertsons Companies, Inc., FTC Docket No. D-9428 (Feb. 26, 2024).
[8] Brent Kendall, Haggen Struggles After Trying to Digest Albertsons Stores, Wall St. J. (Oct. 9, 2015), www.wsj.com/articles/haggen-struggles-after-trying-to-digest-albertsons-stores-1444410394.
