Kroger and Albertsons executives defend merger proposal at hearing

Albertsons and Kroger Supermarkets

Bridget Bennett | Bloomberg | Getty images; Brandon Bell | Getty Images

Battle for food giants kroger as well as Albertsons should be allowed to combine heated.

On Tuesday, leaders of the two companies defended their merger proposal at a congressional hearing in Washington, where they were asked a series of questions about how the deal could change the competitive landscape and possibly the prices consumers pay at the store.

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“I just don’t see a decrease in competition going forward,” Kroger CEO Rodney McMullen said at a hearing before the Senate Judiciary Subcommittee on Competition Policy, Antitrust and Consumer Rights. “It’s easy for shoppers to turn right or left.”

In October, Kroger announced plans to acquire Albertsons in a $24.6 billion deal. The Cincinnati-based company is the second-largest grocery store by market share in the U.S. behind Walmart, according to market researcher Numerator, while Albertsons is fourth behind Costco. Together, Kroger and Albertsons would be in second place behind Walmart.

At Tuesday’s hearing, McMullen said the combined company could help lower food prices and improve the customer experience, especially at a time when grocers struggle to adapt to changes like online shopping. He said retailers must constantly reinvent themselves to stay relevant and convince shoppers to drive to their stores.

However, the proposed merger faced strong opposition from elected officials of both political parties and from the United Food and Commercial Workers, a large grocers union representing thousands of grocers.

Sen. Amy Klobuchar, Democrat of Minnesota, held a hearing Tuesday with Sen. Mike Lee, a Republican of Utah. Both disputed the companies’ actions, including Kroger’s announced $1 billion share buyback last year and shareholder dividend plans, as well as previous deals such as the acquisition of Albertsons Safeway.

They stressed that the proposed deal comes at a time when groceries take up a large portion of American families’ budgets. Food prices have risen sharply as inflation hovers near a four-year high. Prices for everyday commodities, including butter, eggs, poultry and milk, jumped double digits from a year ago as of October, according to the latest available federal data.

Skeptical senators, workers

The hearing offers a preview of the upcoming larger antitrust battle.

For Kroger and Albertsons, the argument is clear: the merger will help them weather dramatic changes in the industry. Online food sales are eating into already thin margins. New players such as big discounters like Aldi and e-commerce players like Amazon are also putting pressure on traditional grocers.

“The food market has completely changed over the past decade, resulting in fierce competition for consumers,” Albertsons CEO Vivek Sankaran told the hearing. “The best way to compete with megastores like Walmart and large-cap online companies like Amazon is to merge with Kroger.”

He argued that even as a combined company, Kroger and Albertsons would still be small compared to Walmart, Costco and Amazon.

Ahead of the hearing, members of the UCFW, which represents more than 100,000 workers at Kroger and Albertsons, shared their concerns at a press conference on Capitol Hill. Their fears ranged from the potential loss of pension plans to rising food prices and losing their jobs.

Unionized Albertsons employees were mindful of the impact of past mergers. Judy Wood, a longtime cake decorator for the food giant, said she and her colleagues were shocked by the store closures that followed Safeway’s merger with Albertsons, which was announced in 2014.

Union members also opposed private equity firms that would benefit from a proposed $4 per share special dividend for Albertsons shareholders announced in connection with the deal. Cerberus Capital Management owns a 28.4% stake in Albertsons, according to Factset. For now, dividend payments are on hold until at least December 9 due to a decision by a Washington state court.

McMullen said Tuesday the company has no plans to close stores or lay off employees, but said it would work with the Federal Trade Commission if necessary to spin off stores for competition reasons.

Kroger said that as part of his original proposal there was already a plan to overcome merger fears — the divestment of 100 to 375 stores through a spin-off of a subsidiary. Kroger and Albertsons had to work together – and with the Federal Trade Commission – to decide which stores would become part of the subsidiary.

On Tuesday, McMullen said the company was in “active discussions” with unions about the deal and what it means for its employees. He said the deal would ultimately expand opportunities for employees. Kroger will also spend $1 billion to raise salaries and benefits for store employees after the deal closes, he said.

“A successful business is what keeps it safe to work,” he said. “And we believe that we will have an incredibly successful business that will provide job security.”

Some grocery store competitors and industry experts also spoke out against the deal at the hearing.

Michael Needler, chief executive officer of Fresh Encounter, an independent grocery store chain based in northwest Ohio, said companies like Walmart and Amazon are using their size to pressure suppliers to lower prices and improve conditions. Instead of creating a level playing field, he said, the Kroger-Albertsons deal would create another powerful player that would make it difficult, if not impossible, for small grocers to compete.

For example, he says, big grocers are campaigning against his own chain by offering coupons for free groceries.

“I don’t know of any other way to point out predatory pricing other than to buy your competitor,” he said.

Sumit Sharma, a senior fellow at Consumer Reports who specializes in antitrust and competition, also said at the hearing that he sees no advantage in a combination of companies. Instead, he said, retailers would have less reason to raise employee salaries. Buyers will have less choice and more sticker shock.

“Even if they sell a few stores, it will take the competition out of the market,” he said. “So prices will go up.”

CNBC Amelia Lucas contributed to this report.

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