Albertsons Companies beat its profit and sales expectations for the fourth quarter of 2022, ahead of a proposed mega-merger with Kroger — but its margins slipped a percentage point.
The grocery store chain’s fourth quarter earnings report comes amid a proposed $25 billion merger with Kroger Co., a deal that has attracted criticism in Wyoming and across the nation, as well as increased scrutiny by the Federal Trade Commission, which is charged with ensuring antitrust laws are followed.
The proposed Albert-Krogerson deal would create a new grocery store giant in the purely supermarket sector. Between them, Kroger and Albertsons would control 4,996 stores with combined annual sales that could easily exceed $200 billion.
That’s comparable to Costco’s annual sales of $234.4 billion in the purely supermarket sector. But it’s chump change when compared to Walmart’s $570 billion and Amazon’s $500 billion in grocery store sales, which also sell other goods while still making up two of the big five that sell food stuffs in America.
Kroger has argued it needs the proposed merger with Albertsons to maintain competitiveness in the grocery market, given the pricing power that Walmart and Amazon command. The chain hopes the merger will allow it to set its own prices the way Walmart and Amazon do.
Cost-savings from increased efficiencies will lower prices for consumers by a collective $500 million and allow the chain to boost worker wages by $1 billion, according to Kroger’s information page on the merger. There will also be another $1.3 billion in savings that will be used to plump up and enhance the shopping experience in Albertsons stores.
Cracks Are Showing
Albertsons revenue was up 5.1% for the fourth quarter year over year to $18.3 billion, and its sales were up 5.6 percent year over year after adjusting to screen out new or closed stores.
On the surface, that suggests robust growth, but inflation is making up a good portion of those figures, implying that the growth is actually quite soft.
By contrast, the price for groceries were up 10.2% for February in the United States, according to U.S. Labor Department statistics, which indicates how extreme inflation still is in this sector.
CEO Vivek Sankaran warned that tougher markets lie ahead for the grocery store sector in the earnings report.
“We have prepared our business for a more difficult consumer environment,” he wrote, “and are expecting significant labor investments and inflationary cost increases.”
Despite that, Sankaran said Albertsons is “well-positioned to drive top-line growth by deepening relationships with our customers, even as inflation continues.”
Albertsons stocks fell after the earnings report, which did not include fiscal year guidance or the customary earnings call with Q&A for investors. This is typical for companies involved in a merger.
Albertsons net debt to earnings before interest, taxes, depreciation and all that, otherwise known as EBITDA, is 1.81. That figure is still lower than what it was in 2018 and 2019, company officials have pointed out. Cash and cash equivalents on hand, meanwhile, dropped from $2.9 billion a year ago to $455 million.
The payout also required a $1.5 billion loan, which was the subject of a lawsuit brought by Washington Attorney General Bob Ferguson against the merger.
The payout cannot help but soften the company’s capital reserves ahead of the turbulence Sankoran is alluding to for the marketplace.
Merger Opposition Continues To Build
The proposed merger of Albertsons and Kroger has attracted many critics across the nation, including Wyoming.
Ferguson and the attorneys general of three states each filed lawsuits trying to stop payment of the $4 billion payout to Albertsons shareholders. The two suits have largely been unsuccessfully in stopping the payment.
Washington’s lawsuit was denied, while the second suit filed by three states is still working its way through the legal system. The judge in that second case, however, declined to enjoin Albertsons from making the payment, suggesting the likelihood of succeeding on the merits of the case is considered very low.
More recently, a group of 25 consumers from various states filed a lawsuit in California opposing the merger, as well as demanding that the $4 billion payment, which has already been made to shareholders, be reversed.
Unrelated to that case, but in the same timeframe, several unions and private organizations ranging from trade associations, farmers associations and free market associations have joined forces to oppose the Albert-Krogerson deal, which is under review by a skeptical Federal Trade Commission.
That agency’s antitrust review has expanded beyond the usual parameters, asking retailers and wholesalers across the United States for their views of the merger.
Typically, the FTC has looked mainly at specific geographic areas and overlapping stores to decide whether a deal is anti-competitive.
In this case, the agency is taking in a much broader look at the grocery sector, including shopping data, pharmacy operations, store labors, labor dynamics, and testimony from grocery store workers.
This broadened focus comes as the Biden administration signaled a much more critical stance on mergers than has been the case in the past.
“The rate of new business formation has fallen by almost 50% since the 1970s, as large businesses make it harder for Americans with good ideas to break into markets,” an executive order from President Joe Biden states.
FTC Chair Lina Khan, meanwhile, has not been bashful in criticizing the 2014 Safeway-Albertsons deal that essentially blew up in regulators’ faces, writing in 2017 that the “spectacular” failure of that deal to maintain competitiveness in the marketplace should have been easy for even casual observers to predict.
Past Is Prologue?
Local 7, the union that represents 750 grocery store workers in Wyoming, has suggested the merger will ultimately mean less access to food and expanding food deserts, fewer jobs for workers and potentially higher grocery store prices for everyone as competition is driven from the marketplace.
The map Albertsons and Kroger have provided online about the merger is a quick preview of what’s about to happen, according to UFCW Local 7 President Kim Cordova.
“The map shows you how concentrated and how many stores overlap in the western part of the U.S.,” she told Cowboy State Daily when the merger was first proposed. “In some of our areas throughout (Colorado and Wyoming) they control almost 100% of the grocery market.”
Cordova suggests the merger will create an oligopoly, where just a few entities are controlling the food supply chain, along with fuel, pharmacies, and other products.
Cordova has also been critical of Kroger’s proposal to spin off 300 or so of its stores to maintain competition in the grocery store sector. Lawmakers, too, have wondered about that as well.
If Kroger cannot remain competitive with several thousand stores, Sen. Mike Lee, R-Utah, asked during a recent congressional hearing, then how will a spin-off do so with a few hundred?
Kroger CEO Rodney McMullen pointed to the company’s merger with Harris Teeter, which he said lowered prices by $130 million. But, he added, lower prices are not necessarily what creates the best market scenario for Kroger.
“What we have found is by giving customers a better value, using personalized pricing for each household based on what’s really important to that household and passing those savings, that creates more loyalty,” he said then. “And then we also really focus on fresh foods. And that’s really from a competitive standpoint, we always try to make sure we have the freshest product in the market.”
Cordova, however, believes the answer to the question lies in what happened during the 2014 merger of Albertsons and Safeway stores.
Albertsons sold 168 of its locations to Haggen Foods and Pharmacy to maintain competitiveness in the marketplace. But, less than a year later, Haggens was bankrupt. Dozens of those stores were then repurchased by Albertsons.
“They are not going to let that competitor thrive,” Cordova predicted, pointing out that some of the existing Kroger and Albertsons stores are in basically the same parking lot. “They sell them a lemon basically.”
What happened in the wake of Haggens’ bankruptcy meanwhile wasn’t the lower prices or higher wages that were promised.
Instead, hundreds of workers lost jobs and retirements. Data from USDA, meanwhile, shows food deserts had expanded by 2019, versus what they were in 2015.
