The CEOs of Kroger and Albertsons took the stand Monday in the Washington trial over their proposed merger, arguing that the $25 billion deal is justified by powerful competition from Walmart, Costco and Amazon.
But attorneys for the state, which sued to stop the merger, pressed the executives over claims that Kroger, which owns QFC and Fred Meyer, and Albertsons, which owns Safeway and Haggen, truly face existential threats from their nontraditional rivals.
Monday’s session in King County Superior Court in Seattle also revisited the issue of store closures, which Albertsons CEO Vivek Sankaran acknowledged was still “on the table” if the merger were blocked. Critics have argued that the merger itself could lead to closures.
The appearances of Sankaran and Kroger CEO Rodney McMullen came as the state trial moved into its second week. The court will also hear from Eric Winn, CEO of C&S Wholesale Grocers, which would buy and operate 579 Kroger and Albertsons, including 124 in Washington, if the merger moves ahead.
Washington’s suit against the merger, filed Jan. 15, was the first by any government seeking to block the deal. Separate suits also have been filed by Colorado and the Federal Trade Commission, whose Feb. 26 action was joined by nine states but not Washington.
Last week, the FTC, Kroger and Albertsons wrapped up their hearing in federal court in Portland, and they await a ruling on whether the merger should be blocked until the FTC can evaluate whether the deal violates federal antitrust laws.
Monday’s testimony focused heavily on the financial condition of Kroger and Albertsons as independent players.
The state contends that both companies are highly profitable and, based on their own financial statements, would continue to be profitable even if the merger is blocked.
Under questioning by Glenn Pomerantz, an outside attorney representing the state, Kroger’s McMullen acknowledged that he had recently told investors that even if the federal judge blocked the merger, “Kroger is operating from a position of strength” and that he was “optimistic about Kroger’s future” and “that Kroger has many ways to drive sustainable growth.”
Pomerantz works for Los Angeles-based Munger Tolles, which was hired last year by the state Attorney General’s Office to help with the suit.
Later Monday, Albertsons CEO Sankaran said he agreed with prior company statements that Albertsons was “confident in … its continued ability to compete in its ferociously competitive industry,” and that “regardless of whether the merger is consummated,” Albertsons had “the financial wherewithal” to continuing investing its stores, employees and capabilities, during questioning by Jonathan Kravis, another attorney with Munger Tolles representing the state.
The retailers noted, however, that Albertsons will be at a significant disadvantage going forward. Albertsons’ prices are significantly higher than other players — including Kroger’s, which Sankaran attributed to Kroger having “a better cost structure … and more scale.”
Both retailers also pushed back against the argument that Kroger and Albertsons are each other’s most significant rivals.
In the Seattle-area market, Costco is the bigger competitor for Albertsons, Sankaran said. He noted that Seattle-area Albertsons customers only spend 17 cents of each grocery dollar at Albertsons locations, but around 20 cents at Costco.
Around 17 cents goes to Walmart, with Kroger third among Albertsons’ competitors, at around 14 cents, Sankaran said. “I’m losing more of our customers’ dollars to Costco and Walmart than I am to Kroger,” he added.
McMullen said Kroger has to pay close attention even to smaller competitors such as Trader Joe’s. He said Kroger uses its in-house label, Private Selection, to “really target Trader Joe’s, in terms of the innovation for that product line.”
The state, however, has argued that the more meaningful competition is between Kroger and Albertsons, because both offer “one-stop shopping.”
Federal and state regulators have argued that because Kroger and Albertsons offer similar full-service product lines, which many shoppers still value, allowing a merger would eliminate the market pressures that currently forces the two retailers to compete directly on price, product innovation and service.
Kroger and Albertsons have argued that consumers no longer value the one-stop model as much as they did, and that the typical shopper now regularly visits numerous stores. But as the state pointed out Monday, until 2023, Kroger itself described its stores as offering a “one-stop shopping experience.”
Monday’s testimony also touched the question of store closures, an issue that has been front of mind for many Washington shoppers since the merger was announced in 2022.
McMullen reiterated earlier assurances that no stores would close as a result of the merger. But he also acknowledged, as Pomerantz put it, that “if financial analysis shows that Kroger would be better off closing one of its stores, nothing in your merger agreement stops you from closing that store if this merger goes forward.”
Sankaran, for his part, implied that the risk of store closures was far higher if the merger was blocked and Albertsons was left to fend for itself.
Without the merger, “we’ll do OK for the next two, three years, but we will have to find ways … to do more than we’ve done in the past, and that will mean doing more with less, less resources,” Sankaran said.
Asked if that could include closing stores and exiting some markets, Sankaran said “all of those [options] would be on the table, and are on the table.”
Sankaran’s testimony was set to continue Tuesday and is expected to be followed by testimony from Winn, the C&S Wholesale CEO. Under the proposed merger, C&S would operate the 579 “divested” Kroger and Albertsons locations and, in theory, replace any competition lost in the deal.
