Playing Against Khan Is A Rigged Game; Kroger, Albertsons Seek New Venue To Continue Battle

As Tom Petty once noted, “The waiting is the hardest part.” But not the most unpredictable part. After spending thousands of hours and tens of millions of dollars on the proposed $24.6 billion merger effort by Kroger and Albertsons, the long journey which began on October 14, 2022 and ended (at least for now) on February 26, 2024, was indeed hard. Perhaps not harder than the FTC’s ultimate decision to reject the deal, but still difficult to comprehend if you work for either retailer whose managements firmly believed that this merger was a winner.

However, for those on the outside, the ruling from the FTC is easier to understand when you objectively view the hurdles that both chains faced when they signed the agreement to join forces more than 16 months ago.

To start, dealing with the current group of primarily left-leaning commissioners at the large federal agency would pose a huge challenge given that the leader of the FTC was a self-proclaimed skeptic about the negative impact of large business mergers. Using chairwoman Lina Khan’s 2016 article in the Harvard Law & Policy Review which decried the authorization and outcome of Albertsons’ 2015 acquisition of Safeway, the odds were stacked from the outset that this deal would ever receive a fair hearing.

The fact that Khan and her cohorts who sit on the commission have blocked an astonishing 38 deals since her appointment by President Biden in June 2021 should have also been a black smoke signal. And some (but not all) of the reasoning that the FTC made in defending its current decision is unproven and potentially false (e.g.: “In addition to raising grocery prices, the FTC alleges that Kroger’s acquisition of Albertsons would also diminish their incentive to compete on quality.” And…“The FTC charges that the deal would eliminate head-to-head price and quality competition, which have driven both supermarkets to lower their prices and improve their product and service offerings. If the merger takes place, grocery prices will increase, and Kroger and Albertsons’ incentive to improve product quality and customer service will decrease, further harming customers.”)

However, I’ve also got to find fault with Kroger’s and Albertson’s approach to defending a deal that they knew would be controversial. Despite promising that no front-line union jobs would be lost and that any stores that needed to be divested would remain open and the new buyers would hire the same unionized clerks and meatcutters who worked for both chains, they did little in the first few months to publicly lobby for the consumer advantages they thought such a merger would offer.

Within 24 hours of the original announcement, the blowback was significant. UFCW International, the largest organized presence at both companies, railed against the deal despite the promise of job security for its members. The reason: distrust about job security from previous food retail mergers including the 2015 acquisition of Safeway’s approximately 2,200 supermarkets by Albertsons for $9.2 billion. As a result of the deal,  the two large retailers divested 146 overlapping West Coast stores to regional merchant Haggen only to see those stores fail and Haggen file for bankruptcy (29 of those supermarkets were reacquired by Albertsons). Jobs were lost in that multi-faceted transaction and the UFCW never forgot.

It was not only the UFCW, virtually every organized labor union (except for UFCW Local 555 in Oregon) soundly rejected the deal as did consumer groups, states attorneys general and several influential U.S. senators and members of Congress.

In fact, it wasn’t until April 28, more than six months after the deal was announced, that Rodney McMullen and Vivek Sankaran, chief executives of Kroger and Albertsons respectively, first publicly addressed what they believed were “myths” about the ramifications of the merger. And the forum they chose to get out their position wasn’t the Wall Street Journal, New York Times or Bloomberg – it was in with an op-ed piece in the Cincinnati Enquirer, Kroger’s hometown newspaper.

It might not be fair that the CEOs of retail food organizations, which combined operate about 5,000 supermarkets and employ more approximately 700,000 associates, needed to spend valuable time on also becoming media influencers, but they should have anticipated the blowback and aggressively clawed back in the court of public opinion from the outset.

And though I don’t doubt the claims of McMullen and Sankaran that this deal will create more purchasing leverage, greater operating and technological efficiencies and ultimately lower prices, it’s hard not to also believe that the primary goals of this deal are to: 1) create an accretive boost for Kroger’s shareholders, and 2) finally allow Albertsons largest institutional shareholders (Cerberus, BlackRock, JP Morgan Chase) to unload an investment that some have been involved with since 2006.

But for Kroger and Albertsons not to legally challenge the FTC’s decision would be irresponsible. They’ve both invested so much time and money getting to this stage that to accept the commission’s decision would be foolish.

And the track record for challenging and reversing recent Khan rulings has been somewhat encouraging – at least six of her 38 rejections have been overturned in District or Circuit Court (with several more challenges pending).

However, the level of distraction has already affected both chains and the amount of time and money needed for a lengthy court case (and possible appeals) will only be amplified in the coming months (or years).

Kroger could probably continue to survive and prosper if litigation drags on for 18-24 months; it’s less certain Albertsons could. After all, Albertsons has played second banana to Kroger during many steps of the merger process. And several of its institutional holders have been seeking to exit since at least 2015 and seem as anxious as the late comedian Henny Youngman was to part with his spouse (“Take my wife, take my wife, PLEASE TAKE MY WIFE!”). Its prospects to sell to another party aren’t optimal, especially since a leading strategic candidate Ahold Delhaize walked away from a potential deal just before the Boise-based chain began talking to Kroger.

Do I believe that a Kroger-Albertsons merger would create a more level playing field when competing against Walmart, Amazon, Costco, Target and Aldi? Yes.

However, my vote doesn’t count and neither does yours unless your name is Lina Khan or the judge who will oversee the upcoming legal challenge.

Influencers Comment On FTC’s Decision

The timing of the Kroger-Albertsons news was startling (although not surprising) and the story has deep ramifications as for how both retailers will move forward if they are unable to have the FTC’s decision reversed in an open courtroom.

I thought it might be interesting to hear from several leaders who has played roles (even if it was an indirect one) in the gestation process now that the FTC’s decision has been announced. From Marc Perrone, president of the UFCW International, the largest union organization representing front-line workers at both companies: “The FTC’s decision reflects clear concerns over the impact such a megamerger could have on workers, food prices, and millions of customers.  As our delegates made clear last year at our International Convention, the UFCW stands – and will continue to stand – in opposition to any merger that would negatively impact our hundreds of thousands of hard-working members who work at Kroger and Albertsons. As this legal process now moves ahead, our focus will remain the same.  The UFCW will continue to advocate for a stable and long-term solution that is in the best interest of our members and the customers and communities they serve. That means that any company who is looking to purchase stores must first and foremost honor our collective bargaining agreements and be committed to protecting these essential jobs now and in the years ahead. Regardless of the next legal steps, we must never forget that Kroger and Albertsons are successful because of these incredibly dedicated workers, and no proposed merger should be allowed to endanger their jobs or their livelihoods.”

From U.S. Senators Amy Klobuchar (D-MN) and Dan Sullivan (R-AK), who had previously lobbied against the merger: “In late 2022, I held a bipartisan hearing with Senator (Mike) Lee (R-UT) on the proposed Kroger-Albertsons merger, where we heard concerns that the transaction would reduce competition and consumer choice. The FTC’s announcement today is an important step toward ensuring there is continued competition in the grocery market” (Klobuchar).

“As Senator (Lisa) Murkowski (R-AK) and I wrote in a letter to the FTC last September, the fact that this merger could result in grocery store closures and higher prices in Alaska – a state that already has some of the highest prices for food and basic goods in the country—had many Alaskans very concerned. We demanded that the FTC conduct a rigorous analysis to ensure that Alaskans would not be negatively impacted by this merger. In that analysis, the FTC found that the merger would likely reduce competition and raise prices – putting further strain on working families in our state who are being crushed by the high inflation…I appreciate and support the FTC’s thorough analysis and decision to take action to block this merger for the benefit of Alaskans” (Sullivan).

From Greg Ferrara, CEO of the National Grocers Association (NGA), and Chris Jones, the trade association’s chief government relations officer and counsel: “Every day, America’s local independent supermarkets face economic challenges due to the influence of massive power buyer chains who use their leverage over suppliers at the expense of smaller rivals in the marketplace. NGA appreciates the FTC’s commitment to preserving competition in the grocery sector” (Ferrara).

“NGA appreciates the FTC’s commitment to a competitive grocery industry, and we look forward to the FTC taking further action to level the playing field, including enforcing antitrust laws like the Robinson-Patman Act that prohibit economic discrimination against independent grocers and their customers” (Jones).

And from The Wall Street Journal’s editorial board which led with this headline – “The FTC’s Grocery Gift to Walmart and Amazon: Chair Lina Khan Won’t Let Kroger and Albertsons Merge to Become More Competitive.” Part of its opinion piece stated: “…Supermarket workers also increasingly compete with self-check-out, in case Ms. Khan hasn’t visited a store lately. If Kroger and Albertsons are blocked from merging, they will look to shave costs by using more automation. Unprofitable stores will be closed. How does this benefit workers? None of this matters to the Khan FTC, which wants to send a message to CEOs not even to try mergers lest they risk a long legal battle. If consumers pay higher prices or workers lose their jobs, so be it.”

So Much Ahold Delhaize News

After January’s announcement that it would be folding its Retail Business Services and Peapod Digital Labs units in Ahold Delhaize USA (ADUSA), there’s lots more news involving the retailer, both here and abroad.

Last month, the big Dutch merchant posted its Q4 financials and, like many other retailers of late, comp stores sales were down and profits were flat to slightly negative when compared to Q4 in 2022. At ADUSA, net sales were down 1.5 percent year-over-year in Q4 at constant exchange rates, while same-store sales excluding gasoline declined 1.9 percent. The company said that diminishing inflation, the reduction of SNAP benefits and its sale of online grocer FreshDirect (to Getir) adversely affected results. Ahold Delhaize said it lost about $268 million on its three-year investment of FreshDirect in which it paid approximately $327 million for an 80 percent stake (investment firm Centerbridge Partners owned the remaining 20 percent of Fresh Direct).

However, unlike other traditional supermarkets, ADUSA’s comp store decline has now lasted four consecutive quarters. The bright note was once again Food Lion which has now posted an impressive 45 straight operating quarters of positive comp store revenue. Hannaford, too, continued a more modest sales streak, with 10 consecutive quarters of increased comps. Both those ADUSA brands were originally owned by Delhaize America before the 2016 merger.

With the earnings release, Ahold Delhaize also revised its 2024 sales and earnings projections, noting that it expects to achieve an underlying operating margin of more than 4 percent; underlying EPS comparable to 2023 levels; free cash flow of around $2.46 billion; and net capital expenditures of around S2.4 billion.

Even with a less-than-stellar fourth quarter, Ahold Delhaize CEO Frans Muller remained optimistic, telling shareholders: “I am pleased to report a solid end to the year for Ahold Delhaize. The local brands in our strong international portfolio have been steadfast in creating value for customers by enhancing their highly personalized loyalty programs, increasing access to omnichannel offerings, and expanding their innovative own-brand assortments.”

For all of fiscal 2023, ADUSA’s sales were $59 billion, with $4.6 billion of that amount generated from online orders. As of December 30, 2023, ADUSA operated 2,048 supermarkets, three fewer than the year before.

And just before we went to press, the large retailer published its 2023 Annual Report, a 339-page tome about the company’s financial and non-financial performance last year. “The theme of this report is ‘local matters’ – and, in 2023, we proved that once again,” said Muller. “Our brands remain intensely focused on our aim to ensure that customers and communities have access to affordable, sustainable and healthy products. And at the same time, we are committed to playing our part as an industry leader to ensure we can build a more sustainable value chain that is healthier for the planet.”

Among other highlights recapped by Muller were:

*“We met all of our key financial goals for the year. For example, our free cash flow was €2.4 billion ($2.6 billion), finishing at the higher end of our guidance range, reflecting solid and consistent operating cash flows. Looking at our cap-ex, we invested €2.4 ($2.6 billion)  billion in areas such as store remodels and Home Shop Centers, including innovations and improvements to support our ESG agenda. And we continued to modernize our infrastructure.”

*“In 2023 we significantly exceeded our original Save for Our Customers goal, generating over €1.25 ($1.35 billion) billion in cost savings, which is over €250 million ($2.71 million) more than we had originally planned. This enabled our brands to keep prices as low as possible for customers.”

*“Our brands expanded their high-quality own-brand assortments, optimized loyalty programs and provided a seamless shopping experience both in-store and online. For instance, our European brands expanded customer value through the roll-out of ‘Price Favorites’ to nearly 7,000 products in 2023. Scaling technology enhanced digital relationships, resulting in 6.9 percent growth in online sales and 12.1 million loyalty card holders. All our U.S. brands have continued to invest in e-commerce, now operating 1,558 click-and-collect points. They provided 11 billion personalized offers, enriching customer experience. Worldwide, our brands have 18.1 million active monthly app users.”

*“In 2023 we made significant progress in the area of health and sustainability. We reached almost 55 percent of own-brand healthy food sales, further reduced GHG emissions in our own operations by 35 percent compared to our 2018 baseline, reduced food waste per food sales by 37 percent compared to our 2016 baseline and reduced virgin plastic in own-brand primary packaging by 10 percent compared to our 2021 baseline.”

*“The report includes several sections related to our role in society, both in the communities we operate in and the impact we have on our more than 400,000 associates. We have included data on such topics as in-kind and cash donations to food banks across our store network, information about pay equity in our brands, and how we’ve increased women representation in our leadership group from 27 percent end-of-year 2021 to 33 percent end-of-year 2022 and to 37 percent end of 2023.”

*“We expanded our ESG section with more details, including a new overview of the UN Sustainable Development Goals and how we’re striving to help fulfill them. We also added details about our journey to comply with the Corporate Sustainability Reporting Directive (CSRD).”

*“Our ambitions to have climate targets in line with 1.5ºC scenario remains unchanged and we updated our scope 3 targets consistent with the latest communication of the Science Based Targets initiative (SBTi), which requires that we make a distinction between GHG emissions related to forest, land and agriculture (FLAG) and non-FLAG GHG emissions, referred to as Energy and Industrial (E&I) GHG emissions.”

*“Our approach to ESG was rewarded in 2023 with an AAA rating from MSCI, indicating Ahold Delhaize is an industry leader in managing financially relevant ESG risks and opportunities.”

Ahold Delhaize also announced that its annual shareholder’s meeting would be held on April 10 in Zaandam.

Earlier in February, ADUSA made two other moves. It is selling its two meat plants – in Camp Hill, PA and North Kingstown, RI – to large meat processor Cargill, Inc. Additionally, the big merchant confirmed that it has signed a new agreement with ecommerce platform DoorDash to home deliver groceries to customers of all ADUSA brands – The Giant Company, Stop & Shop, Giant Food, Hannaford and Food Lion – by this month.

It’s clear that ADUSA is attempting to prioritize its omnichannel retail while revamping or shedding certain assets. At its two case-ready meat plants, Cargill was already part of both facilities in a day-to-day management role.

“As our brands focus on being the leading omnichannel grocery retailers in our markets, we have made the decision to sell these facilities so that we can continue to be intentional about our investments in the U.S. as we drive growth,” said ADUSA president JJ Fleeman. “By aligning these facilities with a company that specializes in meat production, we can continue to provide quality products to our brands’ customers and increase our focus on being leading omnichannel retailers.”

With the acquisition announcement, Cargill will continue to provide packaged meat products to Ahold Delhaize USA brands in the Northeast.

The deal was actually made by ADUSA subsidiary Infinity Meat Solutions. When it was still known as Ahold USA in 2013, the retailer opened a 163,650 square foot meat plant in Camp Hill to produce packaged ground beef, pork, muscle cuts and value-added products such as seasoned, marinate and breaded meats initially for The Giant Company and Giant Food.

In 2020, ADUSA opened its second such facility near Providence, RI, a 209,000 square foot processing plant to serve Stop & Shop and Hannaford. Originally, the retailer utilized Vantage Foods as its management partner for both processing centers, but in 2020 Cargill acquired Vantage and has been a part of the Camp Hill and North Kingstown facilities since that purchase.

Cargill said it plans to service other retailers from the Camp Hill and North Kingstown plants.

As for its newly created relationship with DoorDash, the ecommerce platform is already being utilized by The Giant Company, Giant Food, Stop & Shop and Hannaford. A Food Lion pilot project has already begun and will go “live” sometime this month.

“As leading omnichannel grocery retailers in their markets, Ahold Delhaize USA brands are focused on providing fast and convenient grocery delivery for customers. The addition of DoorDash as a marketplace partner for our companies is very exciting,” said Fleeman. “The speed and ease of DoorDash and its strong reputation for providing great customer service aligns with the priorities of each of our local brands. We look forward to delivering this new option for customers of our local brands – as well as new customers through DoorDash – and leveraging this partnership to enable our brands as they continue to drive omnichannel growth.”

ADUSA brands are already utilizing the services of Instacart as well.

The company also announced that Marc Stolzman has been named chief sustainability officer for ADUSA. A five-year veteran of the retailer, Stolzman was most recently executive lead, Peapod Digital labs.

‘Round The Trade

As we saw with ADUSA’s Q4 comp sales and earnings, rival Weis Markets also posted flat numbers in its fourth quarter, which ended December 30. Net sales totaled $1.21 billion for the 13-week period compared to $1.31 billion for the 14-week fourth quarter ended December 31, 2022, down 7.1 percent.

Fourth quarter comps, adjusted for an additional week in 2022 and excluding fuel, increased 0.2 percent. Earnings-wise, Weis’ Q4 net income (after provision for income taxes) totaled $20.52 million compared to $28.88 million in 2022, down 28.9 percent. Fourth quarter earnings per share totaled $0.76 compared to $1.07 per share in 2022.

For its entire fiscal 2023, revenue at the Sunbury, PA-based regional chain totaled $4.70 billion for the 52-week fiscal year ended December 30, 2023. That compares to $4.70 billion when the extra operating week of 2022 was factored in. Adjusted comps increased 2.3 percent for Weis’ full ’23 fiscal calendar year ended December 31, 2022, up 0.02 percent. Fiscal year 2023 comparable store sales, adjusted for an additional week in 2022 and excluding fuel, increased 2.3 percent on an individual year-over-year basis and increased 9.8 percent on a two-year stacked basis.

“We are grateful to our associates for their service to our customers and company,” said chairman, president and CEO Jonathan H. Weis. “Our fiscal year 2023 and fourth quarter results are in line with our expectations despite an additional week in 2022 and declining government benefits. In 2023, we continued to make significant price investments that help us to effectively compete in all our markets and meet the expectations of our customers impacted by the inflationary pressures of recent years. In addition, we carefully managed our business processes and expenses at every level of our company and invested in technologies that improved efficiencies.”

From the standpoint of retailers who primarily sell food, only Walmart, Costco and Publix remain relatively minimally impacted by the current economic rocky road in consumer spending.

Family Dollar stores, a subsidiary of Chesapeake, VA-based Dollar Tree, has pleaded guilty to operating its former West Memphis, AK distribution center in an unsanitary (and dangerous) manner and will pay the U.S. Justice Department $41.7 million  in forfeitures and fines, the largest monetary financial penalty in U.S. history. You may remember that in 2022, the 850,000 square foot “Rathouse” was found to have housed thousands of rodents potentially tainting products that were shipped to about 400 FD stores in the region.

To give Dollar Tree its due, the company was fully cooperative with the government’s investigation and has made a commitment to build an expanded new facility on site which will employ about 300 associates. Still, you gotta wonder why companies like Family Dollar and Dollar Tree continue to operate or have operated stores and warehouses that are unsanitary, unsafe and unappealing on so many levels

We have a couple of obituaries to report this month, including one from the food industry. Underrated cereal innovator William Post has also passed away. You might think that Post worked for C.W. Post and invented Post Toasties. That’s not the case at all – the Michigan native spent most of his career at Kellogg’s and is credited with inventing the Pop-Tart. What started as an item intended to resemble a toasted fruit scone that came in four varieties (with no icing), went on to become one of the most enduring and iconic ready-to-eat breakfast items of all time. Today, there are more than 30 Pop-Tart SKUs. Post, who grew up in Kellogg’s hometown of Grand Rapids, joined the company in 1964 as plant manager in one of the company’s bakeries. After Pop-Tarts became a hit, Post quickly rose through the ranks until he became a senior VP, a post he held until he retired. While I personally don’t eat Pop-Tarts anymore, apparently they were good for Post’s bank account and his health. He lived until age 96.

Charles “Lefty” Driesell, the Hall of Fame basketball coach who led four major college programs to more than 100 wins each, has died at the age of 92. One of the most colorful characters in the era – 60s, 70s, 80s – when college basketball became popularized, Driesell’s zany antics – such as starting “Midnight Madness”  and declaring that “Maryland had the potential become the UCLA of the East” – sometimes overshadowed what a truly excellent coach he was. Here are some career highlights: his first head coaching job was at Davidson where he compiled a record of 176-65 in his nine-year stint. He was then recruited by the University of Maryland, and in 17 years with Driesell at the helm the Terps had an overall record of 348-159, which included eight NCAA post-season tournament appearances, as well as an NIT championship in 1972 (when that still meant something). After he was forced to resign following the tragic death of star player Len Bias (from a cocaine OD in his college dorm) in 1987, he became head basketball coach at James Madison and then closed out his career at Georgia State in 2003. When he retired, Driesell had an overall record of 786-394, and today he is still ranked in the top 20 among all NCAA Division I coaches in wins. In 2018, he was inducted into the Naismith Basketball Hall of Fame. I can attest that watching “Lefty” Driesell coach a game at the old Cole Field House in College park was indeed something special.