Kroger to merge with Albertsons?

[ClownLoach]

I think that Kroger is going to make far fewer changes than we expect. They used to operate like a giant wholesaler that also owned and operated some stores (ironically, like C&S). I think they're going to leave Kroger formats separate from ACI formats for quite some time to create the image of competition and choice. Not that different from how ACI handled their merger with Safeway which arguably has been a successful marriage in the difficult SoCal market other than high prices which Kroger is also guilty of at Ralphs. Albertsons was dead in the water in SoCal and now leads multiple markets. We like to criticize ACI using seemingly Albertsons merchandising with Safeway merchandise but it does seem to work somehow. And they've done it by maintaining subtle differences between their formats to the point where as we know they have viable stores practically next door to one another with different banners...

This is so true, @ClownLoach. I remember the palpable excitement at my local Vons store in the runup to the SWY/ACI merger over implementing house-made guacamole and salsa, cut fruit prepared in-store, and the abandonment of pre-sliced deli meats in favor of freshly-sliced every time. The employees were practically giddy. As a customer, I liked it (and still like it at Safeway), too. There was something about the old Albertsons' (and later Essential Everyday) brands that seemed "off." ACI, smartly IMO, tweaked "Safeway [fill in the blank]" into "Signature." There's something about "Signature" that sounds better than "Essential Everyday" and "Kroger." When we look at the Safeway store brands Kroger didn't sell to C&S (O-Organics Signature [fill in the blank]) it becomes apparent they might use those names post-merger and we will see Signature (conventional), Private Selections (premium), Simple Truth, ("all-natural"), O-Organics, and Lucerne brands at the new company.

...They really have laid the groundwork for doing the same at Kroger. It took about 3 years to integrate those two companies and 5 years to really start making changes (PNW Albertsons to Safeway rebrand initiative, Pavilions relaunch initiative etc.). With how much larger Kroger is I expect 5+ before you see real change aside from the immediate merger required banner changes. I have every expectation that the Albertsons units kept will rebrand with ACI names not KR names. No Albertsons is getting a Ralphs sign unless it's remodeled to the Ralphs format and so forth. The Albertsons will become Vons. This is also a reason they're ramping up the Pavilions name because of the downscale reputation of Vons vs Albertsons; in the richer communities taking the Albertsons "down" to a Vons is going to be perceived negatively. Supposedly another South OC Albertsons after San Clemente is rebranding to Pavilions.

Taking San Diego as an example where Vons outnumbers Ralphs, do you see Kroger keeping both Vons and Ralphs banners?

I don't see them doing any banner consolidation anytime soon, and for the good reason that there's going to be absolute chaos already with the forced removal of the Albertsons banner from tons of stores. If it's an Albertsons now it's more than likely going to be a Vons or Pavilions. I don't see them hanging a Ralphs sign on a building that obviously looks like and runs like a Albertsons/Vons.

Remember that Ralphs had arguably a very bad transition when they merged in Alpha-Beta in SoCal. Those stores were wildly inconsistent and were nothing like a Ralphs. They have less Ralphs bannered stores now than before they added in Alpha-Beta. How many of those Alpha-Beta conversions are left today? This coupled with the botched Lucky-Albertsons combination which did the same thing also had a bad result.

The Safeway-Albertsons merger despite all the criticism we throw at them is really the model for a well executed merger. No disruption aside from divests. Stores that stayed consistent and slowly changed brands, decor, layouts etc. The only major visible change began when they started rolling the first "combined" decor package that we called Colorful Lifestyle here, an obvious combination of Albertsons and Safeway decor, along with the disappointment of the Florida Modern decor and in both cases unified the center store layouts as best as possible around the existing refrigeration and such. Now they have also subtly reminded the customer that Albertsons is Vons and vice versa. So in this new rebrand insanity if allowed they won't really blink when their Albertsons becomes a Vons as perceptions now are it's the same. But if it changed banners to Ralphs - it is not a Ralphs in any way shape or form, and can't just become one overnight.

I still think their intent is to operate like a supply company and a stores company separated internally. Hence they can run lots of formats. They ran Fred Meyer and QFC for how long without changing banners? It worked out fine for everyone and if it wasn't for the fact that they're acquiring the Safeway and Albertsons names in the same market I'm sure they wouldn't change a thing. I see them running Ralphs, Vons, and Pavilions for many years to come. It is very much obvious they'll educate everyone over time that they're part of "the Kroger Family of Stores" and hang a "fruit cart" sign on everything eventually, but when they introduced that goofy cart that was really their way of saying that the marketing experts told them don't change all the signs to Kroger or you're going to regret it.

[ClownLoach]

I don't know if there's any real news here, but it does look increasingly likely that the FTC will seek to block or greatly restrict this deal.

Zero chance it’s blocked in the sense of “completely disallowed in any form”. The total nationwide market share isn’t even close to that kind of threshold. FTC would get laughed out court.

700-800 divests using algorithms that take into account pedestrian, transit and automotive flows, employment patterns, WIC and SNAP data and store-level financial performance, with grain as fine as census blocks.

I think getting C&S out in front as the preferred candidate at this point is savvy - their role in cleaning up the Fleming mess protected a lot of rural independents and their operations for AAFES have been high-quality. Their balance sheet is also attractive. This is a much healthier approach for interfacing with FTC than the SpinCo appendage that would have serious balance sheet questions from day 1.

Problem is that kind of algorithm based crap is everything that nobody wants or needs because it leads to false conclusions and logical fallacies. I've seen the results of that kind of spreadsheet twisting junk and it told my company that the absolute worst building I operated, in the worst possible location, was my best entirely from demographics, census tract data and all that jazz. It was literally an armpit location in a cluster of multiple shopping centers, worst spot of all. (Got it closed anyway and it was torn down and replaced with non-retail use because it was like I said a bad spot).

I've also seen where every algorithm and numerical indicator would tell you "open a store right there and now!!!" because of traffic numbers, demographics, etc. but a real human familiar with the area knows all the great numbers are red herrings. There is an intersection in Huntington Beach that on paper is one of the best retail locations anywhere. Ralphs spared no expense building a palace of a store there replacing a vacant strip mall. Obviously there was a reason it was vacant. Ralphs pulled the plug before even the first lease term was up as the store was dead and hemorrhaging money. Now it's a Whole Foods, who probably looked at the algorithms and not surprisingly it's also a dud for them... It'll also probably close at end of first lease term. This "gem" has now been a Ralphs, Orchard, and Whole Foods and all are failing. The secret? The high traffic road is all cars trying to bypass the horrible I-405, SoCal's most infamous freeway, so despite the fact that the intersection is clearing almost 100K cars a day nobody's stopping for groceries or anything else there.

That's exactly why they are smart to have combed through the entire combined network of stores (again I believe they hired outside impartial professionals to do this like AlixPartners or Accenture) and dumped a load of 400 duplicate or obvious overlaps on C&S. Plus I'm sure real logic was involved. Could you imagine if some doofus at the FTC made the choices? They'd probably force a couple dozen Fred Meyer full size stores to go to C&S who wouldn't even begin to know what to do with them besides see if they could flip them to Walmart or Target.

There are real problems with one size fits all approaches like algorithms. Personally, I'm not bothered by a small town, spread out area with a Ralphs on the West side and a Vons on the East side both being kept because the nature of more rural areas is less cross shop anyway. If the closest store doesn't have it then you go to a big box like Walmart, Costco Etc which might be an hour drive away. But when they force the issue it almost always ends in only one store where two were viable and fine - because the new in town operator screws up the divested store and it closes. The central coast of California saw that problem extensively with the Haggen divest problem where most of those stores never were replaced because the cost of opening (or reopening) is high and now there aren't enough grocery stores left nor will they be replaced anytime soon.

Want a perfect example of this? I learned from this board that Albertsons was forced to divest their just-opened acquired Scolari's in San Luis Obispo or otherwise they'd have to divest in Morro Bay. Go look at a map and see how far it is to Morro Bay from San Luis Obispo... That was a completely stupid and unnecessary divestiture of stores over ten miles apart which of course flopped as Haggen and now it's a Smart and Final which is not a full service supermarket; they had to sell another nearby older, smaller and funky Albertsons too which became an IGA that's more of a specialty food store (California Fresh/El Rancho). Now the central core of a beautiful downtown where many people used to walk to get groceries for decades has been left without any conventional chain grocery store under the guise of "improving competition" by basically forcing a 50/50 keep vs divest rate... Everyone has to either compromise with S&F or pay more for Whole Foods type stuff at the IGA, otherwise they now have to get in a car and drive to a Vons that is way over capacity and thus too underserves the community. In this case they basically lost two stores and kept one or they would have had to leave the small town of Morro Bay entirely. All of these stores would still be open if the FTC had kept their noses out of that merger. We can all complain about how we don't want a Kroger monopoly but at least they know how to keep the damned doors open. Once the store is gone, and in the case of a Haggen type situation the landlord buys back the lease while the bankrupt company liquidates the fixtures, the refrigeration, the meat cutting and deli equipment and cases and such leaving a stripped empty building with a few old gondolas? It's not very likely that it'll be a full service market ever again because the startup cost becomes too high.

I also don't see an issue in markets with ample nearby competition if there are enough choices within a reasonable distance.

Where it's a problem is the areas with higher population that are under served, without enough reasonable access to multiple competitors, and there are probably less of those than we might think. Hence the idea that they think there will be only 231 total additional divests at the most in wave 2, and by getting the number down so much they can better discuss on a store by store basis in clusters where they're being asked to divest a unit.

[ClownLoach]

I was thinking some more about this situation last night and here is what I think the FTC needs to do.

1) Go through the list with an appropriate attitude and discuss situations where they think divests are needed, but be reasonable and don't bring brain dead algorithms, obsolete zip code surveys, or any of that junk. The fact is that if the store being forcibly divested is at any risk of underperforming or closing once sold off then it should stay.

2) Kroger must commit to all stores not being divested to C&S remaining open for at least the next 20 years, with some sort of due process established for reasonable and necessary closures. An independent outside consulting firm such as Accenture or others should be hired by the FTC at the expense of Kroger for review of any store closure being considered; if the outside firm identifies that the store can be "saved" through reasonable changes then they must attempt them and come back for a review later (like say reducing center store SKU depth and inventory levels, or implementing security measures to control shrink losses). Effectively they're going to subject themselves to a independent store closure committee. This includes stores that could be naturally closed at end of lease terms that still have additional terms available for renewal. Basically, they can't decide to cull a bunch of locations to raise overall volumes and profits as we saw them do for a decade plus in SoCal; if they decide to fight to keep the store in the merger instead of divesting then they're in it for the long haul with that store. Obvious exception when they're getting kicked out by the landlord, and if any collusion is found between them a massive fine should be levied.

3) Kroger must have a deal with C&S (or additional parties that may arrive later) where they have right of first refusal on acquiring any store Kroger wishes to close for the next 20 years at a fair price to be determined by either an agreed upon formula now or an independent reviewer later. Could even be a situation where the store gets sold for $1 to keep the doors open in the community. They get to appraise the store and see the full books, full P&L etc so they're fully informed and can do their due diligence. If Kroger owns the real estate then it will be sold with the store to the new operator, or Kroger will be required to become the landlord and lease to the new operator at fair market rent to be determined independently.

4) As condition of the merger, Kroger agrees to forever relinquish all lease covenants and restrictions upon sites that are closed. Dead rent is no longer to be permitted, if a store is closed then the lease severance is to be paid in full and the landlord is then free to use the site in whatever way they wish including immediately replacing with another grocery store. Kroger may not sublease either or arrange for a non-grocery to replace them; their only option on leased stores is to close the store once approved and let the landlord do what they wish to do independently. If Kroger owns the building and a competing grocery store wishes to acquire the facility at a fair price or lease at market rent then Kroger may not block the transaction or prevent the replacement grocery store from opening.

5) Any sites where Kroger or Albertsons Companies is currently paying dead rent on a dark store must have lease severance costs paid at close of merger so these sites are fully released for competition to open. As an alternative, Kroger may elect to reopen these sites upon close of the merger with FTC approval. If these closed sites are company owned buildings, then any restrictions to prevent grocery stores from acquiring or leasing the site are to be removed and the sites are to be immediately marketed by a Commercial Real Estate as available for immediate occupancy as a supermarket.

6) Non-compete agreements are also to be canceled or no longer enforced upon merger close in situations where for example an Albertsons is in line with a Target or other super-store format thus allowing them to add reasonable competition to the market. The non-compete should only be allowed to apply to mainline, conventional grocery stores over 15,000 Sq ft where over 51% of space is dedicated to foods. This would correct situations like Target or Walmart that are not allowed to have their usual and customary food assortments because of these outdated and anti-competitive lease covenants. This also would allow other uses currently restricted such as drugstores that are forced to have a reduced food assortment compared to their usual and customary format, or specialty stores such as Cost Plus World Market which currently would not be able to open in the same center under these lease covenants. This relaxing of restrictions would not necessarily permit alternative supermarkets like Walmart Neighborhood Market, Target Express, Sprouts, Aldi, Trader Joe's, or Grocery Outlet to open within the same center; it would not be reasonable to force an exception for a drastically altered store that differs widely from the chain's usual and customary operation (such as a Grocery Outlet that reduces their food assortment and increases GM to comply with the size and floor space restrictions).

Basically, at this point the right thing to do is say "Kroger, you've got one shot at unloading stores before the deal. Anything you are even thinking about closing or consolidating later - sell it to C&S now.". Then they're committed to staying open unless there are true extenuating circumstances validated by independent experts, like a store that is losing money due to circumstances that cannot be reasonably fixed like massive shrink. Deciding to close stores just to improve their earnings and stock value won't be acceptable. Establishing a right of first refusal for a competitor or C&S to buy anything they want to close later would again discourage them from creating food deserts by consolidating locations to maximize their profits. And then they can't play any of the games of the past where they close and pay rent on a dark store to keep the competition out, or have lease covenants saying it can never be used as a grocery store again and so forth.

[HCal]

1) Go through the list with an appropriate attitude and discuss situations where they think divests are needed, but be reasonable and don't bring brain dead algorithms, obsolete zip code surveys, or any of that junk. The fact is that if the store being forcibly divested is at any risk of underperforming or closing once sold off then it should stay.

Just about any store could be at risk of underperforming or closing once sold off, unless it's sold to a company larger than Kroger (i.e., Walmart). But it is Kroger's responsibility to come up with a plan that meets antitrust laws. If a store needs to be divested to maintain competition and a competent buyer cannot be found, then that means the merger cannot go through.

I don't like the idea of giving Kroger a bunch of conditions to follow after the merger. This could lead to an FCC situation, where telecom companies are asked for unrelated concessions like bans on data caps in exchange for approval. If post-merger Kroger is too big, then these conditions aren't going to fix it. They are easy to circumvent and a future "business friendly" federal government may not even want to enforce them.

[ClownLoach]

1) Go through the list with an appropriate attitude and discuss situations where they think divests are needed, but be reasonable and don't bring brain dead algorithms, obsolete zip code surveys, or any of that junk. The fact is that if the store being forcibly divested is at any risk of underperforming or closing once sold off then it should stay.

Just about any store could be at risk of underperforming or closing once sold off, unless it's sold to a company larger than Kroger (i.e., Walmart). But it is Kroger's responsibility to come up with a plan that meets antitrust laws. If a store needs to be divested to maintain competition and a competent buyer cannot be found, then that means the merger cannot go through.

I don't like the idea of giving Kroger a bunch of conditions to follow after the merger. This could lead to an FCC situation, where telecom companies are asked for unrelated concessions like bans on data caps in exchange for approval. If post-merger Kroger is too big, then these conditions aren't going to fix it. They are easy to circumvent and a future "business friendly" federal government may not even want to enforce them.

Their deal with C&S ensures theyll take every location Kroger will divest, so they already have that "competent buyer." But the reality is that a store which is currently in the middle of a district of 12 Ralphs within a 25 mile radius that suddenly is the only C&S owned unit in town and the only Albertsons (or QFC or Piggly Wiggly or whatever other name) for a 50 mile radius might not be viable anymore. Kroger will be fighting to keep the store, the FTC should not be fighting to separate it as their track record of trying to maintain competition does the exact polar opposite (see Haggen).

The real reason for conditions is to prevent greed. We know that these companies have been acting in an anticompetitive manner for quite some time with the lease restriction and covenant game, and that they would fight today to keep as many sites as possible while calling for the liquidators to come close them down tomorrow if it meant more profits and less competition. If they don't want to run it or it's an obvious overlap then it should be sold to C&S. But if they are keeping it, and fighting with the government to keep it, and making all these promises to the State AG's, FTC, Unions, and such that they won't close anything later- then there should be a mechanism to hold them to their word. What I'm asking for is basically a consent decree - the FTC gives them consent to merge and keep as many stores as they want, but they have to actually keep them open. So the store goes to C&S and presumably stays open, or it stays with the new Kroger and presumably stays open. Either way it addresses the real concern of the merger which isn't competition, it's store closures leaving communities without a grocery store in the name of bigger profits and fatter margins.

And if the FTC actually gives a damn about ensuring competition, then instead of playing around with zip code maps and road traffic charts and other nonsensical garbage that has as little relevance to divestiture needs as shaking a "Magic 8 Ball" - they should be looking at the rules of the road that the new company will be using. I'd rather see Kroger be allowed to keep everything they didn't voluntarily dump on C&S in wave 1, but at the same time address all non-compete agreements, lease covenants, dead rent on dark stores, and all other anticompetitive behavior Kroger and Albertsons have been weaponizing for years in an effort to quash competitive entry. The site that Albertsons couldn't keep open as a Vons doing less than $10M a year might be a $50M a year 99 Ranch Market; or maybe a $20M Bristol Farms, or a $15M Trader Joes plus a $5M CVS. If they can't make enough money on the site because they can't meet the needs of the customers in the market that should not allow them to decide to unilaterally block any competitor from opening there later. Target couldn't keep a dumpy old store in a rough area along South St. in Lakewood going and decided to close it. They didn't put exclusions on it because they don't behave that way. Walmart opened in the same dumpy store and they do just fine because they understand how to survive and make a profit in that kind of neighborhood. And the Target a couple miles to the south at the Mall does just fine as well. Everyone wins because competition is preserved.

Right now, allowing these companies to merge and behave under "business as usual" practices for them is the worst possible outcome even if they have to sell 800 stores. They are not on a level playing field with everyone else because of the games they play. Truly level the field, no anti-competitive behavior, no paying rent on closed stores to maximize profit while putting cars on the road polluting their way to the only store left which is on the other side of town, no blocking market entry for life on these sites.

In fact, I would go so far as to say merger or no merger, the FTC and Justice Department should be suing all of the grocery store chains that engage in this anticompetitive BS. They pervert the concept of lease covenants, which were put in place for safety purposes so that for example an adult bookstore can't sign a lease next door to Toys R Us, or a Fitness Center that has limited parking turnover can't replace a closed furniture store because it'll suck up all the parking and thus damage the business of the remaining stores. Those are legitimate types of lease restrictions. "If Ralphs ever leaves this can't ever be a grocery store in perpetuity" isn't a legitimate restriction, it's an anticompetitive action.

[HCal]

Their deal with C&S ensures theyll take every location Kroger will divest, so they already have that "competent buyer." But the reality is that a store which is currently in the middle of a district of 12 Ralphs within a 25 mile radius that suddenly is the only C&S owned unit in town and the only Albertsons (or QFC or Piggly Wiggly or whatever other name) for a 50 mile radius might not be viable anymore. Kroger will be fighting to keep the store, the FTC should not be fighting to separate it as their track record of trying to maintain competition does the exact polar opposite (see Haggen).

Just because C&S is a competent buyer doesn't mean every location they buy will be viable. In your example, obviously an isolated store in the middle of a district of 12 Ralphs within a 25 mile radius is not going to be viable for C&S. The solution to that is not to say "oh well, then Kroger can keep it". The solution is to put the onus on them to come up with a way of making it viable. Perhaps they divest additional stores in that area so C&S has a critical mass. Perhaps they divest to another operator that has stores in an adjacent area. If they can't find something that works for them, then too bad, merger denied.

The real reason for conditions is to prevent greed. We know that these companies have been acting in an anticompetitive manner for quite some time with the lease restriction and covenant game, and that they would fight today to keep as many sites as possible while calling for the liquidators to come close them down tomorrow if it meant more profits and less competition. If they don't want to run it or it's an obvious overlap then it should be sold to C&S. But if they are keeping it, and fighting with the government to keep it, and making all these promises to the State AG's, FTC, Unions, and such that they won't close anything later- then there should be a mechanism to hold them to their word. What I'm asking for is basically a consent decree - the FTC gives them consent to merge and keep as many stores as they want, but they have to actually keep them open. So the store goes to C&S and presumably stays open, or it stays with the new Kroger and presumably stays open. Either way it addresses the real concern of the merger which isn't competition, it's store closures leaving communities without a grocery store in the name of bigger profits and fatter margins.

And if the FTC actually gives a damn about ensuring competition, then instead of playing around with zip code maps and road traffic charts and other nonsensical garbage that has as little relevance to divestiture needs as shaking a "Magic 8 Ball" - they should be looking at the rules of the road that the new company will be using. I'd rather see Kroger be allowed to keep everything they didn't voluntarily dump on C&S in wave 1, but at the same time address all non-compete agreements, lease covenants, dead rent on dark stores, and all other anticompetitive behavior Kroger and Albertsons have been weaponizing for years in an effort to quash competitive entry. The site that Albertsons couldn't keep open as a Vons doing less than $10M a year might be a $50M a year 99 Ranch Market; or maybe a $20M Bristol Farms, or a $15M Trader Joes plus a $5M CVS. If they can't make enough money on the site because they can't meet the needs of the customers in the market that should not allow them to decide to unilaterally block any competitor from opening there later. Target couldn't keep a dumpy old store in a rough area along South St. in Lakewood going and decided to close it. They didn't put exclusions on it because they don't behave that way. Walmart opened in the same dumpy store and they do just fine because they understand how to survive and make a profit in that kind of neighborhood. And the Target a couple miles to the south at the Mall does just fine as well. Everyone wins because competition is preserved.

Right now, allowing these companies to merge and behave under "business as usual" practices for them is the worst possible outcome even if they have to sell 800 stores. They are not on a level playing field with everyone else because of the games they play. Truly level the field, no anti-competitive behavior, no paying rent on closed stores to maximize profit while putting cars on the road polluting their way to the only store left which is on the other side of town, no blocking market entry for life on these sites.

In fact, I would go so far as to say merger or no merger, the FTC and Justice Department should be suing all of the grocery store chains that engage in this anticompetitive BS. They pervert the concept of lease covenants, which were put in place for safety purposes so that for example an adult bookstore can't sign a lease next door to Toys R Us, or a Fitness Center that has limited parking turnover can't replace a closed furniture store because it'll suck up all the parking and thus damage the business of the remaining stores. Those are legitimate types of lease restrictions. "If Ralphs ever leaves this can't ever be a grocery store in perpetuity" isn't a legitimate restriction, it's an anticompetitive action.

I completely agree with you that these anticompetitive practices are unacceptable and need to be fixed. But I view them as a separate issue from the merger. If Kroger gains too much market share, either nationally or locally, then that's a problem that cannot be fixed simply by voiding non-competes. With the general decline in physical retail, the issue may become irrelevant anyway; if an ethnic chain can't open in one shopping center because Kroger used to be there and still pays the rent, there is likely an abandoned Kmart, Toys R Us or Bed, Bath and Beyond fairly close by that doesn't have such a restriction.

[ClownLoach]

Their deal with C&S ensures theyll take every location Kroger will divest, so they already have that "competent buyer." But the reality is that a store which is currently in the middle of a district of 12 Ralphs within a 25 mile radius that suddenly is the only C&S owned unit in town and the only Albertsons (or QFC or Piggly Wiggly or whatever other name) for a 50 mile radius might not be viable anymore. Kroger will be fighting to keep the store, the FTC should not be fighting to separate it as their track record of trying to maintain competition does the exact polar opposite (see Haggen).

Just because C&S is a competent buyer doesn't mean every location they buy will be viable. In your example, obviously an isolated store in the middle of a district of 12 Ralphs within a 25 mile radius is not going to be viable for C&S. The solution to that is not to say "oh well, then Kroger can keep it". The solution is to put the onus on them to come up with a way of making it viable. Perhaps they divest additional stores in that area so C&S has a critical mass. Perhaps they divest to another operator that has stores in an adjacent area. If they can't find something that works for them, then too bad, merger denied.

The real reason for conditions is to prevent greed. We know that these companies have been acting in an anticompetitive manner for quite some time with the lease restriction and covenant game, and that they would fight today to keep as many sites as possible while calling for the liquidators to come close them down tomorrow if it meant more profits and less competition. If they don't want to run it or it's an obvious overlap then it should be sold to C&S. But if they are keeping it, and fighting with the government to keep it, and making all these promises to the State AG's, FTC, Unions, and such that they won't close anything later- then there should be a mechanism to hold them to their word. What I'm asking for is basically a consent decree - the FTC gives them consent to merge and keep as many stores as they want, but they have to actually keep them open. So the store goes to C&S and presumably stays open, or it stays with the new Kroger and presumably stays open. Either way it addresses the real concern of the merger which isn't competition, it's store closures leaving communities without a grocery store in the name of bigger profits and fatter margins.

And if the FTC actually gives a damn about ensuring competition, then instead of playing around with zip code maps and road traffic charts and other nonsensical garbage that has as little relevance to divestiture needs as shaking a "Magic 8 Ball" - they should be looking at the rules of the road that the new company will be using. I'd rather see Kroger be allowed to keep everything they didn't voluntarily dump on C&S in wave 1, but at the same time address all non-compete agreements, lease covenants, dead rent on dark stores, and all other anticompetitive behavior Kroger and Albertsons have been weaponizing for years in an effort to quash competitive entry. The site that Albertsons couldn't keep open as a Vons doing less than $10M a year might be a $50M a year 99 Ranch Market; or maybe a $20M Bristol Farms, or a $15M Trader Joes plus a $5M CVS. If they can't make enough money on the site because they can't meet the needs of the customers in the market that should not allow them to decide to unilaterally block any competitor from opening there later. Target couldn't keep a dumpy old store in a rough area along South St. in Lakewood going and decided to close it. They didn't put exclusions on it because they don't behave that way. Walmart opened in the same dumpy store and they do just fine because they understand how to survive and make a profit in that kind of neighborhood. And the Target a couple miles to the south at the Mall does just fine as well. Everyone wins because competition is preserved.

Right now, allowing these companies to merge and behave under "business as usual" practices for them is the worst possible outcome even if they have to sell 800 stores. They are not on a level playing field with everyone else because of the games they play. Truly level the field, no anti-competitive behavior, no paying rent on closed stores to maximize profit while putting cars on the road polluting their way to the only store left which is on the other side of town, no blocking market entry for life on these sites.

In fact, I would go so far as to say merger or no merger, the FTC and Justice Department should be suing all of the grocery store chains that engage in this anticompetitive BS. They pervert the concept of lease covenants, which were put in place for safety purposes so that for example an adult bookstore can't sign a lease next door to Toys R Us, or a Fitness Center that has limited parking turnover can't replace a closed furniture store because it'll suck up all the parking and thus damage the business of the remaining stores. Those are legitimate types of lease restrictions. "If Ralphs ever leaves this can't ever be a grocery store in perpetuity" isn't a legitimate restriction, it's an anticompetitive action.

I completely agree with you that these anticompetitive practices are unacceptable and need to be fixed. But I view them as a separate issue from the merger. If Kroger gains too much market share, either nationally or locally, then that's a problem that cannot be fixed simply by voiding non-competes. With the general decline in physical retail, the issue may become irrelevant anyway; if an ethnic chain can't open in one shopping center because Kroger used to be there and still pays the rent, there is likely an abandoned Kmart, Toys R Us or Bed, Bath and Beyond fairly close by that doesn't have such a restriction.

There's a big distinction. Grocery store buildings are purpose built. The cost of converting a non-grocery facility is substantially higher and precludes most sites from conversion. Sometimes it's physically impossible, if for example the roof cannot support the weight of additional refrigeration units. Environmental permitting and reviews are drastically different. Back end logistics are different; most box stores have one dock door, sometimes only at ground level, and don't have room to add more. Even if all those issues of cost could be overcome the construction time line would be much longer due to the need to basically tear everything out to the dirt below the slab and start from scratch. It took Safeway almost 18 months to convert a mint condition Sports Authority on Oahu; my non grocery company converted an identical building in 5 months.

The fact is that maybe a store like Aldi can go into a closed BB&B because they don't require a meat cutting room, prep kitchen for deli, and so forth, but a full line grocery store might be millions of additional dollars that the landlords won't contribute. The additional up front cost and substantial time line will exclude most sites from grocery reuse, and they know it. It is much easier for a new competitor to reopen in an existing grocery store and reuse the perimeter facilities, all they have to do is replace equipment and fixtures then hook up to the existing lines and plumbing. If they do have to convert something unusual like that 99 Ranch converting a onetime Robinsons in Arcadia all the additional costs ultimately will pass along to the customer and thus make the competitor less viable which is exactly what the chains like Kroger want. Some cost savings do bear out on larger projects like converting a former Kmart or Lowe's type building so the construction as a whole for the grocery store going in mostly is offset by the simplicity of the other box store suites.

Couple that with intentionally manipulating deeds and leases to prevent reuse and you have anticompetitive behavior that arguably has more of a impact than this merger. The fact is that typically today a landlord bears the cost of building the store initially, not Kroger or Albertsons, and then they demand rights that extend past their own lifetime on the site? This is one of the reasons why they are not getting as many new stores open except in extreme growth areas because landlords are getting stuck with empty sites which lead to other empty sites. My last company has a store next to a dead Albertsons which pulled out almost a decade ago. We have lost half our foot traffic (although we got rent concessions for their closure), and all of the ethnic chains wanted to fight it out to open there but the lease covenants forbid them from doing so. Eventually the entire center will close and likely be demolished even though there is 100% occupancy of big boxes surrounding the site, demand for the site only from grocers since everyone else is in the surrounding area, and no additional room to develop in town. It's ridiculous.

And it is absolutely relevant to discuss the competitive practices of companies as they merge, furthermore the FTC has a long tradition of requiring concessions and changes even when there are not asset divestitures.

[veteran+]

Excellent points about these "clauses" and its anti competitive results.

Food Fair Properties Inc. was Food Fair, Pantry Pride, J.M Fields and other divisions' Real Estate and Property Development division. It was once the TOP shopping center and shopping mall developer in the country.

They were taken to court over and over again for this behavior that you described so well.

These legal challenges must be brought to bear again!

[VibeGuy]

Consent decrees in a business with grocery margins? Pigs will line up for take off at LaGuardia first. (I also wouldn’t trust Accenture to run a compliance program at any cost, but that’s another story).

Does ACI even own any real estate anymore? I thought the various deals have essentially been paid for by sale-leaseback on the entire portfolio if they could find a REIT to buy it. I don’t think FTC is going to have levers to drag Kimco et al into any of this, and frankly, the REITs may have a little more power against Krogersons than they had with ACI. They may be much more willing to diversify some of their lessee portfolio to not have quite so many eggs in one basket in every region where they operate.

FTC’s only lever on competitive issues here is limiting further consolidation in duopoly markets. They’re not going to be able to get Kroger into a consent decree-esque structure because they haven’t committed the sin of monopoly. They can maybe (and it’s a big maybe) unwind some portions of the Haggen debacle by getting at least that many divests in those markets but that’s the edge of what they can do.

I think FTC is smart and empowered enough to avoid letting Kroger create islands of divested single locations. Mock doing this with a GIS approach all you want, but I honestly don’t see the Feds taking a particularly locally informed approach that isn’t almost entirely driven by third-party data. The AGs in the five most-affected states will be taking point on hyperlocal issues - FTC’s big goal should be to set some overarching goals and then allow themselves to be convinced why the divest *shouldn’t* be so brutal as to create precisely zero definable geographies where their new marketshare is over 50% when it wasn’t before.

Twenty years of oversight is about 19.5 too many. I’m less concerned about operational vagaries than allowing Kroger massive structural advantage that immediately creates abusive consolidation.

I also want to touch on the conversions: maybe ACI is just particularly bad at them. Winco has managed to convert Sports Authority and Sears locations in a timely manner, and they’re not exactly Walmart when it comes to real estate projects. The reality of commercial RE for the foreseeable future is going to be more remodels and repurposing than greenfield.

[veteran+]

Perhaps the problem is, the meaning of monopoly has devolved?