The Federal Trade Commission (FTC) last week sued to block the largest proposed supermarket merger in U.S. history – Kroger Company’s $24.6 billion acquisition of the Albertsons Companies – alleging that the deal is anticompetitive.
GWU Law
The FTC action was cheered by public interest groups across the board.
“A Kroger-Albertsons merger would have been a disaster for workers, consumers, and farmers, and represented the worst of grocery store consolidation,” Public Citizen’s Lisa Gilbert said. “The FTC said clearly that superstores cannot merge their way to dominance. We applaud the FTC for bringing a strong common-sense case, challenging this mega merger plan at a critical juncture for our markets.”
But exactly how strong is the FTC’s case?
To get a sense, we checked in with former FTC chair and current GWU Law Professor William Kovacic.
“It depends so much on what cards the merging parties are holding and we haven’t seen those yet,” Kovacic told Corporate Crime Reporter in an interview last week.
“There are three key factors that will determine the success for the companies. One crucial factor is whether they can rebut the FTC’s argument that the relevant focus of attention is traditional supermarkets.”
“The FTC in their complaint says that a variety of other grocery retailers are not in the relevant market. They exclude for example limited assortment retailers like Lidl and Aldi. They exclude premium organic oriented retailers like Whole Foods. They exclude low cost retailers like dollar stores. They exclude ecommerce delivery systems like Amazon. They exclude Amazon Fresh. They leave out box stores and club retailers like Sam’s Club and Costco. They say those don’t provide meaningful constraints on traditional grocery stores.”
“The companies are going to fight that. So one big question is – can the companies provide convincing evidence that the FTC has drawn the boundaries too narrowly.”
“The second big factor is that the FTC is betting heavily on discrediting the proposed divestiture buyers – C&S Wholesale Grocers – as a credible acquirer of the assets that the parties say they will spin off.”
“The parties said – we don’t think that there is a problem. But if there is a problem, we have a solution. And our solution is to sell off over 400 retail outlets. By selling off this package of assets, we will cure the competitive problems that the FTC has identified in a variety of major metropolitan areas.”
“The proposed purchaser is C&S Wholesale. It’s a food wholesaling company with relatively limited experience in retailing. The FTC’s complaint says C&S is not up to the job of providing an effective competitor constraint with these divested assets, that they have too little experience in retailing, that the package of assets is too small and that the collection of stores don’t constitute a robust stand alone enterprise that can compete effectively against Kroger and Albertsons and against other traditional grocery stores.”
“The FTC is betting heavily on discrediting the proposed solution that the parties came up with. So, the second key variable is – can the companies demonstrate that the divestiture buyer is truly a capable and effective competitor and will be able to make an effective transition into being a major retailer with these stores?”
“The third variable focuses on labor. Can the companies persuade organized labor representatives to come forward and say – we don’t see a problem here? In fact, we see good things in the merger that will enhance the position of our workers over time.”
“There is a larger food services union that the FTC refers to again and again. I believe there was a report that the local affiliate of that union might have said that it favors the transaction. Can the companies come forward with voices from organized labor who say – this is good for us?”
“Those are the three big variables.”
“Do they have evidence to broaden the market perspective to include these other retailers beyond traditional grocery stores?”
“Can they demonstrate that their proposed divestiture buyer will be effective?”
“And third, can they introduce evidence showing that organized labor does not see this as a bad transaction, but in fact sees this as positive.”
Kroger argues that the FTC action strengthens its larger non-unionized retailers like Walmart, Costco and Amazon by allowing them to further increase their overwhelming and growing dominance of the grocery industry.
“That argument can be effective if they can generate evidence and present it in the courtroom to back it up,” Kovacic said. “This is related to the argument that the FTC’s conception of the market is badly deficient.”
The FTC isn’t saying that Walmart isn’t a competitor.
“They aren’t saying that. But they arguably underestimate the extent to which the other traditional grocery stores are evolving in ways that make Kroger and Albertsons less significant. And that they arguably underestimate the strength of these other traditional grocery stores. Again, they exclude new sources of rivalry that come from these other non-traditional grocery retailers. The companies argue that the FTC does not properly understand the formative influences in the market and the FTC does not understand how this transaction would enable Kroger and Albertsons to be a far more effective competitor in the marketplace.”
“The companies have to give the judge a new way of framing the problem and say – the FTC wants you to look at this transaction through this frame. We have a bigger frame, a more nuanced lens for you to see what is happening in the market so that you understand that this is not going to restrict competition. Instead, it enhances it.”
What are the odds for FTC success here?
“So much depends on information we don’t have. The FTC has a plausible case. I would expect them to convince the judge that they have a prima facie case. What is impossible to assess is what kind of evidence the companies can bring forward.”
“Does the FTC have a plausible case here? Yes. But how good is the defense of the companies going to be? That’s hard to tell until we see what cards they are carrying.”
Even if Kroger and Albertsons merge, the merged company will still be smaller than Walmart as a grocer. If antitrust is about busting up giant corporations, isn’t there a case against Walmart?
“I assume that one argument the parties will make to justify the transaction is that it puts them in a position to compete more effectively with Walmart. In a way, they are going to ask the court to think about who we are rooting for here. Are we cheering in this instance for Albertsons and Kroger to put themselves in a better position to go after the largest firms in the sector? Or are we cheering for a program that simply keeps more players in the market, even though the largest player remains unscathed in this process?”
“A rhetorical argument that they can use is to say – this is pro-competitive because it puts us in a better position to go after the truly dominant players in the field. Why are you picking on us where what we are doing will enable us to take on the real source of power in this market?”
Isn’t there a case against those companies, like Walmart, who dominate the market – a case just based on its dominant position in the market?
“Under U.S. antitrust law, dominance by itself is not a basis for an antitrust challenge. As one colleague once put it to me – you have to be big and bad. The bad element refers to the means you use to acquire power and to sustain it. So, the short answer is – dominance by itself is not an offense.”
Former FTC chair Robert Pitofsky wrote an article back in the day titled – The Political Content of Antitrust.
In his article, Pitofsky writes this:
“It is bad history, bad policy, and bad law to exclude certain political values in interpreting the antitrust laws.”
“By political values, I mean, first, a fear that excessive concentration of economic power will breed antidemocratic political pressures, and second, a desire to enhance individual and business freedom by reducing the range within which private discretion by a few in the economic sphere controls the welfare of all. A third and overriding political concern is that if the free-market sector of the economy is allowed to develop under antitrust rules that are blind to all but economic concerns, the likely result will be an economy so dominated by a few corporate giants that it will be impossible for the state not to play a more intrusive role in economic affairs.”
Do you agree with Pitofsky on this – that antitrust law should take into account democracy concerns, not just economic concerns?
“At a high level, I agree with Pitofsky. The problem occurs when we try to go from the high level to formulate practical, operational criteria that tell enforcement officials and courts what level of concentration is incompatible with democratic ideals.”
“Do we reach the threshold of concern when ten firms each have ten percent of a market? Five firms with 20 percent? When a firm with 5 percent buys a firm with 5 percent? Suppose a merger creates a firm with 25 percent and reduces costs by 20 percent, leading to a significant drop in prices? Do we block the deal because a firm with 25 percent menaces democracy, despite the price cuts?”
“Pifotsky did not answer these questions. If we do not answer these questions, we are left with high level aspirations but no operational principles for putting them into effect. So how do we travel from the idea to its realization in practice?”
What about enforcement budgets?
“Given the magnitude of the responsibilities assigned to the Department of Justice and the FTC, the enforcement budget is desperately inadequate. For an economy the size of the U.S. economy, the outlay for antitrust is strikingly small and has remained with some increases recently flat for a long time.”
“That’s not nearly enough in a couple of respects. One is that you don’t have enough people and necessary physical infrastructure, like information systems, to do the job the way you should. And we have a pay scale for civil servants that inhibits the ability of the government to get and keep the talent that it needs.”
“There are some areas of our civil service – the SEC and the Federal Reserve Board – that are able to pay higher salaries because they are funded in part by the fees they collect. The FTC and Department of Justice are subject to a civil service pay scale that makes it difficult for them to recruit and maintain top talent because the government simply won’t pay so well.”
“It’s not just a matter of the total resources. It’s the way in which the agencies are permitted to spend them, and the limits on the ability of the agencies to bid for and keep good talent. You might say that what we have in the United States when it comes to the civil service is a fundamental cynicism where we hold out to the public that we want great results and robust enforcement, but at a basic level we are not willing to pay for it.”
“We want Mercedes Benz type performance but we want to pay for a Chevrolet.”
[For the complete q/a format Interview with William Kovacic, see 38 Corporate Crime Reporter 10(11), March 4, 2024, print edition only]