The Kroger–Albertsons merger has no guarantee of success. But the two companies should be allowed to try.
The Kroger–Albertsons merger has no guarantee of success. But the two companies should be allowed to try.
K roger and Albertsons’s recent decision to merge is a potential $24.6 billion deal that will likely interest the Federal Trade Commission. Antitrust hawks should be aware of two things about this proposed deal: the relevant-market fallacy, and how the deal fits into the grocery market’s century-long tradition of continuous change, disruption, and innovation.
First is the relevant-market fallacy, which I’ve written about before. This means defining a company’s relevant market very narrowly in order to make the company look more dominant than it really is. For example, Apple has a monopoly on the iPhone market — but not on the smartphone market. Which of these market definitions is more realistic?
Kroger and Albertsons are the country’s two largest supermarket chains. They have a combined market capitalization of about $47 billion, and combined revenues of $209 billion. For comparison, Germany-based Aldi is America’s third-largest supermarket chain, with $134 billion in 2021 sales, though it is also the fastest-growing.
Notice that up to now I have only used the term “supermarket” to describe Kroger, Albertsons, and Aldi. This was on purpose.
A potential antitrust challenge might well use the term “supermarket” as the Kroger–Albertsons merger’s relevant market. But supermarkets are just one place people can go for groceries. The real-world relevant market is much larger.
According to foodindustry.com, America’s largest grocer in 2021 was Walmart, which is a retailer, not a supermarket. Walmart also owns Sam’s Club, which is a wholesaler, not a supermarket. The second-largest grocer is Amazon, which offers online ordering and delivery in addition to owning Whole Foods supermarkets. Costco, another wholesaler, is in third place. Kroger and Albertsons are fourth and fifth, respectively.
The grocery market is diverse and competitive. A combined Kroger–Albertsons would not reduce people’s options for groceries, or give those stores the market power to raise prices.
But why the need to combine in the first place? Because the grocery market is changing to a hybrid business model of both online and in-person shopping. Scaling up would allow Kroger and Albertsons to better keep up with changing customer demands, which their competitors are also scrambling to meet.
Grocery delivery with online ordering has been around for a while. Peapod, founded in 1989, was the first online grocer. Instacart was founded in 2012. But when Covid-19 hit, online ordering skyrocketed in popularity, and it isn’t going away anytime soon.
Even as Covid recedes, many people are continuing to order staples and bulk goods online, while going to physical stores for fresh produce, seafoods, and meat, as well as last-minute items that can’t wait a day or two for delivery. People who don’t want to pay for delivery but still want to save time can order online and pick up their orders at the store. Meanwhile, plenty of people are still grocery shopping the old-fashioned way, too.
It takes a lot of infrastructure to be able to offer diverse online and physical options to people. It takes a website and/or mobile app that is easy to use, and can give customers up-to-the-second inventory so they know when something is out of stock. It takes sophisticated logistics software to help employees pick the right goods at the right time from store or warehouse shelves, and coordinate delivery routes. This is in addition to running a chain of supermarket-sized stores, each of which typically stocks roughly 45,000 unique items, plus the warehouses needed to supply both stores and individual deliveries.
If Kroger and Albertsons think scaling up can help them compete with online-centric retailers such as Amazon and wholesalers such as Costco — in addition to traditional grocers such as Aldi, Meijers, Publix, and others — regulators should allow them to give it a go. After all, those other traditional grocers are expanding their online and hybrid options, too. If any of them succeed, consumers win. If they can’t keep prices down or give customers a better option than their many competitors, their sales figures will let them know.
This move to a scale-intensive hybrid business model is just the latest stage in a century-long evolution of the grocery market. In older general stores, customers asked the clerk for each individual item, and the clerk would then fetch it from the back of the store. There were few or no brands to choose from, and quality guarantees were minimal. In the 1920s, Piggly Wiggly became the first store to let customers pick their own goods.
The now-defunct A&P, which stands for Atlantic and Pacific, was the first nationwide chain of grocery stores. While it faced multiple antitrust cases, it was really done in by its inability to successfully compete with newer supermarkets. Today’s antitrust regulators should note this bit of irony. A&P insisted on keeping smaller stores with fewer goods, even as customers insisted otherwise.
The rise of frozen foods in the 1940s and 1950s made scale important, thus making an important contribution to the rise of supermarkets. Frozen foods require larger stores with enough room for freezer sections and a nationwide “cold chain” that could keep goods frozen for the entire journey from factory, to shipping to store freezers and, finally, home freezers.
By the 1970s and 1980s, supermarkets in turn had to adapt to low-price retailers such as Walmart who developed better distribution technologies and found that these were also useful for lowering the prices of groceries. Customers also liked having everything under one roof, which saved time.
Now, we are seeing a shift to various hybrids of online and physical shopping. The Kroger–Albertsons merger, if it happens, would be part of that ongoing process. It has no guarantee of success, given both intense competition and the long history of failed mergers. But the two companies should be allowed to try. They compete in a huge relevant market that is constantly evolving.