Instead of blocking such market competition, the FTC should enable it.
Here’s why the FTC’s blocking of the proposed merger would not help market competition or consumer welfare.
A t a time when many Americans are struggling with high food prices and the U.S. grocery sector remains less efficient than in many countries, the industry needs competition and innovation. The Federal Trade Commission’s decision to delay — and potentially block — the proposed merger between two supermarkets, Kroger and Albertsons, with an estimated combined market share of 12.9 percent, is unlikely to help. Instead, U.S. consumers need a more permissive regulatory environment where growing competition between incumbent supermarkets and new entrants expands consumer choice, improves food quality, and reduces prices.
Since early 2020, the combined effects of Covid-19, the Ukraine conflict, supply-chain disruptions, and extreme weather events have led to unprecedented increases in food prices worldwide. However, notwithstanding the record profits of many U.S. agri-food companies such as meat producers, the commercial outlook for U.S. supermarkets remains more modest. As the Economist points out, whereas Tyson Foods, the largest U.S. meat producer, reported a 74 percent year-over-year increase in net profits during the second quarter of 2022, the net margin after taxes was only 2.3 percent for Walmart and 1.2 percent for Kroger that year.
Meanwhile, U.S. supermarkets now face growing competition, not only from the likes of Amazon and Costco but also from Trader Joe’s and the German discount retailer Aldi, as well as convenience stores and local supermarkets. Such competition is a positive development for consumers, and the government should encourage competition — not stifle it. Yet that is what it would risk doing if the FTC blocks the proposed Kroger-Albertsons merger.
In October 2022, Kroger and Albertsons announced their intention to merge. The value of the proposed transaction at $24.6 billion understandably attracted regulatory scrutiny, but it is worth noting that the amount represents less than 3 percent of the annual turnover of the U.S. grocery sector, $851.8 billion.
Although the merger would likely make Kroger-Albertsons the second-largest retail store after Walmart, its market share would still be far behind that of Walmart. According to data from Euromonitor, a London-based research and consultancy firm, the combined market share of Kroger (8.1 percent) and Albertsons (4.8 percent) added up to only 12.9 percent, approximately half the market share of Walmart (25.2 percent). Other sources, such as the International Center for Law and Economics (ICLE), estimate an even lower combined market share for Kroger and Albertsons.
Furthermore, given that a growing proportion of U.S. consumers shop for groceries online, the relevant antitrust market should include both physical retail markets and e-commerce platforms. Under this broader and more appropriate definition, the Kroger-Albertsons market share would be even lower, suggesting that national-level market concentration concerns should be insufficient grounds for blocking the transaction.
The relatively low level of market concentration nationally does not preclude the possibility of monopolistic power across specific product lines or regions where both supermarkets have a significant presence. The merger agreement rightly includes plans to divest five product lines and sell 413 stores to C&S Wholesale Grocers to assuage such concerns. While additional divestitures might be needed depending on the economic data under review, blocking the proposed merger entirely because of unfounded concerns about market dominance would hardly be in the best interest of market competition or consumer welfare.
On the contrary, there are good reasons why consumers would benefit from a more permissive regulatory approach. The last high-profile M&A deal in this sector was Amazon’s acquisition of Whole Foods in 2017 for roughly $13.7 billion, facilitating the e-commerce platform’s entry into the food and grocery sector. Although Amazon still has less than a 2 percent share of the grocery sector, its entry meant that competitors like Kroger and Walmart responded by offering grocery shopping online. To compete more effectively, Walmart also introduced Walmart Plus, a membership-based service that offers free delivery.
Now, as it was before, the case for an evidence-based, permissive approach to competition policy remains strong. Despite the lack of regional competition in some parts of the country, U.S. supermarkets tend to be less concentrated nationwide. The lack of bargaining power relative to dominant suppliers from heavily concentrated agri-food industries is one reason why American supermarkets have been less successful than their European counterparts in resisting price hikes by food suppliers.
As long as U.S. supermarkets continue to face horizontal pressure from online platforms and new retail challengers, a modest increase in their vertical bargaining power vis-à-vis dominant food suppliers might keep prices and profit margins low while expanding consumer choice and benefiting consumers. More important, the growing competition between different types of companies — retail and e-commerce and U.S. and foreign — can add a breath of innovation and competition. Instead of blocking such market competition, the FTC should enable it.