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Kroger CEO Rodney McMullen and Albertsons CEO Vivek Sankaran went before the US Senate's Subcommittee on Competition Policy, Antitrust and Consumer Rights yesterday, arguing that the merger of their two companies - a deal valued at more than $24.6 billion -  will be good for consumers and employees, and will not be anti-competitive.

“I just don’t see less competition going forward,” McMullen said.  “It’s easy for customers to make a right turn or a left turn.”

The argument is that a merger of the nation's second and fourth ranked supermarket chains will allow them to be more competitive with number one Walmart, and with Amazon, which has an outsized influence on the marketplace;  even combined, the new combined company will still be smaller than Walmart.

“The marketplace for groceries over the past decade has completely transformed making the competition for consumers fierce,” said Sankaran. “The best way to compete with mega stores like Walmart and highly capitalized online companies like Amazon will be through a merger with Kroger."

CNBC writes that "Sen. Amy Klobuchar, a Democrat from Minnesota, led the hearing Tuesday along with Sen. Mike Lee, a Republican from Utah. Both challenged the companies on their actions, including Kroger’s $1 billion in share buybacks announced last year and plans to pay dividends to shareholders as well as previous deals, such as Albertsons’ acquisition of Safeway.

"They emphasized that the proposed deal comes at a time when groceries are taking up more of American families’ budgets. Food prices have surged as inflation hovers near four-decade highs. Prices of everyday items, including butter, eggs, poultry and milk have jumped by double-digits from the year-ago period as of October, according to the most recent federal data available."

From the Wall Street Journal coverage:

"The proposed merger has drawn opposition from elected officials, independent retailers and some union groups over its potential impact on workers’ jobs, as well as on industry competition and food prices for consumers … Kroger and Albertsons have said their combination would give them a more national reach with a bigger network of stores, distributors and suppliers. The companies have said they expect to invest $500 million in keeping prices low, along with spending $1 billion on wages and benefits and $1.3 billion on improving Albertsons stores."

The Associated Press noted that Lee conceded that "the subcommittee would have little say in whether the merger will go through. That will be a decision for the Federal Trade Commission and the Justice Department. But he said the hearing was an important opportunity for the public to understand a merger that could impact their lives."

Also testifying were  Sumit Sharma, senior researcher at Consumer Reports, and Andrew Sweeting, professor of economics at the University of Maryland.

Sharma argued against the merger:  "We are skeptical that the benefits of the deal as claimed by the parties will be realized.  The most likely outcome of this merger would be to significantly lessen competition and lead to higher prices, fewer choices and worse supermarket access in some neighborhoods … Even if there are some efficiencies, these cost savings are not likely to be passed on to consumers. Why would these be passed on to consumers unless competition required it?”

And Sweeting argued that competitive issues need to be evaluated local market by local market, not seen in a national context.

KC's View:

I watched the entire hearing yesterday, and it was a kind of mini-education in how government works.  It was kind of nice to seem since more often we all seem get exposed to examples of ays in which government doesn't work.

I'm not sure that anybody was persuaded to change their minds, one way or the other, or was presented with a telling argument that made them rethink a stated or entrenched opinion.

One person I was really impressed with was Michael Needler, Jr., CEO of Fresh Encounter, a 100-store company who was representing the interests of both his brethren and the National Grocers Association (NGA).  He made the point that, as a retailer who has grown his company considerably through the purchase of distressed retail assets, he is "not opposed to growth," and actually is "agnostic" about the Kroger-Albertsons acquisition.  However, he emphasized a familiar - and to my mind, legitimate - NGA refrain, that guardrails that should be in place through enforcement of the Robinson-Patman Act are virtually non-existent, and that predatory pricing by power buyers like Walmart, Kroger and Albertsons is a far greater threat to viable competition.

I continue to believe that with some divestment of stores, this deal eventually will go through.  But I also think that this is a perfect time to have a conversation at the legislative and regulatory levels about the impact of such deals on shareholders vs. stakeholders.  McMullen and Sankaran argue that this merger will do much to protect local markets and union employees, but they may have a way to go to persuade folks that in the end, this is really going to be best for shareholders.

I did find it interesting when Sen. Josh Hawley (R-Missouri) decided to use his time to critique both companies' embrace of ESG (environmental, social and governance) issues, and saying that their complimentary approach was reason enough to approve the merger.  “Why would having complementary ESG strategies be justification for a merger?” Hawley said. “Why would that be relevant at all?”

In some ways, he has a point - the fact that both companies embrace ESG isn't enough to justify a merger.  Though, I suspect that what the companies really are arguing is that their cultures will be a nice fit in these areas, without the kind of dissonance that might disrupt the merger of two giant businesses.

That said, I've never understood the hostility that some folks have for ESG.  Seems to me that if companies or investment funds prioritize ESG because they think it is good for business, that's, well, their business.  As long as they're transparent about it, investors can decide whether they want to put their money into those companies or not. 

The same goes for companies that reject ESG - people can make their investment decisions based on that information as well.

At another point in the hearing, Hawley questioned McMullen about layoffs that might occur as a result of the merger, and the Kroger CEO said that no front line workers would be laid off.  That didn't seem to satisfy Hawley, who pushed McMullen to say that nobody would be laid off … which strikes me as a specious position, since there almost certainly will be front office duplication that will result in layoffs.  To think otherwise is silly.  (I thought that was the moment for Vivek Sankaran to raise his hand and point out that once the merger is completed, he, in fact, will be laid off.)