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What you need to know
- After being blocked by federal courts, Kroger and Albertsons cancelled their multi-billion-dollar merger plans this week.
- How does this affect the price of groceries? It's complicated. The price of goods tends to increase over time. This is influenced by many factors, including the weather, world conflict and labor availability.
- According to research, grocery mergers tend to increase the prices of areas where there are fewer rivals, and decrease them in densely populated areas.
Regulators said a Kroger-Albertsons merger would've raised grocery prices. Companies disagreed. Now the deal is off—so what's next? Turns out it's complicated.
This week, Kroger (KR), and Albertsons cancelled their long-planned tie-up after a judge sided against the Federal Trade Commission. They said that the merger would lead to fewer competitors and higher wages and prices. They argued merging their stores would help them save costs and lower prices, allowing them to better compete against retailers such as Walmart (WMT), Costco(COST), or Amazon (AMZN).
The FTC on Tuesday called the axed merger a "major victory for the American people," and said the companies continuing to compete with each other would help consumers and employees.
But it may also get tougher for grocery chains: Bank of America analysts this week said the news means "conventional supermarket peers are less likely (through M&A) to be able to achieve Walmart's competitive scale in terms of a national store footprint, buying power, supply chain efficiencies, omni-channel capabilities, and digital advertising potential."
What drives grocery prices?
The prices were most likely to rise regardless of what the outcome was. The Government Accountability Office’s 2023 report found that the average grocery price rose by 2% each year between 2013 and 2022. Prices only declined in two years.
The report identified more than a dozen factors—including global conflict, animal and plant disease, and labor shortages—that can affect prices. These factors have increased prices in the past few years. In November, wholesale egg costs rose 54% due to an outbreak of bird influenza.
A 2012 study from the Federal Trade Commission found that there was "no single price effect" of grocery mergers, as the impact varied across the mergers they studied. The study did find that the local competition had an effect on prices after mergers. The study found that mergers resulted often in higher prices for smaller communities, where there were fewer retail outlets, while they often decreased prices after the merger in more densely populated, competitive markets.
In a study of U.S. supermarkets, it was found that the Kroger brand is the sole competitor located within 5 miles of 30% of Albertsons stores. They had both promised that they would sell 500 or more locations in order to satisfy the FTC concerns regarding consolidation.
According to an analysis presented in Kroger's Washington State trial, Kroger and Albertsons competed in 57 discrete markets within the state. The combined entity, after merging would have averaged a market share of 75 percent in these markets.
'It's Hard to Bring Things Down Once They're Up'
Retailers are now focusing on the future. Albertsons accused Kroger of failing to do enough to satisfy regulators in order for the merger approval. Kroger denied the allegations. “baseless and without merit” In a letter to Investopedia.
Kroger announced in a second statement on Wednesday that it would resume its stock-buyback program and continue prioritizing investments such as lower prices for customers and increased wages for employees.
Donald Trump said that lowering the price of groceries was a challenging task. He made this promise as a central part of his election campaign.
Trump said that he would lower the price of groceries by improving supply chains and lowering energy costs. According to the U.S. Department of Agriculture, just less than 9 cents of all dollars Americans spend for groceries are attributed to transportation and energy costs.
"I'd like to bring them down," Trump told Time. "It's hard to bring things down once they're up. You know, it's very hard. But I think that they will."
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