FTC Sues to Block Kroger-Albertsons Merger; USDA Finalizes Anti-Discrimination and Anti-Retaliation Rule
Antitrust enforcers dealt two major challenges to corporate power at different ends of the food supply chain over the past two weeks. First, the Federal Trade Commission (FTC) last week sued to block Kroger’s takeover of Albertsons. Next, the U.S. Department of Agriculture (USDA) this week finalized a rule to protect farmers and ranchers from discrimination and retaliation by meatpackers.
Kroger-Albertsons Suit Draws on New Merger Guidelines and Labor Charges
The Federal Trade Commission hasn’t been in the habit of blocking grocery mergers. For the past 30 years, the agency generally permitted grocers to buy up rivals, so long as they sold off some stores to a third party in especially concentrated grocery markets. The logic was that selling off stores would preserve head-to-head competition on a local level and prevent the merged chain from raising prices as the only game in town.
In practice, divestitures have not prevented the ills of increased grocery consolidation, including higher prices and diminished market access for farmers and food businesses. (In fact, in all markets, divestitures have not been an effective merger remedy. One study found that they had the same if not worse effect on prices as rubber-stamped deals.)
The FTC, joined by nine state attorneys general from both red and blue states, broke this trend last week by suing to block Kroger’s takeover of Albertsons. “The proposed acquisition is by far the largest supermarket merger in U.S. history,” antitrust enforcers wrote in their legal complaint. “If allowed, this merger would substantially lessen competition, likely resulting in Americans paying millions of dollars more for food and other essential household goods, as well as reducing the ability of hundreds of thousands of workers to secure better wages and benefits.”
The suit includes classic arguments about how the merger could raise prices and diminish food quality, and it goes a step further to argue that Kroger and Albertsons’ proposed sell-off plan to C&S Wholesale Grocers would not solve these problems.
The suit also makes some new arguments that represent a more aggressive approach to merger enforcement. First, the case uses the FTC and Department of Justice (DOJ)’s new merger guidelines, finalized in December, to argue that mergers that give one company too large a share of a market are presumptively unlawful. In dozens of local grocery markets, the Kroger and Albertsons merger would pass this threshold by creating a company with control over 30% of that regional market.
“I don’t think this will end up being the very first case that’s tried under the new merger guidelines, but it will easily be the highest profile case,” says John Newman, antitrust law professor and former deputy director of the FTC’s Competition Bureau. “How the new guidelines fare is something to watch.”
Another way the FTC suit goes beyond the usual is the focus on workers. Together, Kroger and Albertsons employ over 700,000 people and directly compete for workers. The two companies are also some of the largest employers of unionized grocery workers, and the FTC makes a compelling and novel argument that this merger would limit unions’ ability to pit Kroger and Albertsons against each other in collective bargaining agreement negotiations.
For instance, union workers can threaten to strike and send sales to a competing supermarket, preferably another represented by their union (in this case, the United Food and Commercial Workers). Kroger and Albertsons are aware of this dynamic and have made attempts to coordinate labor negotiation strategies, the complaint reveals, albeit not successfully. Merging the companies would by default create total alignment to collude against UFCW negotiators.
The idea that mergers should be blocked because they could harm workers is not totally new; the DOJ recently blocked the merger between Penguin Random House and Simon & Schuster on the grounds that it would limit competition for best-selling authors. However, the focus on how a merger would affect union contract bargaining dynamics is noteworthy, says economics professor Marshall Steinbaum.
“The idea that workers having collective power on the job is pro-competitive and any merger that erodes the union’s bargaining power is anti-competitive, that is an expansion of the meaning of Section 7 of the Clayton Act to be a pro-union statute,” says Steinbaum.
What Happens Next
The FTC only needs to convince a judge that the merger will harm workers or consumers, not both, to block the deal. Kroger and Albertsons also face existing challenges from the state of Colorado and Washington. As the path to closing the deal narrows some stakeholders wonder if Albertsons’s private equity owners will try to sell the chain to someone else.
Private equity interests were a major driver behind this merger. After a lackluster IPO in 2020, some of Albertsons’s largest investors started selling their shares on the stock exchange, raising fears that a mass selloff could collapse the company’s stock price. This prompted a “strategic review” in 2021 that led to the merger decision and a massive $4 billion special dividend to Albertsons’s private equity owners, namely Cerberus and Apollo.
As the FTC investigated the merger, private equity owners quietly divested their stake in Albertsons. At the end of 2021, Albertsons’s five largest shareholders held 78% of the company. By the end of 2023, they held just 34%. All this is to say, Albertsons’ remaining special investors could plausibly sell off their shares without as much risk to the stock price, opening a viable exit strategy that may not require selling Albertsons to a rival after all.
USDA’s Final Anti-Discrimination Rule Takes a Slightly Different Approach Than Proposed
On Tuesday, USDA finalized a rule to better protect farmers and ranchers from retaliation, discrimination, and deception by large meat companies under the Packers and Stockyards Act (P&S Act). The rule more explicitly bans meatpackers from retaliating against livestock producers that contest contracts, form associations, or speak with the government. It also makes clear that packers cannot discriminate against farmers and ranchers based on several protected classes, such as race and gender.
The rule also targets deceptive practices by meatpackers. It ensures that packers cannot use a pretext or false reason for canceling a contract, such as a specious animal welfare or meat quality claim. Contracts cannot include false or misleading information, nor can they omit essential information that farmers need during contract formation, renewal, or termination. For instance, packers must let growers know if and how they tweak their payment formulas.
USDA first proposed this rule in September 2022 and accepted public comments on it (The Open Markets Institute submitted a comment and joined a comment with Food & Water Watch). The proposal originally banned discrimination and undue prejudice against “market vulnerable producers,” a new term that USDA defined as “membership in a group that has been subjected to, or is at heightened risk of, adversely differential treatment in the marketplace.”
However, USDA opted not to include this new terminology in its final rule and instead bans discrimination against a “delineated set of protected bases,” namely, race, color, national origin, religion, sex, sexual orientation, gender identity, age, disability, and marital status. It also bans discrimination against members of farm cooperatives or associations. USDA determined that this approach would achieve the goals of the proposed rule while avoiding the uncertainties of a new term like “market vulnerable.”
Some advocates hoped that the “market vulnerable” standard could encompass small farmers or producers operating in heavily concentrated markets. However, in their final rule, USDA made clear that this was not their intent. “While [the Agricultural Marketing Service (AMS)] is sympathetic to the plight of small producers’ challenges in accessing fair markets, AMS did not intend this rule to address those concerns,” the agency wrote.
For years, farmers’ organizations have asked for Packers & Stockyards Act rules that prevent packers from favoring large producers and feedlots when associations of smaller producers could provide the same number of animals. In response to public comments, USDA said that this issue raises “complex economic implications of volume preferences and efficiencies” that would be better considered “in the context of a future update to undue preferences rules,” which farmers are still waiting on.
USDA also admitted that livestock markets are so concentrated that any special protections for producers in markets with a limited number of buyers “would likely result in an all-encompassing rule that would swallow this rule’s intent to protect specific well-established classes.”
Thus, the agency leaves a lot of key questions to future rulemaking, which it promised to issue in the latest unified agenda submitted to the Office of Management and Budget. A forthcoming “Unfair Practices, Undue Preferences, and Harm to Competition Rule” will largely determine whether USDA stands up for small, independent farmers and more importantly, whether P&S Act protections will be readily enforceable.
As it stands in many courts, to charge meatpackers with violating the Packers and Stockyards Act, farmers and ranchers need to prove that meatpackers not only harmed them but also harmed industry-wide competition. In the supporting text of its new final rule, USDA asserts that farmers can bring individual retaliation and discrimination claims under the P&S Act without meeting this stiff harm-to-competition standard. USDA could further codify its long-held interpretation of the Act through explicit regulatory language.
“It seems pretty clear that AMS is aware of those issues in their own right and planning to consider them in future rules,” says Emily Miller, a staff attorney for Food & Water Watch. “It underscores the importance for the Biden administration to get moving and finalize all the rules in this package as soon as they can.”