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A Merger Only a Judge Could Love

The Democrats are in trouble. With the midterms less than two weeks away, a New York Times/Siena College poll is the latest to show Republicans gain as voters get increasingly anxious about the economy and high inflation. While the Times poll has received a lot of media attention, its findings are hardly surprising. In fact, it has been clear for quite some time that when it comes to the issue that voters are most concerned about — soaring prices — Dems lack a coherent message.

Not that there is a shortage of things to say about inflation that will connect with voters. By now, for example, we know that while inflation is driven by many factors — Russia’s invasion of Ukraine, the breakdown of global supply chains, and the devastating effects of climate change-related droughts on American farmers — one of the primary drivers of US price hikes is monopoly power. Earlier this year, a paper by Boston Fed economists Falk Bräuning, José L. Fillat, and Gustavo Joaquim showed the link between inflation and the increase in concentration over the past two decades. And a Roosevelt Institute paper by Mike Konczal and Niko Lusiani showed that markups increased dramatically in 2021 as companies with market power exploited the pandemic to raise prices above costs. With profit margins at a 70-year high, the Groundwork Collaborative has assembled dozens of examples of CEOs boasting about their ability to jack up prices and pin the blame on inflation during earning calls. Going after corporate price-gougers at a time of surging prices seems like a no-brainer.

It’s not that voters are particularly skeptical of this explanation, either. In fact, despite the best efforts of neoliberal economists to deny any connection between market power and inflation, polls show that a majority of Americans believe that profit-maximization is driving price increases. So why has it been so difficult to rally voters around cracking down on corporate profiteering? Perhaps, as Barry Lynn recently wrote, the problem is a lack of an overarching narrative. Or, as The Lever’s Andrew Perez and David Sirota note, it is a simple matter of Democrats not trying all that much. But it could also be a lack of opportunity: perhaps what has been missing is a story so egregious that it serves as a vivid illustration of how corporate greed exacerbates inflation. After all, every good story requires an attention-grabbing villain.

Enter the Kroger-Albertsons merger. If allowed to go through, the $25 billion deal would combine two of America’s largest grocery store chains into a corporate behemoth that would own Ralphs, Dillions, Safeway, Vons, and many others. It is, of course, a terrible idea that seems about as illegal as a merger can get. For one, the supermarket sector is already highly concentrated: the National Grocers Association estimates that over 60 percent of US grocery sales go to the country’s top five retailers. Moreover, merging the second-largest and fourth-largest grocery store chains would leave consumers in many markets with little to no options beyond Kroger-Albertsons and Walmart.

As Forbes’ Errol Schweizer writes in his fantastic analysis of this merger, the deal would potentially be highly lucrative for investors and company executives. But it would be extremely damaging for workers and for consumers, and especially for suppliers:

A 5,000 store chain in over 48 states could more easily set payment terms, negotiate shelf space and assortment, and extract better costs and greater trade allowances for promotions, couponing, ad placement and slotting fees.

Not to mention that proposing such a merger as food prices are increasing 13% year over year is a scandal unto itself. To justify this merger, the companies claim that the merged company would have the economies of scale necessary to reduce prices. But as Matt Stoller and others have pointed out, this is a weak argument. Moreover, it’s the exact same argument Albertsons made when it bought Safeway in 2015.

It would be easier to take these claims seriously if the merged company’s prospective CEO did not brag about how they can get away with raising prices by using inflation as a cover. Last year, Kroger CEO Rodney McMullen boasted that “a little bit of inflation is always good in our business” and added that as long as inflation is around 3%-4%, the company could cite it to justify price hikes since “customers don’t overly react to that.” Weeks later, Kroger raised prices, citing inflation as the reason.

Given its peculiar timing, it is no surprise that the merger has already sparked political backlash. Several Democratic Senators, including Elizabeth Warren, Bernie Sanders, and Amy Klobuchar, have come out strongly against the deal. Klobuchar and Republican Senator Mike Lee, the ranking members on the Senate Judiciary’s antitrust subcommittee, plan to hold a hearing on the deal in November.

In other words, it is a merger only a judge could love. While the FTC will almost certainly try to block this deal, Kroger and Albertsons are clearly counting on merger-friendly federal judges to reject these attempts, as they have done several times this year. Anticipating the regulatory backlash, the companies have offered to spin off up to 375 stores to alleviate antitrust concerns. It is easy to see why they would try to appease enforcers this way: it worked for Albertsons when it convinced the FTC to approve the Safeway merger in exchange for selling 168 stores to local chain Haggen. But as David Dayen and Ron Knox point out, that arrangement failed miserably, and Albertsons soon ended up buying many of the stores it sold at a nice discount.

In any case, FTC Chair Lina Khan is unlikely to take the bait. Khan has criticized similar divestitures in the past and has already set her sights on “the anticompetitive practices of large supermarket chains.” Given the judiciary’s long-standing pro-monopoly bias, the companies may be right that the merger could go through. But this merger may just be so preposterous that even the courts would have a hard time waiving it through.

This deal, in other words, is the antitrust equivalent of Liz Truss’s mini-budget: it is deeply unpopular, would be a complete disaster, and can only really appeal to ideological zealots or those paid to advocate for it. So why even attempt it? Stoller theorizes that the whole thing might be an attempt at financial engineering by Albertsons’ private equity investors, Cerberus and Apollo, to squeeze $4 billion from the company as a “special dividend” before the merger is inevitably shot down. 

But whether or not the Kroger-Albertsons deal actually goes through, it represents a rare political opportunity. What better way to encapsulate the connection between market power and high food prices than a merger that promises to increase prices and offers no benefit to anyone but private equity investors and executives? Whether Democrats capitalize on this opportunity or not remains to be seen. But if there was ever a merger that could tie it all together, this is it.

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