Kroger-Albertsons Deal Is Haunted by ‘Spectacular’ Past Failure (2024)

The largest US supermarket deal ever would spin off 579 stores, but critics warn of repeating a decade-old divestiture that left shoppers paying the price.

By Leah Nylen Christopher Cannon July 17, 2024

To complete the largest ever US supermarket merger, Kroger Co. and Albertsons Cos. are trying to allay antitrust concerns with a plan to sell off nearly 600 stores across the country where the companies now compete.

The Biden administration and a coalition of states fighting the deal say that spin-off is doomed to fail. At a trial next month, they plan to cite as evidence a botched divestment from nearly a decade ago: In 2015, Albertsons took over rival Safeway by promising to sell 168 stores so shoppers would still have competition to keep their grocery bills down.

It was then the biggest divestiture of supermarkets ever.

It was also a disaster. Investors lost their shirts, workers lost their jobs, and communities lost vital stores to provide fresh food and low prices.

Almost a decade later, that scenario is at risk of playing out again, according to antitrust officials trying to break up the deal.

Back in 2015, Haggen Holdings of Bellingham, Washington bought most of the divested stores. Within months, Haggen declared bankruptcy — and most of those locations were gobbled back up by Albertsons.

Only half of the divested stores survive today as Albertsons competitors, a Bloomberg News analysis found. Albertsons bought back 44 of its former stores — some for as little as $1 — along with the 14 original Haggen branches. Ten other locations closed permanently and 17 more were converted to hardware stores, gyms and, in one case, a hotel.

That cautionary tale — what Federal Trade Commission Chair Lina Khan once called a “spectacular” failure — is now a key piece of evidence in the agency’s case, which heads to trial on Aug. 26 in Portland, Oregon.

Kroger, with about 2,800 stores, agreed in 2022 to acquire Albertsons, which has about 2,200 locations, for $24.6 billion. They have offered to sell 579 stores to C&S Wholesale Grocers Inc., the largest wholesale food supplier in the US. The company, which is affiliated with the Piggly Wiggly chain, currently operates 23 supermarkets mostly in New York and Wisconsin.

The grocers say C&S is better financed to make the stores successful and shouldn’t be compared with Haggen.

But in three different lawsuits to block the merger, the US and attorneys general from both Republican and Democratic states point to Haggen as proof that large store divestitures risk failure. The Kroger-Albertsons proposal to sell markets to C&S, they allege, is just history repeating itself.

In fact, Kroger-Albertsons proposes to sell 24 of the same stores that were divested to Haggen in 2015, only to be repurchased after that company went bankrupt.

In some areas of the country, like Gunnison, Colorado, the merger would create a monopoly with the next closest supermarket 65 miles away. Washington’s attorney general says the deal would end competition in at least 49 cities and towns in the state. The FTC lawsuit alleges Albertsons’ rivalry with Kroger-owned stores has prompted it to improve customer services, such as store hours and grocery pick-up centers, and the two directly compete in hundreds of communities from Alaska to Texas to Maryland.

Haggen’s Downfall

Haggen began as a single, family owned grocery store in 1933 and expanded to become the largest independent grocery chain in the Pacific Northwest.

In 2011, the Haggen family sold a majority stake to the private equity firm Comvest Group Inc.Comvest saw an opportunity in 2014 after Albertsons announced the Safeway merger, a deal that would create one chain with 2,200 stores under 16 different banners. To address antitrust concerns, Safeway and Albertsons told the FTC that they would sell off stores in areas where the companies directly competed.

Haggen originally wanted to bid on 22 of the stores, but under pressure from the firm backing Albertsons, Cerberus Capital Management LP, it eventually agreed to pay $309 million for 146 supermarkets — including stores in states where the company had no existing business.

Comvest executives argued internally that the opportunity was “too juicy” to pass up, according to testimony in Haggen’s bankruptcy proceeding.

The transaction was complicated: Haggen would operate the stores, while a separate company would own the real estate. That strategy would require Haggen to pay $13 million a year in rent for use of the stores, according to bankruptcy filings.

Comvest executives testified that the FTC understood that Haggen wouldn’t own the underlying property. In February 2015, the agency cleared the sale to Haggen. Soon after, Comvest sold most of the properties.

Within six months, Haggen filed for bankruptcy.

‘Bit of a Blow’

That failure hit communities such as Klamath Falls, Oregon, a town of about 21,000 on the border with California, where Haggen closed two former Safeways that couldn’t find buyers in the bankruptcy.

“It was a bit of a blow because that was our grocery store,” Klamath Falls Mayor Carol Westfall, elected in 2016, said of one of the Safeways.

That store housed the only pharmacy downtown, and the other, the area’s only Starbucks. The Seattle coffee chain later opened a stand-alone store. The local hospital agreed to operate a pharmacy once Klamath County bought one of the buildings for $1.6 million and wooed a small California chain to open a new grocery store, an upscale Holiday Market.

The other former Safeway was converted into a Planet Fitness and T.J. Maxx. Some former Safeway workers were able to find jobs at other groceries, Westfall said, though others, including her son, trained for new careers.

Klamath Falls now has one Albertsons and one Fred Meyer, a brand owned by Kroger, about two miles away. If the acquisition proceeds, the Albertsons will be sold to C&S.

Different Scenarios

Kroger and Albertsons say their deal will benefit consumers, bringing them cleaner, more modern stores with new products and services, and increase their clout with suppliers to push food prices lower. The increased buying power and cost synergies will help them compete with bigger retailers, such as Walmart Inc., which moved into the grocery business in the 1980s, and Amazon.com Inc.

Company representatives say C&S shouldn’t be compared with Haggen.

“Haggen’s small size and limited capital capacity made it difficult to invest in prices and sufficient marketing,” said Scott Moses, head of grocery, pharmacy and restaurants for Solomon Partners, who is consulting for Albertsons and a 20-year veteran of supermarket deals. Haggen rapidly expanded to eight times its size, said Moses, who consulted for the company on its sale to Comvest and during the bankruptcy. Moses said he had a “limited” role in Haggen’s acquisition of stores from Albertsons and Safeway.

C&S is primarily a wholesaler with estimated revenues of $35 billion last year. The transaction would make it the 8th largest US grocer in terms of sales. Japan’s SoftBank Group Corp. is providing financing for C&S, and the deal will allow it to keep many of the store banners.

“C&S is a seasoned acquirer,” Moses said.

In its lawsuit to block the Kroger-Alberstons deal, the FTC quoted emails from C&S’s then-CEO Bob Palmer, to incoming CEO, Eric Winn, on a draft press release about the divestitures. “‘Do we have to say that we won’t close stores? (the ‘all’ is a problem) — the trick is that they stay open as they transition but then what? Are we committed to this?’”

C&S is “deeply committed” to its retail expansion, said Lauren La Bruno, the company’s vice president for communications. She declined to comment on how long C&S intended to operate the stores after acquiring them.

‘On Paper, They Looked Great’

Grace Garcia, 49, had worked at the Albertsons in Burbank, California, for 24 years when it was sold to Haggen.

“On paper, they looked great,” she said of Haggen.

But the company raised prices, began layoffs and then shipments stopped arriving when the company didn’t pay bills on time, Garcia said. A single mother of two, she stayed at the store until it closed in December 2015, and then helped close down another branch in Tujunga.

She later took a job at the Vons’ Starbucks in nearby Glendale for $4 less per hour than she had been earning at Albertsons.

“It took five years to get back where I was,” she said in an interview.

Other long-term employees wound up back where they started — eventually. Naomi Oligario, 55, began working at the Safeway in Port Orchard, Washington at age 15.

Once Haggen took over, the company raised prices so much that she could no longer afford to shop there. Then it shed workers. She eventually wound up working for another Safeway an hour away.

The Port Orchard store closed in December 2015. When Albertsons bought it back and reopened the Safeway four months later, Oligario was rehired.

In bankruptcy, Haggen sued Albertsons, alleging the larger grocer set it up to fail by providing misleading information about the stores it was acquiring. Albertsons later settled for $5.75 million.

Haggen’s creditors, including the unions that represented employees, sued Comvest, alleging the private equity firm engaged in a “Machiavellian scheme” to enrich itself and put the real estate assets beyond their reach.

A judge ultimately ruled in 2018 that Comvest’s transaction wasn’t fraudulent, but “the people in charge” of Haggen “acted foolishly.”

Bus to the Nearest Market

Even Haggen’s hometown of Bellingham wasn’t immune from the fallout. Albertsons closed its Birchwood neighborhood store in 2016 after buying Haggen out of bankruptcy. The city, with about 90,000 residents, is just south of the Canadian border.

The Birchwood store served Bellingham’s most racially diverse and low-income neighborhood, including the Lummi Reservation. Residents now must travel nearly two miles north to the Fred Meyer or more than a mile to the next neighborhood over to shop.

As many as one-third of residents don’t have a car, so the county revised bus routes for easier travel to other stores.

The city couldn’t coax another grocer to the location because Albertsons — which sold the property in 2018 — maintains a restrictive covenant that prohibits a rival leasing the space until 2038. Albertsons said it decided in 2023 to eliminate the restrictive covenant and began the formal process to do so in December. In late June, the company filed papers to lift the restriction after Bloomberg submitted questions about it and the Washington attorney general’s office began an investigation.

A Big Lots opened there in 2019, but only sells dry goods such as cereal and canned soups. A Mexican restaurant and bakery — Netos Market — offers a limited selection of produce and dairy products like milk, eggs and butter but can’t accept food stamps.

“It’s really been a struggle for people in the neighborhood,” said Tina McKim, who helped found the Birchwood Food Desert Fighters, a group that distributes food weekly to 90 area families. “We want people to be able to access food with dignity.”

Locals worry about the impact of the new deal on Bellingham: Kroger and Albertsons are the two largest supermarket chains in Washington, and collectively own over 300 supermarkets — more than half of all in the state. The companies are proposing to sell off five stores in Bellingham to C&S, including a Safeway and four Haggen stores.

Next Market — 65 Miles

Colorado wasn’t one of the states where Haggen purchased stores, but has suffered in the years since Albertsons bought Safeway, the attorney general alleged in a suit filed in state court earlier this year. Washington’s attorney general likewise filed suit in state court; the FTC and a group of eight other states plus Washington, DC sued separately in Oregon federal court.

Since the 2015 merger, Albertsons has closed at least 20 Colorado locations, according to the state. Eleven of those closed within six months of the Safeway deal, the Bloomberg News analysis found.

Albertsons said in a statement that the Colorado closures were unrelated to the Safeway merger. The company decided to close “underperforming stores” after a year-long analysis.

Residents of Gunnison, home to Western Colorado University, have two choices: Safeway, now owned by Albertsons, or City Market, a banner owned by Kroger. The next closest grocery store is 65 miles east in Salida or 90 miles west in Montrose. Grand County, home to Rocky Mountain National Park, also has just two grocers.

Kroger operates 148 stores in Colorado, while Albertsons has 105. To remedy the potential antitrust concerns, they’ve offered to sell off 91 Safeway locations to C&S, which doesn’t currently operate in the state.

For months, the companies didn’t offer any details to employees about which locations would be sold, said Atul Jariwala, a sales manager at Ralphs in Torrance, California, who has worked for Kroger for 26 years. His wife was undergoing cancer treatments and he was agonizing over changes to his health insurance or finances if the C&S divestiture turns out like Haggen.

“I worry about my job,’’ he said, “and being able to live my life.”

Updates with additional details on Albertsons restrictive covenant.