Buyer set to take over excess stores in Kroger-Albertsons merger warned against elements of deal (2024)

Advisers hired by a grocery wholesaler raised various concerns about its plan to acquire hundreds of stores as part of a side deal in the $24.6 billion merger between Kroger and Albertsons.

executives testified this week in an antitrust hearing playing out in Portland federal court over the proposal for Kroger, the corporate parent of Fred Meyer and QFC, to buy Albertsons, which owns Safeway.

To mollify antitrust concerns, Kroger and Albertsons have agreed to sell 579 stores in 18 states and Washington, D.C., to C&S Wholesale Grocers for $2.9 billion. The grocery distributor would also get any fuel stations and pharmacies associated with the stores, as well as the banners QFC, Haggen, Mariano’s and Harris Teeter.

Lawyers for the Federal Trade Commission, which has asked a judge to pause the merger, have questioned whether the New-Hampshire based C&S has the experience to absorb hundreds of stores through the divestiture deal and compete meaningfully with a combined Kroger and Albertsons. As evidence, they presented internal communications and advice from consultants hired by C&S to evaluate the deal.

Alona Florenz, senior vice president of corporate development and financial planning for C&S, testified Thursday that the company hired various consulting firms to advise on the divestiture deal with Kroger and Albertsons.

A real estate consulting firm, Florenz said under questioning from an FTC attorney, advised C&S in April 2023 against acquiring the QFC, Harris Teeter and Mariano’s stores due to quality and performance issues.

There were also questions within C&S about the quality of the brands it had proposed to acquire.

The FTC offered as evidence texts from last fall between Florenz and Jonathan Granger, one of the employees that work in C&S’s corporate development team. Granger asked if she had “looked into the market perception of QFC,” suggesting the Washington state Kroger subsidiary had a bad reputation for high prices.

Florenz replied that “Kroger gave us their worst chains.”

A separate consulting firm warned C&S in February, as it weighed taking on even more stores in the divestiture, that “QFC has a weak brand.”

And another warned that the deal was structured in a way that would force C&S to introduce brand-new grocery brands in various markets, which risks alienating local customers.

Florenz said Friday that C&S officials had considered the consultants’ input but felt confident that the company can run the large number of stores.

“You can’t take consultant numbers … at face value,” she said.

Kroger and Albertsons have touted C&S, which owns or franchises about 160 stores under the Piggly Wiggly and Grand Union banners, as a strong potential competitor in the markets where the supermarket giants overlap.

Federal and state regulators, who have sued to block the merger, have argued that C&S won’t have the scale to be a viable competitor in the grocery business, and that its inexperience in retail would further weaken its odds of success.

C&S today only directly operates 25 retail locations, Mark McGowan, the company’s president of retail, said on the stand Thursday. C&S directly operates 21 stores in Wisconsin under Piggly Wiggly Midwest and four stores in upstate New York under the Grand Union banner.

The company closed a Piggly Wiggly in Milwaukee 18 months ago because it wasn’t profitable, McGowan said

And the company’s Grand Union stores, acquired in 2022 as part of a divestiture deal in the much smaller merger of Price Chopper and Tops Markets are struggling. McGowan said the Grand Union stores didn’t meet growth projections reported to the FTC prior to the sale and to this day “are still underperforming.”

The newest divestiture deal is under particular scrutiny because Kroger and Albertsons have argued selling stores to C&S would preserve grocery competition in markets where the grocery giants have historically competed.

But consumers and regulators worry a smaller operator wouldn’t survive the rapid expansion. In the Northwest, they point to the Washington state grocer Haggen, which had 18 locations when it bought nearly 150 more from Albertsons and Safeway, clearing the way for those companies to combine.

Haggen soon collapsed under the weight of its growth, eventually selling itself back to Albertsons. Some of its expansion stores, including several in Oregon, closed altogether.

Against that backdrop, Oregon and federal regulators have scrutinized C&S’ business plans and sought to make the case that it lacks the sophistication to successfully run a nationwide grocery chain — and cast doubt on its commitment to doing so.

On Thursday, FTC attorneys showed internal communications that suggested C&S planned to buy all the stores for sale in the Price Chopper and Tops, then turn around and sell some to a third party.

“Right now I think we should buy all the Tops divestiture stores lol,” Florenz wrote in a text to another C&S employee, Dan Franceschelli. “I figure if we buy them, then they are happy and you could spend a year or so finding other buyers.”

The company could afford it, Franceschelli said in the exchange, even if it lost money on retail and absorbed lease costs and union pension liabilities. That’s because of its robust wholesale business, supplying its own and other stores.

C&S hasn’t sold the stores, but it’s also not making money from its growing retail network, according to an internal presentation entered into evidence by the FTC.

In a partially redacted slide, the FTC displayed a chart that showed that C&S’ retail business had operated in the red over the last two fiscal years.

It’s not the first time C&S has tried to enter the grocery business. It acquired hundreds of stores in the early 2000s.

But by 2012, most stores had been sold or closed. And by 2015, C&S exited the retail business entirely.

Eric Winn, the chief executive officer of C&S, said on Friday that C&S reentered the retail business in 2021, after it lost its largest wholesale customer, Alhold Delhaize, the Dutch owner of the grocery chains Food Lion and Stop & Shop.

Winn testified he is confident his company can successfully build a new nationwide retail network and that C&S would compete aggressively “from Day One.”

“Every business venture has challenges,” he said.

-- Kristine de Leon covers the retail industry, small business and data enterprise stories. Reach her at kdeleon@oregonian.com.

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