What Is Happening to Harris Teeter?
David Montgomery
Many Easton residents were very happy when Harris Teeter opened its doors here, and are deeply concerned about whether it will be closed and why. For a one-line answer: nothing will happen for quite a while, and we have a good chance that in the end we will keep Harris Teeter in Easton.
The merger of the Albertsons and Kroger supermarket chains, which created the possibility we would lose Harris Teeter, has attracted vigorous opposition and is now on hold. That means we can rest easy that Harris Teeter will remain in operation in Easton for quite a while. Its eventual fate depends on how lawsuits by nine states and the Federal Trade Commission (FTC) to stop the merger are decided. In my opinion, the FTC, which is responsible for enforcing antitrust laws, has made a strong case against the merger. No merger means we keep Harris Teeter, at least as long as it stays profitable for its current owner, Kroger.
A Quick Review
Paradoxically, the threat to Harris Teeter comes from the FTC’s opposition to the merger of the owner of Acme (Albertsons) and the owner of Harris Teeter (Kroger), and its designation of Easton as one of the locations where the merger would reduce competition and raise prices. The FTC, joined by nine states including Maryland, has gone to court to block the merger. These kinds of trials are often drawn out, and Albertsons and Kroger have put their merger on hold until they are completed. Thus there is no immediate threat to Harris Teeter.
The FTC position on the merger is that 1. it would reduce competition in a large number of markets nationwide, and 2. the proposed remedy of selling (“divesting”) some stores would not work.
Interestingly, the fact that Kroger and Albertsons are now the two largest supermarket chains in the country, and if merged would have four times the revenue of the next largest, is not the main reason the FTC objects. For retail chains, the FTC bores down to each local market in which each of the parties to the merger have stores that are now competing. To focus down to our town, the FTC has noted that it is one of the local markets in which the merger would produce an excessive drop on competition and likely raise prices. . As part of its effort to save the merger, Kroger offered to sell (“divest”) a package of stores, including our Harris Teeter store to another company. Their proposed buyer is a wholesale grocery company that currently owns a few Piggly Wiggly stores. If that happened, it is most likely that Harris Teeter would be replaced by some other, lesser known supermarket like Piggly Wiggly and eventually fail. So that is our risk.
For good news, the FTC objected to the proposed divestiture, on the grounds that the buyer proposed by Albertsons and Kroger could not manage almost 600 stores successfully and would ultimately fail, leading to the closing of many stores. So now there is an impasse, and the court cases are going ahead. The best outcome for us would be for the FTC to win completely and stop the merger. I think that is also the most likely outcome.
Another satisfactory outcome might be for someone to convince the FTC or the Court that Harris Teeter does not now compete with Acme, so that there is no need to sell it. Or it could simply be argued that Harris Teeter fills a market niche and any replacement different from Harris Teeter would fail, putting us back to just three competing stores. I think these arguments could be made based on how the FTC classifies stores, but I do not think Albertsons is likely to pursue them.
For those who want to take a deeper dive into how this particular brand of sausage is made, read the following:
The Process
The schedule for deciding these cases is convoluted, since there are proceedings in Federal court in several states as well as in the District of Columbia. The Federal Trade Commission declared the merger to be anticompetitive and filed a complaint on February 26 to block the merger. That case will be heard by an administrative law judge in DC. Seven states, including Maryland, joined the FTC in a lawsuit in Federal Court for a preliminary injunction hold off on the merger. The trial on the preliminary injunction will be held in the state of Oregon, and it has been scheduled to start on August 26. The trial on the FTC complaint to block the merger is on hold until the Oregon trial on the preliminary injunction is completed.
To complicate the schedule even further, the states of Colorado and Washington filed separate lawsuits to block the merger in their states. On July 25 the two companies voluntarily agreed to put the merger on hold while the Colorado case plays out. That trial is now scheduled to start on September 30. Trust me, it is likely that proceedings will be delayed again, pushing back a definitive answer on the fate of Harris Teeter even further. To keep track of progress, or lack thereof, go here.
Which gives us time to understand how Harris Teeter was picked out to be closed. When at Charles River Associates, I learned the ropes of grocery store mergers by helping one of my colleagues who was a respected expert witness in cases just like this. As luck would have it, the case was one of Albertson’s early acquisitions of another grocery chain.
When retail chains decide to merge, they must get the approval of the Federal Trade Commission. In the case of retail chains, the major concern is about local markets in which the merged stores would be able to raise prices because of their near monopoly. The FTC review in problematic cases begins with negotiations in which the FTC gains access to truckloads of documents, and both parties hire experts to support their claims about competitive effects. This involves analyzing every local market in which both of the merging firms have stores. The usual remedy is for the merged firms to sell stores in those markets to another company that will be able to compete effectively, called “divestiture.” Thus when Exxon and Mobil merged, many of their branded gas stations were bought by independent dealers or marketers.
Easton is one of the places with a problem, because Acme is owned by Albertsons and Harris Teeter is owned by Kroger. There are other grocery stores around here not owned by one of the two chains that want to merge: in Easton I can think of Aldi’s, Weis, Giant, U5, bodegas, and grocery departments in Walmart, Target and BJs. But the FTC has decided that these will not be enough to prevent significant price increases.
How the FTC Decides to Block a Merger
The Clayton Antitrust Act gives the FTC authority to intervene in mergers that would reduce competition excessively. The first step the FTC takes when two retail chains propose to merge is to decide which stores owned by one or the other are competing with one another. It does that for all the stores owned by the two parties, and in our case that comes down to Acme and Harris Teeter.
. The FTC stated that only supermarkets, that it defines in the Complaint at ¶24-27, are effective competitors with one another and that other types of grocery retailers are mostly irrelevant. The FTC states that its analysis differentiates “supermarkets and other store formats and indicates shoppers do not view other store formats as reasonably interchangeable with supermarkets.”
The next step is to determine the geographic market that Acme and Harris Teeter serve. In its complaint, the FTC simply identifies this market as “Easton.” (Complaint ¶33)
Geographic market definition is now a highly data-driven process, since grocery stores collect massive amounts of data from their point-of-sale terminals. All the data collected by the parties to the merger become available to the FTC, and it often requests data from other potential competitors. This makes it possible, with enough computer time, to match customers and determine the overlap between, say, Harris Teeter and Acme’s “catchment areas.” Other methods are to measure distances between stores and estimate what share of their customers can drive reasonable distances to either, or to rely on documents and statements by the merging parties about their markets and competitors.
The FTC than examines all this data to find “the smallest area that a monopolist would have to control in order to raise prices by a small but significant amount.” I put that in quotes because it is the phrase that economists apply and lawyers argue about at length in every case. In its Initial Brief, the FTC stated that its criterion was more than 75% overlap between catchment areas.
Finally, for each of those defined geographic markets the FTC calculates an index, based on the market shares of all the competitors, with and without the merger. To oversimplify greatly what typically happens next: the FTC requires divestiture of stores in markets where the change in the index indicates that there is a high likelihood that prices will rise significantly, and if it cannot get agreement, it opposes the merger. All this is discussed in the Complaint, which I reference here.
FTC’s Conclusions About the Easton Market
The FTC has not released its analysis of individual markets to the public, but from its conclusions it is possible to infer its reasoning pretty accurately. My guess is that when it did this analysis the FTC decided that Acme, Giant, Weis, and Harris Teeter were the competitive stores in Easton. As stated in the Complaint, the FTC now appears to treat only large, full-service supermarkets as competitors. When Giant and Food Lion proposed a merger several years ago, it concluded that they were the same kind of store. The FTC required the Easton Food Lion be sold to Weis to maintain competition in Easton. Acme and Harris Teeter presumably were also found by the FTC to be the same type of store, since the FTC appears to have concluded that merging them would reduce competition.[1]
The FTC explicitly stated that Aldi’s was not a “supermarket” because of its limited selection of items and services (see Complaint ¶29). All the rest were ruled out for similar reasons of limited selections and size. Big box and discount stores were also ruled out as competitors to Acme.
The FTC would have done this analysis for every one of the markets in which Albertsons and Kroger both operate stores. It concluded that “the proposed acquisition is presumptively illegal in the overlapping local markets surrounding 1500 Kroger and Albertsons supermarkets.” In order to include Easton in this list, the FTC must have looked at competition among the four “supermarkets” now in Easton and decided that reducing that number to three would lead to significant price increases. But it has not made its own analysis at this level of detail public.
A little history may help to understand the FTC reasoning. Not too long ago there were four grocery stores that the FTC would likely have found to be competitors: Giant, Acme, Safeway and Food Lion. Then Acme and Safeway were merged, and shortly thereafter Safeway was closed bringing us down to three. Why the FTC did not require Acme to sell Safeway to another viable competitor rather than closing it is a mystery. Then the Giant chain proposed acquiring the Food Lion chain, and this time the FTC required it to sell the Easton Food Lion to prevent Easton from having only two independent grocery chains. Fortunately for Easton Food Lion went to a solid owner, Weis Markets. Easton retained three independent grocery stores: Acme, Giant and Weis. When Harris Teeter arrived it bumped us up to four: Acme, Giant, Weis and Harris Teeter. The merger of Acme and Harris Teeter would have taken us down to three again, and this time the FTC objected.
Selling Harris Teeter
To deal with these concerns, Albertsons and Kroger initially offered to divest what the FTC called a “hodgepodge” of 413 stores out of the 1500 or so identified by the FTC. Specifically, it reached an agreement with C&S Wholesale Grocers who will pay $2.9 billion to buy 579 stores, as well as 6 distribution centers, office sites and some private-label brands. The FTC did not require specifically that Harris Teeter be divested, that decision was made by Albertsons and Kroger’s. If their proposal had been accepted, Harris Teeter’s building could well have become a Piggly Wiggly, as local rumors reported, for as long as it survived.
The FTC objected to this sale for reasons detailed in its complaint. The FTC described C&S as a company whose strategic direction had been to stay out of the retail business, without retail experience. Right now C&S has a large grocery wholesale and distribution business, but operates only 23 Piggly Wiggly and Grand Union supermarkets. The FTC detailed several reasons why it did not believe C&S would be unable to operate successfully the far larger number of stores, with different banners and spread around the United States, that it would be acquiring. It points out that “C&S previously tried and failed to operate other supermarkets successfully, even at a much smaller scale…,” and that C&S stated as recently as 2021 its intention to get out of retail entirely. The FTC called the collection of stores C&S would be buying a “a patchwork of assets cobbled together by Kroger’s antitrust lawyers, not a standalone business likely to succeed.” (Complaint ¶11)
The FTC also pointed out that Albertsons has “a track record of advocating for divestiture remedies that ultimately prove ineffective… Albertsons has done this twice in the last decade alone.” (Complaint ¶96) As an example, the FTC cites giving permission for Albertsons to acquire Safeway in 2015, with the condition that Albertsons sell 168 of the stores it was acquiring to a viable competitor. The buyer, Haggen, filed for Chapter 11 bankruptcy shortly after the merger was completed. As a result, most of the stores it had acquired were closed or sold, often for non-supermarket use. Albertsons re-acquired a number of the stores and also bought the remains of the Haggen company. The FTC points to this historical example to demonstrate why divestiture to an unqualified operator like C&S would fail and implies that it is suspicious that Albertsons has the same plan for Harris Teeters and the other stores it offered to sell.
Conclusion
If I were Albertsons’ antitrust expert, I would argue that the product market should include Walmart (which is now the largest grocery seller in the country), Costco (third largest but irrelevant to us) and Target (also in the top 10 grocery sellers), and that taken together the Easton market would remain adequately competitive even with Harris Teeter under the same ownership as Acme.
That would not necessarily be a winning argument. The FTC definition of competitors as other “supermarkets” has been tested in other mergers, and I expect it to be accepted by the Court in this case even if I do not entirely agree with it. Given this market definition, the methods used by the FTC to determine whether the merger would have an excessive impact on competition in local markets is standard and has been accepted in countless merger cases.
Based on the reasons given for FTC’s conclusion that Whole Foods is not a “supermarket,” I might also argue that our Harris Teeter is a very different store from our Acme, and therefore not a “supermarket” in the relevant sense. But I do not think Albertsons or Kroger will bother with this detail to save our store.
The examples of the failure of stores divested by Albertsons in its last two acquisitions strike me as devastating arguments against the merger. To satisfy the FTC, the two chains would have to divest even more stores – and since they are already the two largest supermarket chains, finding a satisfactory buyer would be difficult. The next largest supermarket chain, the owner of Giant and Food Lion, would likely be rejected by the FTC because it already owns stores in markets where Harris Teeter and other stores being divested are located — like Easton.
I think, taking all this into account, that the FTC will prevail in court, and the merger to create the largest seller of groceries in the country, surpassing even Walmart, will be blocked. Thus, I am optimistic that we will keep our Harris Teeter. But as a distinguished antitrust lawyer and friend pointed out to me, there are always surprises when a dispute ends up in court.
[1] I am not sure I agree with the FTC’s apparent classification of Harris Teeter as “supermarket” like Acme. The FTC states in its complaint that Whole Foods (an issue in other locations) is in a different market from Acme because it is a high-end store selling organic food. I would think that Albertsons could make a similar argument about Harris Teeter, because it has a distinctly different feel, generally higher quality products and higher prices. They could do so when their expert reports are submitted. If they do not make that argument, I will be suspicious that Albertson’s does not really want Harris Teeter in their collection of stores, offering it up to try to mollify the FTC while not actually giving up anything that they wanted.