Kroger and Albertsons grocery megamerger halted by federal court

A federal judge in Oregon has blocked temporarily the merger of grocery giants Kroger and Albertsons, ruling Tuesday in favor of federal regulators.

The ruling makes it increasingly unlikely that the deal, worth $24.6 billion, will eventually succeed. Kroger runs many familiar grocery stores, including Ralphs, Harris Teeter, Fred Meyer and King Soopers. Albertsons owns Safeway and Vons.

Litigation has left what would be the biggest grocery merger in U.S. history pending for over two years now. A ruling in a separate legal challenge brought by the Washington attorney general was expected later Tuesday. A third lawsuit is playing out in Colorado, and companies will now weigh whether to continue pursuing the merger or abandon it.

The Federal Trade Commission, together with several states, had asked the federal district court in Oregon to halt Kroger's purchase of Albertsons. The government argued that the resulting colossus would lead to higher food prices and fewer choices for shoppers and workers. In many markets, the two chains are each other's biggest rival.

Kroger and Albertsons, in turn, have argued that together, they actually would have more power to lower prices, as well as to compete against other huge retailers that sell food, including Walmart, Costco and Amazon.

U.S. District Judge Adrienne Nelson has now ruled that the merger must halt while it undergoes the administrative review inside the FTC — a procedure that Kroger is separately challenging in court as unconstitutional.

"Both defendants gestured toward a future in which they would not be able to compete against ever-growing Walmart, Amazon, or Costco," Nelson wrote in Tuesday's order. "The overarching goals of antitrust law are not met, however, by permitting an otherwise unlawful merger in order to permit firms to compete with an industry giant."

Together, Kroger and Albertsons have nearly 5,000 stores and employ some 720,000 people across 48 states. They particularly overlap in western states.

Case hinges on how Americans buy groceries

During the three-week trial in a Portland courtroom, the FTC and the companies painted differing views of the grocery market.

Kroger and Albertsons described their merger as existential to survival. They argued the FTC's view of competition — focused on options a shopper might have in their neighborhood — was outdated in the wake of big-box behemoths and the sprawl of dollar stores.

Kroger officials testified that they typically compared their prices to Walmart, rather than Albertsons, but struggled to keep up given Walmart's ability to negotiate better deals with suppliers thanks to its scale. Walmart is the biggest seller of groceries in the U.S., followed by Kroger and Costco.

The FTC, however, argued that someone who shops at Walmart, Costco, CVS or even Trader Joe's likely still relies on their neighborhood supermarket. Government lawyers said enough people were concerned about the merger that the agency received an unprecedented 100,000 public comments.

Federal officials also shared complaints raised by labor unions.

Kroger and Albertsons are the rare unionized shops in retail. The companies argue that, in fact, serves as a reason why they should be allowed to unite to face up to bigger, non-unionized rivals. But the FTC says a merger would give the companies much more power over contract negotiations, leading to lower pay and worse benefits.

Questions about a plan to sell off some stores

The judge separately weighed the plan by Kroger and Albertsons to sell hundreds of their stores to a firm called C&S Wholesale Grocers as a condition of their merger, meant to appease regulators.

The idea is to create a new grocery rival in markets where Kroger and Albertsons currently overlap and, therefore, a merger would eliminate competition. C&S, a grocery supplier, had agreed to buy 579 stores in 18 states and in Washington, D.C.

But the FTC argued C&S would struggle to compete. The firm currently runs only 23 stores, mostly under the Piggly Wiggly brand, without much nationwide name recognition. Government lawyers shared internal notes, in which C&S executives raised concerns about the quality of stores they would acquire.

Kroger and C&S executives presented C&S as an experienced grocery company that could hit the ground running.

The last time the government approved a grocery merger that hinged on divesting stores, it was 2015. Albertsons bought Safeway. It sold off 168 stores, then repurchased 33 of them on the cheap because one of the buyers filed for bankruptcy protection within months of the deal.