Kroger executives stood to collect millions of dollars if their proposed merger with Albertsons in 2024 had succeeded. Albertsons now argues that the conditions attached to those payouts helped ensure it never would.
In the trial over their failed $24.6 billion deal, Albertsons alleges that Kroger’s proposed $400 million executive incentive plan rewarded managers for protecting the merger’s financial benefits – even when winning regulatory approval required giving more of them up.
That is the conflict at the heart of Albertsons’ case: Did Kroger do enough to get the deal approved, or did executives’ financial incentives get in the way? Kroger disputes Albertsons’ account, arguing that regulatory opposition would have defeated the merger regardless.
Kroger and Albertsons: A brief history
As a refresher, Kroger, US’ largest pure-play grocery chain, attempted in 2024 to purchase its largest traditional grocery competitor, Albertsons, for $24.6 billion, in what would have been the largest grocery acquisition deal in US history.
Stakeholders in the grocery industry lined up to oppose the deal. The FTC, eight states and the District of Columbia challenged the proposal in federal court, while Washington and Colorado brought separate state-court cases.
That failed deal came in the wake of two decades of corporate consolidation in the US grocery industry, a point that was a central argument from opponents. They argued that although competition is widespread through online services like Amazon and mass merchandise stores like Walmart, the merger would create monopolies in some regions of the country where Kroger and Albertsons banner stores are the only pure-play grocers.
Two courts agreed, killing the deal, and now Albertsons is suing Kroger for more than $9 billion. Their key argument claims Kroger, and its ousted CEO, Rodney McMullen, did not do enough to work with federal regulators on the divestment of stores.
Ultimately, it was McMullen’s and Kroger’s plan to divest 579 stores to C&S Wholesale Grocers, a distribution company that had little experience running a grocery chain, that killed the deal.
Federal regulators and others argued that the proposed divestiture offered inadequate competition to the combined Kroger and Albertsons in several areas of the US, handing the proposed grocery giant local brick-and-mortar grocery monopolies across the country.
In a December 2024 ruling granting a preliminary injunction, US District Judge Adrienne Nelson wrote that supermarkets are distinct from other retailers, typically offering a larger selection of fresh and non-perishable items and other specialized departments like deli, meat and bakery.
“Both defendants gestured toward a future in which they would not be able to compete against ever-growing Walmart, Amazon or Costco. Without the scale afforded by the merger, defendants argue, it will be more difficult for traditional supermarkets to survive in the long term,” Nelson wrote in the decision. “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.”
In other words, you don’t get to break antitrust laws just because you’re losing market share to a bigger competitor.
Was the deal ‘doomed from the beginning’?
Since losing the case, Albertsons has argued that the deal with Kroger failed because of Kroger’s novel approach to divestment in essentially creating its own competitor and its unwillingness to budge with regulators.
So, some were surprised to see McMullen claim in court last week that the acquisition was “doomed from the beginning,” according to a BoiseDev article. That testimony contrasts sharply with McMullen’s public confidence while the merger was pending. But it also fits Kroger’s defense: that regulatory opposition, rather than a breach of its obligations, doomed the transaction.
A merger between the two grocery giants would certainly have helped both companies defend their slipping market share against retail giants like Walmart, Amazon and Costco, but make no mistake, millions in executive compensation was at the heart of the deal on both sides of the equation.
An Albertsons proxy statement filing in 2024 showed both Sharon McCollam, former president and CFO, who earned $6.6 million in 2023, and Susan Morris, executive vice president and COO, who earned $6.5 million that same year, would have received an additional $4 million as the result of a successful merger. Anuj Dhanda, executive vice president and chief technology officer, who earned $4.3 million, would have received $1 million.
At the center of this colossal business deal flop, however, is the compensation structure for Kroger executives. Kroger promised to do whatever it took to get the merger approved, but the company’s executive compensation package was not static like Albertsons’ – it was based on the merger’s profitability, which caused Kroger to position itself for a favorable divestiture plan. It’s all laid out in Albertsons’ lawsuit.
Kroger executives structured the deal so that executives would divvy up $400 million in compensation, receiving up to six times their base salaries if the deal achieved what Albertsons described as “upside or goal synergies in full.” If profits fell more than $200 million short of the base target, they got nothing.
That’s the conflict. When the merger blew up in court, Albertsons argued that Kroger failed to divest its more profitable stores and work with regulators to push the deal through. The court documents released in this new trial reveal a suspected reason why – not the success of the company, but instead multimillion-dollar payouts for executives.
Albertsons is essentially arguing that corporate greed killed the deal.
BoiseDev reports that McMullen blamed the Biden Administration’s Federal Trade Commission Chair Lina Khan for the deal failing. We’ll see what a judge thinks. The Kroger Albertsons deal was a bad idea from the beginning, and maybe Khan would have sued irrespective of how many stores Kroger divested, but both companies would have been better served taking the billions they’ve paid on their grocery behemoth pipe dream and building better companies.
-
FutureShop is a twice-monthly column by Timothy Inklebarger exploring the forces shaping grocery retail. The views expressed are the author’s own and do not necessarily reflect those of this publication.
