Not-so-super Supermarket Merger
The year of the Foodopoly mega-merger churned forward this week when the second-biggest grocery retailer, Kroger, announced it was buying the Harris-Teeter supermarket chain. The $2.5 billion merger is one of the biggest supermarket super-mergers in ten years and will change the landscape for consumers – and not in a good way. Grocery consolidation limits consumer choices – of stores and of food – and often drives up food prices.
Kroger is already a gigantic grocery retailer, second only to Walmart. Kroger grew during the 1990s by snapping up regional grocery store chains and now it has more than 2,400 stores in 160 metropolitan areas. The chains it bought still fly their old corporate flags, so there are Kroger stores as well as Fred Meyer, Ralphs, Food 4 Less, Smith’s, Fry’s, King Soopers and 10 other names.
The purchase of Harris-Teeter would grab an established upscale grocery chain with over 200 stores in the southeastern and Mid-Atlantic region. Loyal shoppers might not notice, because Kroger will maintain the Harris-Teeter name, but some hometown Harris-Teeter consumers are worried that the store quality will deteriorate.
Consolidation in the grocery industry has rapidly accelerated in the past few decades driven by mergers and the growth of Walmart. In the 1990s, the top four chains sold about one out of every five bags of groceries, but today the big four retailers control half the market selling every other bag of groceries. Kroger is the biggest supermarket retailer in 27 cities and ranks second in another 56 cities.
On the local level, consolidation can be much higher. Kroger alone sells about 40 percent of the groceries in Roanoke, Virginia; Wichita, Kansas; Charleston, West Virginia; and Cincinnati, Springfield and Steubenville, Ohio. The merger brings Kroger to 19 new cities, including giving Kroger the number two or three spot in seven cities in North Carolina.
The merger would significantly increase consolidation in the six Southeast cities where Kroger and Harris-Teeter compete head-to-head. The post-merger Kroger would become the number-one ranking store in three cities. For example, today Kroger and Harris-Teeter are close competitors in Charlottesville, Virginia, ranking 3rd and 5th and with comparable shares of the grocery market. The merged Kroger would be the largest grocery store selling more than a quarter (27 percent) of all groceries.
Right out of the mega-merger playbook, Kroger promises the merger will save money and achieve “synergy goals.” This should comfort shoppers, who are looking for a good deal on synergy. But the merger is unlikely to give consumers a good deal on food.
When only a few supermarkets dominate a local market, they have little incentive to compete on price or quality because they have a lock on the market. Grocery stores are largely a real estate business – they own location, location, location – and it costs consumers time and gas to shop further away. Mergers just reduce the number of options for consumers and force them to travel further to comparison shop. And consolidation increases retail food prices. The U.S. Department of Agriculture looked at dozens of studies and found that “the overwhelming consensus is that prices rise – and, in general, supermarkets set prices less competitively- as concentration increases.”
During the recession, consumers have faced higher food prices but the big supermarket chains have maintained their profits. Retail grocery price inflation increased by about 13 percent from 2008 to 2012, according to data from the Bureau of Labor Statistics. Over the same period, Kroger earned about $4.5 billion in profits.
This merger-mania has got to stop. The grocery Goliaths are already too big. The Kroger/Harris-Teeter merger will only make things worse for consumers. The federal antitrust authorities should block this merger. Click here to tell President Obama to put an end to food monopolies.