Business In News
For some time now, political pundits and activist academics have hung onto the mindset that anything that is big, especially if brought on by a merger or acquisition, is bad. Corporate concentration seems to raise red flags from both Republicans and Democrats alike, who claim that consolidation will lead to predatory practices and higher prices.
The Kroger-Albertsons merger, announced in October 2022, is currently rallying anti-progress, anti-capitalist charges, as demonstrated in Robert Reich’s recent social media rant.
Reich’s quick video clip is catchy (laden with food related puns) but much of what he asserts is misguided at best, and malicious at worst. Here’s why.
Bulking Up for Battling Big Business Incumbents
Reich starts his message by stating that the merger would lead to the combining of 5,000 supermarkets into “one mega company” – implying that this is a bad thing. But a mega-company would equip Kroger to compete with the likes of Walmart which, as of January 2023, has 5,317 retail units.
At the National Retail Federation (NRF) 2023: Retail’s Big Show, held in New York City at the start of 2023, Kroger CEO Rodney McMullen said this merger would build capacity for competing with retail giants such as Walmart, Costco, and Target.
According to an analyst at The Motley Fool, Walmart is poised to continue as the dominant grocer, given its ability to “beat local grocery chains on pricing thanks to its scale” and its ability to operate on thinner margins. Its sheer size is its greatest strength, and in the past few years, Walmart’s grocery sales have been benefiting from the ripple effects of economic insecurity as it attracts a wide range of customers interested in saving on staple products.
Given recent signs that Amazon is retreating from its quest to compete in the retail grocery sector, it would be good for Walmart to have a new adversary to face. As such, antitrust officials should be welcoming Kroger’s aspirations, particularly since Walmart’s behemoth status has often been scorned in the halls of Congress.
Expansion is Expected for Ensuring Market Reach
Reich goes on to state that just 5 companies control over 60 percent of America’s grocery sales – also implying that this is a bad thing. Yet, common sense tells us this is rather commonplace in advanced economies. Larger firms will garner a larger market share.
If you are in need of home improvement materials, you go to Lowes or Home Depot. If you are in need of sports equipment, you go to Dick’s Sporting Goods. If you want to see the latest box-office release, you likely go to an AMC theater or Regal Cinemas.
Even brands like Etsy, which cater to those who want something truly original and unique, are actively seeking out acquisition opportunities to further market reach.
In 2019, it was reported that Walmart accounted for one in every four dollars spent on US groceries and, according to its CFO at that time, Brett Biggs, that market share growth is attributable to the fact that Walmart can do that which “competitors are going to struggle to do” – it can keep its prices low due to the cost savings that come with scale economies. The greater the firm and the greater its reach, the greater the ability to minimize costs for consumers.
Scale Economies Creates Cost Savings and Opportunities for Cross-subsidization
Recently, one of my favorite neighborhood breweries went out of business, and in an interview for the local paper, the owner gave readers an economic lesson on why. The owner stated that “We get it, no one wants to pay $20 for a hamburger. That’s the struggle – not having a larger scale, we can’t continue to deliver what’s best for people at prices they can afford… Others with multiple sites and a much larger scale might be able to absorb those costs.”
Indeed, large firms engage in cross-subsidization, whereas the sales or profits of select items can aid in the subsidization of other offerings. This is particularly useful for the retail sector, given that sales can shift quickly according to interests, trends, and new entrants. It is a well-known secret that Target leverages this tactic, given that it will charge a higher price for in-store purchases in high income areas.
Reich also claimed consolidation will result in fewer options for consumers, which seems strange given that the larger the firm, the more diversified the product portfolio (you can find both manure and mattresses at select Lowes outlets).
To compete with Walmart, Kroger will likely ramp up product offerings, rather than scale down.
In a press release laying out the rationale for the merger, Kroger plans to accelerate its “go-to-market strategy” for becoming a “premier omnichannel food retailer, delivering quality, value, convenience and choice for customers” with the purpose of establishing a “national footprint to serve America with fresh, affordable food for everyone.”
And this bring us to the most abhorrent assertion by Reich, that “big corporations are using the excuse of inflation to pass price increases through” to the consumer.
Why Reich is Incompetent on Inflation
Reich cites Kroger CEO McMullen’s statement that “a little bit of inflation is always good” aiming to demonize McMullen. McMullen’s sentiment, however, is in line with that of the Federal Reserve, which finds that inflation is actually good for economic growth as long as the rate is kept reasonable (around 2 percent). Incremental inflation incentivizes consumers to buy in the present rather than wait and risk a rise in prices over time, and the same is true for producer and supply-side purchases.
What is not good is inflation run amok, which is clearly the current case, and why companies are going to extreme measures to combat surging supply and inventory costs.
In an interview with Reuters, McMullen conveyed that the merger was a means to address inflation head-on by combining the inventory and purchasing power of both companies.
Grocery stores average a profit margin of roughly 1-3 percent, so the markup price is not great to begin with. Moreover, retailers must account for what is known as shrinkage costs, which is a term that indicates the difference between recorded inventory and sellable inventory. Shoplifting and spoilage are examples of shrinkage costs and for 2021, the average shrinkage rate was 1.4 percent. Clearly, profits are razor-thin for retail grocery chains.
Further, grocery stores rely on sales volume and often need to move inventory quickly, given that perishables account for over 50 percent of sales, so the amount purchased matters more than the price being charged. If prices go up, consumers will adjust their purchase behavior and likely purchase less, but Reich makes it sound like we’re all suckers operating with little thought, who won’t adjust our consumption behavior when prices rise.
How Reich Sneaks in Central Planning and Social Welfare
Even if Kroger did decide to increase prices, it has the right to do so, just as it has the right to determine how best to manage its operational costs, which is another area of criticism according to Reich.
Reich notes McMullen’s salary is 679 times that of the typical Kroger employee. I wonder how much Reich rakes in for his professorship, as compared to lower-level staff positions at his academic institution.
Kroger currently pays employees above minimum wage, but Reich claims that the merger will allow Kroger to pay employees “less than it already does.” If Kroger were to pay employees minimum wage, and if workers were to feel slighted by this, then talented employees should seek out better options elsewhere. And if there are no better options or if workers are devoid of having talent and skill sets that can garner higher pay, then that is an economic development issue not a company issue.
When Reich cites a study that conveys Kroger workers have experienced homelessness and food insecurity, I wonder about what these employees may have faced prior to obtaining a position at Kroger and what they would do without it!
Reich should remember, it is not up to companies to ensure our overall wellbeing. Yet, for those seeking work at a Kroger, a focus on well-being is one of the perks of full-time employment. Kroger offers affordable health care programs and free well child visits, free counseling and support services, financial benefits and investment planning resources, tuition support for education and degree attainment, along with career planning and personalized professional development programs.
Small firms are typically unable to offer fringe benefits or opportunities for internal advancement, yet Reich wants us to bash big firms that can.
Why Reich is Short-Sighted on Industry Advancement
Something that Reich fails to mention, probably due to his skewed view, is an underlying money-making interest for Kroger pursuing the merger with Albertsons – it is not to take advantage of customers, but rather to capitalize on the interests of marketers.
Grocery stores are one of the remaining brick-and-mortar locations that customers choose to frequent, making Kroger stores an asset in and of themselves. By increasing its geographic footprint through the acquisition of Albertsons stores (as well as Albertsons’ networks), Kroger can attract the booming sector of retail media marketing.
Now this is not to say that Kroger won’t close any stores. Coincidentally, Walmart recently closed its last two stores in Portland due to debatable (but obvious) reasons, and if Kroger discovers areas of unprofitability, it would be wise to do the same. But for Kroger, the store sites matter for generating new revenue streams as well as its ability to further its mission to be an omnichannel food and drug retailer. In fact, Kroger’s growing interest in healthcare and pharmaceutical offerings will put Walgreens in addition to Walmart on the offense.
For these reasons, the Kroger-Albertsons deals should be defended, not debated, and assertions by academics on industry matters should be met with serious skepticism.