THE KROGER DECEPTION

What follows is my opinion of how Rodney McMullen selected C&S to play a critical role in the merger with Albertsons. I use quotes from McMullen in this article but they are for dramatic effect only. I did not interview McMullen for this story. However, I believe what you are about to read is a plausible representation of how McMullen selected C&S.

The Problem

Kroger CEO Rodney McMullen wanted to merge with the retailer Albertsons , but McMullen was concerned that the Federal Trade Commission would block the merger because a combined Kroger-Albertsons would have a total of 4,950 stores. McMullen believed that the key to getting the FTC to approve the merger was by reducing the store count. But how?

McMullen was also concerned that Kroger's only true grocery supermarket competitor in the majority of markets where they operated was Albertsons. McMullen understood that the FTC would view an acquisition of Albertsons as nothing more than Kroger removing their biggest competitor. McMullen anticipated that the FTC would state, "With Albertsons effectively under their control, Kroger will be able to raise prices, lower wages, and close stores." The FTC was sure to block the merger leading to a lengthy and costly court battle; something McMullen wanted to avoid.

McMullen spoke to trusted advisors; lawyers experienced working with grocery retailers; industry experts; and experts in Mergers & Acquisitions. No matter how many people McMullen spoke with, a solution for his problems eluded him.

And then it happened. An idea came to McMullen. At first the idea was dismissed because McMullen didn't think it would work. But the idea didn't go away. Eventually the idea dominated McMullen's thoughts. "I've done it. I know how to convince the FTC to approve the merger."

Over the coming days, weeks and months, McMullen put his plan into motion. And so began The Kroger Deception.

I'll Invent One

To appease the FTC, McMullen postulated that a minimum of 400 to 600 stores would have be divested. This would lower the total number of stores operated by Kroger-Albertsons to between 4,350 to 4,550 stores. "Walmart operates 5,260 stores in the U.S., and Dollar General operates over 20,000 stores," thought McMullen. "The FTC won't consider 4,550 stores as being too many," McMullen believed.

Confidence. That was the key. ABC -- Always Be Confident. McMullen smiled to himself as he stood in front of the mirror in his office practicing what he would say to the FTC:

"I understand the importance of having a competitor in the regions where Kroger-Albertsons will primarily operate. There will be. We will divest up to 600 stores to a retailer. To ensure the retailer is successful, we will provide them with access to our software and operational support. We will divest one to two fulfillment centers that they can use to replenish the stores they operate. We will help the buyer of the stores succeed and very quickly, they will become our primary competitor."

"That's pretty good," thought McMullen. "That's actually really good."

The stores. Who should buy the divested stores? McMullen knew that if he didn't get this right it would blow his chances of gaining approval for the merger from the FTC. McMullen also understood that if he wasn't careful, whoever bought the stores could one day become a serious threat to Kroger-Albertsons. McMullen wrote out the problem to make sure he understood what he was faced with:

1. I need to sell up to 600 stores.
2. I need to sell the stores to a retailer.
3. The retailer I sell the stores to can't be a competitor.
4. But the retailer must be perceived by the FTC as being a viable competitor or they will reject the merger.

McMullen knew that he should sell the stores to whoever would pay the highest price, but this was different. McMullen was concerned that if he listed the stores with commercial real estate agents, or one of the banks supporting the merger, Amazon, Lidl, Aldi, Costco, Ahold-Delhaize, Publix, and many other competitors, would immediately want to bid on the stores. "That can't happen," thought McMullen. "I can't sell 600 stores to a competitor. In three to five years they may have 1,500 stores. Maybe even 2,000 stores. If I sell the stores to Amazon, they'll try to put me out of business," McMullen pondered.

Nevertheless, the stores had to be sold. But to who? McMullen couldn't come up with the name of a competitor he could trust and control to buy the stores, so he chose to do something he felt would reduce the risk to Kroger, and improve the odds of the merger being approved. "Since I can't find a competitor I can trust, I'm going to invent one," McMullen decided.

C&S Wholesale

The competitor that McMullen chose to invent was C&S Wholesale Grocers . Founded in 1918, as a supplier to independent grocery stores, C&S now services customers of all sizes, supplying more than 7,500 independent supermarkets, chain stores, military bases and institutions with over 100,000 different products. The company operates 50 distribution centers in 16 states. "They're perfect," McMullen thought. "Well almost perfect."

C&S is owned by Rick Cohen. Cohen is also the majority owner of the company Symbotic , who reinvented the traditional warehouse with end-to-end systems leveraging a fleet of autonomous robots and A.I. powered software. Among the industries served by Symbotic is grocery retailing and wholesale food distribution. Albertsons is a customer.

In my opinion, Kroger approached C&S to purchase and operate the stores in exchange for a significant discount on the price of the stores. In addition, I believe an agreement was made whereby Kroger agreed to install Symbotic systems in their warehouses.

In order to convince C&S to take the deal, McMullen had to first make them a promise: "Buy all of the stores that need to be divested to get the merger approved -- and after the merger is approved, do whatever you want with the stores. We'll give you a great deal on the stores so you can turn a healthy profit when you sell them." C&S agreed to buy the stores for $2.9B, but they will be able to sell the stores for between $3.7B to $4B+. C&S got a great deal on the stores.

McMullen also had to find a way to minimize the fact that C&S wasn't a grocery retailer. C&S had very little actual experience running grocery stores. Truthfully, they barely had any experience at all. When C&S had tried to run a small number of grocery stores they'd acquired in the past, they failed. Miserably.

To counter the lack of retail experience and improve the perception of C&S, McMullen worked with his corporate communications team to come up with a "glowing statement" to instill confidence in the FTC. A press release was written to give the impression that a lengthy and detailed search was conducted to identify the best company to purchase and run the divested stores, and that C&S was the clear choice.

“Following the announcement of our proposed merger with Albertsons Cos., we embarked on a robust and thoughtful process to identify a well-capitalized buyer who will operate as a fierce competitor and ensure divested stores and their associates will continue serving their communities in the ways they do today. C&S achieves all these objectives. C&S is led by an experienced management team with an extensive background in food retail and distribution and has the financial strength to continue investing in associates and the business for the long run."

The statement contained a series of falsehoods. Kroger did not "embark on a robust and thoughtful process to identify a well-capitalized buyer." Instead, McMullen ruled out selling the stores to a competitor. This significantly reduced the number of retailers that would have to be vetted.

McMullen made the decision to invent a competitor because he wanted to sell the stores to a company that he could control. C&S was Kroger's pawn to help get the merger approved. I'm on the record as stating that in my opinion, the relationship between Kroger and C&S, was a sham. It's inconceivable to me that anyone with as much experience as McMullen has, would believe that C&S was the best choice.

McMullen had one final problem that he needed to solve. Someone had to lead the newly formed C&S Retail company that was created to oversee and run the divested stores. McMullen couldn't name anyone from C&S to be the CEO because no one from C&S had the required retail store experience.

McMullen didn't just want to name a CEO, he wanted to make a statement. What McMullen needed was a ringer. McMullen knew that the head of the FTC was a woman named Lina Khan. "I bet she's super liberal," McMullen said his voice a whisper. "If we name a woman to lead the new company, Ms. Khan, or even a Judge who may eventually try the case, will probably like that," thought McMullen. ABC -- Always Be Confident.

Susan Morris , a woman who had never been a CEO, was chosen to lead the newly formed C&S Retail division. To McMullen, this would be viewed positively. To people in the grocery industry who had experience running newly formed companies, they viewed the decision to choose Morris with serious trepidation. Running the newly formed company would be an arduous task that would challenge even the most experienced CEOs. Morris was respected and liked in the grocery industry, but her lack of CEO experience set off alarm bells.

He'd done it. Rodney McMullen had solved his problems. Or so he thought.

Aftermath

On February 26, 2024, the FTC announced that they were suing to block the proposed Kroger-Albertsons merger, and cited, Inadequate Divestiture Offering, as one of the reasons. In summary, the FTC didn't believe that C&S was a viable choice to run a standalone grocery company consisting of a hodgepodge of stores. The FTC also sued to block the merger on the grounds that it would limit competition, reduce the power of Union Labor to negotiate, and give Kroger the power to raise prices.

After a lengthy trial, on December 10, 2024, the Kroger-Albertsons merger was blocked by U.S. District Judge Adrienne Nelson, who ruled in favor of the FTC.

Judge Nelson blocked the merger because she too didn't believe that C&S would be a "fierce competitor" as McMullen claimed. In my opinion, the primary reason why the merger was blocked was because McMullen had invented a competitor -- C&S -- and Judge Nelson saw through the charade. Judge Nelson determined that there was no way that C&S would ever become a competitor in the same way that Albertsons competed against Kroger. Selecting C&S to acquire the divested stores doomed the merger.

You can read Judge Nelson's full ruling against Kroger-Albertsons here.

According to Judge Nelson:

“There is ample evidence that the divestiture is not sufficient in scale to adequately compete with the merged firm and is structured in a way that will significantly disadvantage C&S as a competitor. C&S' history of unsuccessful grocery store ventures and its continuing dependence on defendants throughout the TSA period also suggest that the divestiture will not adequately restore competition,” Nelson wrote in her ruling. “The deficiencies in the divestiture scope and structure create a risk that some or all of the divested stores will lose sales or close, as has happened in past C&S acquisitions.”

McMullen and Kroger's vaunted merger team, made a series of mistakes.

Kroger originally proposed to divest 238 stores; an appallingly low number. Only after much negotiating and arm twisting did Kroger agree to raise the number of stores to be divested to 579 stores. The 579 stores that were selected to be divested were located across 19 states, and were considered "dogs" according to court testimony. Judge Allen stated in her ruling that she believed more stores needed to be divested, and that the 579 stores that were selected would fail and/or be sold.

There was clearly a disconnect between the FTC, Kroger, and Albertsons regarding the number of stores that should be divested. Kroger's team of industry experts and lawyers did a terrible job regarding the store divestiture selection and negotiation process. I believe a minimum of 800 to 1,000+ stores should have been identified for divestiture.

I believe that Kroger and Albertsons should have made the argument to the FTC that they wanted to merge "as is" meaning that no stores should be divested upfront. In turn, Kroger-Albertsons should have negotiated an agreement with the FTC whereby they would identify banners (Grocery chains) owned by Albertsons and Kroger, to divest over a period of one to two years to ensure a smooth transition, and minimize confusion and disruption for customers.

Instead of divesting what the FTC referred to as "a hodgepodge of stores," Kroger-Albertsons could have kept the largest banners (Albertsons and Safeway), and divested a combination of the following banners to reach 800 to 1,000 stores: Vons, Jewel-Osco, Shaw's, Acme, Tom Thumb, Randalls, United Supermarkets, Pavilions, Star Market, Haggen, Carrs, Kings Food Markets, and Balducci's Food Lovers Market. It's much easier owning and operating banners than trying to turn 579 stores located in 19 states into a functioning grocery retailer; the FTC would have agreed.

In my professional opinion, divesting stores to C&S was arguably the worst possible strategy that McMullen and his merger team came up with. C&S was woefully unqualified to operate the stores. The fact that selecting C&S was supported by Kroger's team indicates to me that Kroger chose the wrong team. It's inconceivable to me how a team of high-priced lawyers and business industry experts failed to understand that without a viable competitor to replace Albertsons, the merger would never be approved. C&S was not a viable competitor.

McMullen also made a mistake by continually making a series of bombastic claims that prices would fall if the merger was approved, and that Kroger would lower prices by "over $1B." Judge Nelson and the FTC viewed such claims as being "unenforceable promises." McMullen's claims grew stale very quickly, and McMullen lost what little credibility he had.

Was It Intentional?

Did Kroger make mistakes, or did they make decisions to intentionally kill the merger with Albertsons? I believe an argument can be made that Kroger intentionally killed the merger.

To begin with, acquiring 579 stores located across 19 states is factually the worst strategy for becoming a grocery retailer. To make matters worse, nearly all of the stores were unprofitable. It would be nearly impossible to turn around the stores.

C&S serves thousands of grocery retailers on a weekly basis. C&S doesn't operate grocery stores, but they know what it takes to run a grocery retailer successfully. C&S also understands that buying 579 unprofitable stores significantly decreased their chances for success. Why then did C&S agree to buy the stores? Because they knew the merger would never be approved. This also explains why C&S chose a person to be the CEO when they lacked the necessary experience. C&S knew the person they named would never become the CEO. In essence, everything C&S agreed to do was for show.

I can't prove that Kroger intentionally tried to kill the merger. However, Albertsons can.

We'll See You in Court

Albertsons responded to the ruling by immediately ending the merger agreement and filing a lawsuit against Kroger in the Delaware Court of Chancery for “willful breach of contract and breach of the covenant of good faith and fair dealing arising from Kroger’s failure to exercise ‘best efforts’ and to take ‘any and all actions’ to secure regulatory approval of the companies’ agreed merger transaction.” The company further alleges Kroger leadership ignored regulators’ concerns, rejected divestiture opportunities and prioritized their own financial interests over its contractual obligations.

“A successful merger between Albertsons and Kroger would have delivered meaningful benefits for America's consumers, Kroger’s and Albertsons’ associates, and communities across the country,”  said Tom Moriarty, Albertsons’ General Counsel, in a written statement. “Rather than fulfill its contractual obligations to ensure that the merger succeeded, Kroger acted in its own financial self-interest, repeatedly providing insufficient divestiture proposals that ignored regulators’ concerns. Kroger’s self-serving conduct, taken at the expense of Albertsons and the agreed transaction, has harmed Albertsons’ shareholders, associates and consumers. We are disappointed that the opportunity to realize the significant benefits of the merger has been lost on account of Kroger’s willfully deficient approach to securing regulatory clearance.”

Moriarty continued: “We are taking this action to enforce and preserve Albertsons’ rights and to protect the interests of our shareholders, associates and consumers. We believe strongly in the merits of our case and look forward to presenting it to the Court to hold Kroger responsible for the harm it has caused.”

Kroger, meanwhile, dismissed the claims as “baseless and without merit,” saying the company went to “extraordinary lengths” to advance the merger and characterizing the lawsuit as a deflection of Albertson’s own “multiple breaches."

Albertsons will likely prevail in court if they dissect the reasons why so few stores were identified to be divested, and if they force McMullen to answer the following questions:

1. What was the overall strategy for getting the merger approved? How do you know you identified the best strategy? Kroger spent over $1B on the merger. Why did the merger team chosen by Kroger, fail to litigate a successful merger?
2. What methodology did you follow to determine the number of stores that should be divested? How did you pick the stores? Who was responsible for making the decision to only divest 579 stores?
3. Why was C&S, a company with no experience running stores, chosen to purchase the divested stores? What methodology was used to select C&S? Was the selection of C&S unanimously supported by the merger team?
4. How did you convince C&S to buy the stores and become a party to the merger?
5. How did you determine that C&S would operate as a "fierce competitor" when they had no prior experience running grocery stores?
6. Did Kroger negotiate an agreement with Symbotic to install their technology in any Kroger or Albertsons warehouses?
7. Why didn't Kroger sell the divested stores at a higher price to an established grocery retailer?

The smoking gun of why the merger failed is in the hand of McMullen. It was his fault. All of it.