CNBC's Sara Eisen Speaks with Kroger CEO Rodney McMullen on the State of the Albertson's Mega Merger

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Category: Business/Financial News

Published on Wednesday, 28 February 2024 12:20

Written by CNBC Squawk on the Street

CNBC's Sara Eisen spoke exclusively today with Kroger CEO Rodney McMullen after the Federal Trade Commission sued to block the mega merger with Albertson's, arguing it would create a monopoly and ultimately be harmful to consumers.

Below is the exclusive CNBC transcript.

Sara Eisen: Kroger under pressure from the FTC after the agency blocked its nearly $25 billion merger with Albertsons over anti-trust concerns. Even pointing to language in its official complaint that Kroger executives have often referred to Albertsons as their number one competitor. Joining me now to address the new lawsuit in a CNBC exclusive is Kroger's CEO, Rodney McMullen. Rodney, good morning. Thank you for joining me.

Rodney McMullen: Good morning and thanks for the invitation.

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Eisen: So, you know, nobody was really surprised that the FTC sued to block this deal. We're in an election year, we're facing really high food prices, even you and I have talked about the environment. Were you surprised?

McMullen: No, we were disappointed, but not surprised. And obviously, when you look at the merger, it's one of those things where we've committed to investing in pricing, as we have in many of our previous mergers, continue to invest in wages which we've done over the last several years, and it's great for the communities. And if you look at the commitment for the combined companies of the 10 billion meals, all of those things. So disappointing, but not surprising.

Eisen: They say the opposite. The FTC says your acquisition of Albertsons would lead to additional grocery price hikes for everyday goods, further exacerbating the financial strain consumers across the country face today. Why is that wrong?

McMullen: If you just look at Kroger's business model, over the last 20 years, we've reduced our gross profit rate by over 500 basis points or 5%. The fundamental business model that Kroger has is, we continue to identify places to reduce cost, change processes, and give those benefits to our customers and invest in wages. That's been our business model for years. It will continue to be our business model, and we've committed on day one to start investing pricing in the Albertsons stores and others. And if it doesn't happen, the only body that benefits are the large non-union competitors that are significantly larger than Kroger before and after the merger.

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Eisen: But I guess, the core of the argument is that it's good for you – I get you're saying you have a lot of competitors. But Kroger and Albertsons are two of the biggest pure play supermarkets. And it's good to have that competition, because it keeps you guys on your toes when it comes to undercutting pricing for each other, better services, better pharmacy hours so you can compete for customers. That's the argument.

Following is a link to video on cnbc.com: https://www.cnbc.com/video/2024/02/28/kroger-ceo-rodney-mcmullen-on-ftc-lawsuit-we-were-disappointed-but-not-surprised.html.

McMullen: Yeah, I mean, that's the argument, but if you look at it from a Kroger's standpoint, and when you talk about – when we look at competition, you know, our number one competitor is Walmart. Our number two competitor is Costco. Our biggest increasing competitor is amazon. And then you have the discount stores, restaurants, and everything else. As you know, I've been around the industry for a long time, and the industry continues to change every year. And if you look at the competitors and where people eat and how people eat, it's constantly changing.

And this merger allows us to be proactive, protect union jobs, continue to grow union employment, as you know, we've added over 100,000 union associates over the last 11 years, while most companies across the industry has continued to decline in union employment. It's one of those things where, you know, where we always appreciate the engagement and the conversation, because we feel very strongly that it's good for customers, very good for associates and communities.

Eisen: I get that Walmart obviously is a big competitor for you guys and so is Costco. But in the complaint from the FTC, they cite Kroger executives describing Albertsons banners as our "number one direct competitor."

McMullen: Yeah, I don't know the details of who actually said that. Obviously, I would not have said that because Walmart has been our number one competitor for well over ten years. Costco has been our number two competitor for a long period of time. So, you know, I have – I do not know the specifics. I just know from when we have our business plan board meetings and things like that, Walmart really is the competitor we talk about the most.

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Eisen: I mean, potentially even more damning, they have from the complaint they have executives from both of the chains have conceded that Kroger's acquisition of Albertsons is anti-competitive. With one executive reacting candidly to the proposed deal, saying you're basically creating a monopoly in grocery. And that is the political line here, as well. But they cite internal executives.

McMullen: Yeah, but that would have been – I don't know who said it, but if you look at part of the agreement is to sell a significant number of stores to C&S. C&S is an incredibly strong competitor, a multi-billion-dollar business that's been in the grocery business for a long time. And they may have been somebody that wouldn't be aware of the things that would – the stores that would be divested, the infrastructure that's part of that divestiture to C&S, and if you look at the management and leadership teams and all of the infrastructure to support them as well. So, you really have to look at all of those things together and C&S is set up to be incredibly successful, a strong competitor, with great leadership, as well.

Eisen: Yeah, I mean, that's one of the big disagreements from the FTC suit, as well. They call it sort of a hodgepodge kind of strategy or when it comes to divesting some of these stores. And they don't think that they are set up for success, because if i understand it correctly, the stores that are sold to C&S, they don't get to keep the brand, right? So, they might struggle with brand loyalty there, from customers. And it's also just not – it's a small, unless capitalized, business. Is it really a strong competitor to a Kroger/Albertsons combination?

McMullen: Oh, absolutely a strong competitor. And if you look, as part of the transaction with C&S, part of the agreement is to supply several different banners to C&S, also private label. And if you look, the ownership of C&S is owned by somebody with incredible experience in the industry, with a tremendous amount of financial strength, as well. So, you really have to look at all of those things together.

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Eisen: You have said that you're going to commit to $500 million in price cuts on day one of the merger. And I wonder if that's enough. If, as you prepare to fight this, you're going to have to go farther to convince everybody that the price cuts on everyday grocery items are real and will be significant and consumers will feel them.

McMullen: Yeah, we've always -- as you know, committed day one, starting with the $500 million, and as we identify, if you look at previous mergers, as we identify additional synergies, we always take a meaningful part of those incremental synergies that we find, and invest it in pricing and invest in the whole business model. I would not expect this to be any different. And we've always said the $500 million is just a starting point.

Eisen: When people hear "synergies," they think of cuts and job cuts and that's why the union has been opposed to this from the beginning. They celebrated the FTCs lawsuit. Why shouldn't union workers be worried about a combination, especially when there will be certain markets where there will be a lot of stores and there are questions about whether some will have to close.

McMullen: With C&S and Kroger both committed, there will be no store closings as a result of the mergers, no warehouses being closed or anyone that would lose direct line… because of the merger. Part of the synergies, really, if you think about transportation, before we might have had to drive 250 miles to get to a store, Albertsons would have a warehouse closer, and we may only have to drive 20 miles to a store, things like that.

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The other thing, there'll be some synergies as well, I'm sure once we start getting into the details, both companies will identify things that one company does better than the other company. Certainly, if you look at our previous mergers with Harris Teeter and Fred Meyer, every time we have found that there are things that each of us do better than the other company, and you're able to leverage that. If you look at Fred Meyer, we have marketplace stores. And that's something that creates synergies, both at the Fred Meyer, and it also allows us a new avenue for growth. So, I would expect the same thing will happen on Albertsons.

Eisen: But isn't there a lot of evidence -- this has been an industry ripe for consolidation for years, Albertsons... A lot of evidence to show the opposite. I get you're promising no store closures as a result of the merger, but in a few years that could change. And that's what history and research show us.

McMullen: If you look at Kroger, as I mentioned before, we've added over 100,000 union jobs over the last 11 years. So, I understand the point, but, you know, it really gets back to the broader point. The industry is changing, if you look at Walmart, Amazon, Costco, all of those, Aldi, Leedle, all of those companies continue to add stores and expand their footprint. When you look at the industry overall, there's a tremendous amount of change, a tremendous amount of competition. And this will allow us to be able to compete against those non-union players.

Eisen: Yeah, they're also worried that the merged company will have too much negotiating power. Rodney, what is the expected timing here for litigation now going forward?

McMullen: At this point, we would continue to expect to close, you know, the first half of the year, but we really can't talk to the specifics on the litigation piece.

Eisen: Do you think you have a strong case? What are your lawyers telling you about how they assess this suit from the FTC?

McMullen: We've felt incredibly good all along in terms of being well advised by a wide spectrum of professionals, both economists and attorneys, and we feel very, as you know, we've always committed that if we needed to, we would litigate. And that's been the commitment all along.

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Eisen: Rodney, how critical is this merger to the future success of Kroger? What would happen to your business and your strategy if you lose?

McMullen: If you look at -- for Kroger, we've always been positioned -- our fundamental business model is to continue to grow and support the customer and support associates in communities. And when we do that, our shareholders benefit as well. That would continue either way. Obviously, by merging, it will allow us to do it at a scale much closer to a Walmart and Costco and amazon others.

Eisen: Are they threatening? Are they a threat to your business? The increased competition?

McMullen: Yeah, I don't ever look at it as a threat, but they are an incredibly strong competitor, and they really cause you to continue to give the customer a better experience, support our associates. Because an associate can work for Kroger or Walmart, they can work for anyone they want. And all of those things are the things that cause us to get better -- do a better job, but they're incredibly strong and do a great job. And I enjoy visiting their stores.

Eisen: Well, I know that's going to be part of the case, as you fight back. Rodney, really appreciate the time today and taking some of the arguments one by one. I guess we'll talk to you next week for earnings. I know you're in a quiet period ahead of that report.