Corporate greed is the reason behind every problem, right? Not so fast. The pending merger with The Kroger Co. (NYSE: KR) and Albertsons Companies, Inc. (NYSE: ACI) has been “pending” for a very long time. Now the pending merger is in a federal trial against the Federal Trade Commission. The FTC wants to block the merger. And we cannot overlook the ongoing efforts of Kamala Harris using the inflation blame-game on corporate price gouging. This now has a direct implication with the Vice President running a platform in her Presidential campaign as a cause of inflation.
It was way back in February-2024 when the FTC sued to block the $25 billion Kroger planned acquisition of Albertsons. The FTC was not just concerned about the merger leading to higher grocery prices — retail store closures and job losses were also cited as key reasons to block the deal. The government wasn’t even actively blaming price gouging for inflation back then.
Oggonomics has a twofold rationale for covering this key merger AND price gouging issue in the same review. These are greatly intertwined. The first reason is that presidential candidates trying to pass “price gouging” laws is a very slippery slope. If a business doesn’t make a certain margin then it should just invest the money rather than taking on operating costs and risks and dealing with regulations (and thieves!). The second issue here is that Kroger and Albertsons may each be attractive to investors for different reasons on each. What if you heard from someone else that one is attractive whether the merger happens or not?
This is not just an investing story. It’s a economic and personal finance story all wrapped up in one.
THE FED’s REAL BLAME ON FOR HIGHER FOOD PRICES
Rising food prices have many issues to blame. It’s easy to point a finger at large corporations raising prices. After all, they are benefiting with record profits in many cases. The flipside is that companies have to maintain certain margins. Otherwise, why operate as a business at all?
It is too early to predict how the FTC trial will go. The companies have laid out direct plans to sell operations, stores and to cut certain store names more than others. The Federal Reserve may have given a gift for Kroger and Albertsons to use in their fight against the FTC. It would be an odd outcome for the Federal Reserve to indirectly help corporations beat other federal agencies.
A ban on corporate price gouging on food and groceries just became that much harder to support. Does it need to be clarified that no consumer is “pro-price gouging” here? Hopefully not. Then again, price controls are usually targets of socialist and the remaining communist regimes.
A report from the New York Fed was issued in July (ahead of the Kamala Price Gouging stance) shows that rising profit margins aren’t really the real culprit in the food inflation blame game. The report was titled ‘What Was Up with Grocery Prices?’ by economic research advisor Thomas Klitgaard.
While Klitgaard did acknowledge that margins have gone up in food and beverage retailers from 2.9% in 2019 to 4.4% in 2023, this is really the equivalent of about $10 billion of the total $100 billion increase in revenues. He points out the two main culprits as much higher agricultural and livestock prices and much higher wages.
Going back to 2005, the Fed’s report says that grocery prices really respond noticeably only when commodity prices make big moves. It points to 2008, again in 2011 and a collapse in 2015. Many other input costs force the direction in grocery prices.
Inflation had already started before Russia’s invasion of Ukraine. That said, the invasion did hurt fertilizer supplies and wheat supplies simultaneously. It seems that having the title “The Wheat Basket of Europe” may have some merit.
AND MORE ON WAGES & INFLATION
The Fed’s report signaled that higher wage increases for grocery workers relative to other workers played a significant role in the food inflation blame game. Grocery store workers’ wages are shown to have risen 15 percentage points more than wages in the entire workforce as a whole since 2019. That is still about $13 less per hour of work than the average job in the private sector. In 2024, the “significant moderation in food inflation” was a balance of falling commodity prices while wages were still rising.
The consumer price index for food-at-home has been a significant source of pain for consumers. The Fed’s report showed the at-home food index was basically flat for five years ahead of the pandemic — but the damage to consumers was done as the (food-at-home) index rose a sharp 25% from Q4-2019 through Q4-2023. This was broken down as follows:
- up 4 percent in 2020;
- up 6% in 2021;
- and up 12% in 2022.
The Fed’s report did signal that the 25% gain was higher than the core goods index and the core services index with gains of 15% during the same periods.
As far as wages impacting food-at-home inflation in 2024, that remains to be seen. The Fed’s report said:
An open question is whether grocery inflation can stay as moderate as it has been since early 2023 with grocery worker wage inflation still elevated. Specifically, food manufacturing wages rose 4 percent and grocery workers’ wages rose 6 percent year-over-year in May 2024, while the food-at-home index rose by 1 percent.
And while the report does outline how $10 billion of the $100 billion increase in time was tied to gains in operating income, the Fed’s report really puts the big food inflation blame game on commodity prices and wages. It concluded:
Putting these factors together suggests that the unusually high food inflation experienced in the first three years of the pandemic appears to have been due, in part, to much higher food commodity prices and large increases in wages for grocery store workers.
And for the mystery about what food-at-home inflation will look like in 2024:
The subsequent drop in commodity prices then helped bring food inflation down below the core inflation rate even though heightened wage pressure for grocery workers continued. In the end, the moderation of food price inflation has caused the gap that developed between the food index and the core index since the start of the pandemic to shrink from 10 percentage points at the end of 2022 to 5 percentage points in June 2024.
AND BACK TO THAT MERGER (OR NO MERGER)
Oggonomics previously covered a “strategic” call on shares of Kroger. BMO Capital Markets analyst Kelly Bania raised Kroger’s rating to Outperform from Market Perform back in June, and its price target was raised to $60 from $58 in that same BMO call. What stood out so much in that call wasn’t that Kroger was trading in the $51 to $52 area. The attractiveness of Kroger’s stock (per the BMO report) was that it was “with or without the merger” -— win on the merger you win, lose on the merger you win!
Kroger was a $55 stock back at the start of August. That was higher than the $51 to $52 seen in early-June, but now the stock is back to about $52.50 for a round-trip back to the starting point. Finviz shows its consensus price target up at $58.38 and here are some analyst targets that are higher than current prices:
- Argus (Buy) to $72
- JPMorgan (Overweight) to $58
- Telsey Advisory Group (Outperform) to $62
- Evercore ISI Group (Outperform) to $60
Albertsons stock was closer to $20 at the start of June and reached $21 in mid-August. Now it is back to almost $20 again. Finviz shows its consensus price target up at $24.27 and Telsey Advisory Group has a Market Perform rating but a $27.25 price target.
DISCLAIMER
The opinions herein are incorporating current news, Federal Reserve reports and outside broker research. Neither investors nor traders should consider this view on Kroger and Albertsons as investment advice. The information is not a recommendation to buy or sell any securities. All decisions to buy, sell (including shorting or ETFs) or hold are the responsibility of each investor and should be made with a financial advisor.
