Mr Viral
One of the best parts of antitrust trials is how much information comes into the public domain about corporations that usually keep details about their industry private. The Kroger-Albertsons supermarket merger case is no different. One interesting nugget is that supermarket executives see rural markets as particularly easy to monopolize, because there is often just one store. They even have a name, “no-comp[etition] or low-comp[etition] zones,” according to one executive on the stand.
Of course that makes sense, we’d expect firms to maximize profits where they can. One might be tempted to say, well, there are some towns that can’t support more than one store. And that might be true, except that there are several examples of supermarket chains using tactics in such towns to thwart the opening of competition. How? Well, they find a way to dominate the existing plots of land and buildings suitable for such a store.
In June, for instance, Washington state Attorney General Bob Ferguson, who is also litigating against the merger, fined Albertsons $25,000 for imposing a land use restriction on a store it sold in 2018 in a low-income section of Bellingham, Washington. As part of the sale, the supermarket giant put a requirement on the deed that no grocery store could open there until 2038. Ferguson found this provision was a violation of the state antitrust law.
These kinds of land use restrictions are likely common. A few months ago, I got an email from an economist focused on rural areas, who explained how Albertsons abuses its market power in a series of small skiing towns in rural California using a similar strategy.
Mammoth Lakes boasts a large skiing area, with a little fewer than 3 million visitors a year. If you’re driving up from Southern California to Mammoth, you go through the nearby town of Bishop, which is 45 minutes away. Visitors to this area will often rent a place to stay for their outdoor vacation. Many buy groceries at Mammoth, or stop off at Bishop to stock up on the way. And it seems like Vons – which is owned by Albertsons – is the main game in town in both places.
In Mammoth Lakes, Vons is the main supermarket, and there are suspicions they have been working to limit the construction and growth of a competitor, Grocery Outlet, through environmental claims. In 2017, a group, Sustainable Mammoth Lakes, filed to prevent the construction of a small Grocery Outlet occupying slightly more than one acre, with just 49 parking spots, on a spot that had already had commercial building and was close to a highway. They failed in that case, but the town, a major skiing spot, has just a few grocery stores, criticized by locals and tourists for high prices and bad service.
Here are the first several Google reviews about the local Vons, along with pictures.
“The most expensive Vons in California is also in the worst physical condition,” wrote one reviewer. “Worn and missing floor tiles, empty shelves, rude employees etc…”
“This is effectively the only grocery store in town and seems to have a hard time keeping items in stock…”
“There were a lot of bare shelves and the vegetables looked well picked over. Got the 6 items that I wanted and tried to pay. Self check-out counters were all closed. There was only one cash register light on and NOBODY was there…”
“Definitely the worst and dirtiest Vons I’ve ever seen… It’s clear the owners operate on the ‘only game in town’ ethos. Losers…”
“Always a terrible experience at this store. Limited selection of items and saying the older female checker is surly is an understatement. She doesn’t understand Vons and Safeway are the same, yelled at me for adding items to our order, refused to honor the digital coupon prices and told us to shop at Grocery Outlet…”
“Consensus among locals is that everything purchased here basically rots within a day or so of purchase…”
Similarly, Albertsons has tried to control grocery markets in nearby Bishop. As in Mammoth Lakes, it’s not the only game in town. There is a small Grocery Outlet, a relatively pricey Manor Market, and a Smart & Final Extra. But these are niche players. According to a store manager I spoke with, Vons is by far the largest supermarket in town.
There are two old K-Mart buildings that could welcome competitive large grocery stores. Vons started leasing one plot in 2019 when K-Mart went under, “holding the space hostage.” According to the mayor, restrictions imposed by Albertsons on the land “deter big box retailers such as Target/Walmart, and basically completely block grocery retailers.” With millions of people coming through to stay for vacations, these kind of restraints on trade are keeping prices higher than they should be.
Land use restrictions are common in the supermarket industry, especially in rural areas. It costs about $10 million and requires a good plot of land to open a new store. It’s much easier to open a store in a building already suitable for a grocery store than to build something from scratch. Conversely, if you have one of the few stores in town, it’s much easier to make cash by paying to keep an empty lot from being filled by a rival, than to lower your prices and improve service.
As my source noted, it’s not just this kind of skiing town being subjected to this kind of behavior. “I see this across California in a TON of rural communities,” he said, “where multinationals are engaged in all kinds of anti competitive behavior.”
These stores seek market penetration into these rural areas, then once reached, they recalibrate and harm the community. …remember, WalMart’s strategy was to penetrate rural America. Then… it was… late 2000s or early 2010s, WalMart closed about 180 rural stores that weren’t AS PROFITABLE as they’d like, leaving those formerly food accessed communities as newly food desert communities. The rural communities are completely dependent on these giants, and absent a push to develop a coalition of independent rural grocery stores (leveraging purchasing co-ops for scale), rural communities are going to keep getting rolled by these M&As going forward.
Some things are obvious, like land use restrictions to thwart competition. But they require a high-profile merger trial to come to light, nonetheless.
(The first version of this piece had a few errors, notably that I confused the two towns. That said, the mistake didn’t undercut the basic argument, even though it made me feel stupid.)
