When Kroger and Albertsons announced plans this month to sell 413 grocery stores, including 104 in Washington, as part of their proposed merger, the two retailers offered reassuring words for workers, shoppers and regulators.

If regulators approve the sale of the stores — to New Hampshire-based C&S Wholesale Grocers — the deal “ensures no stores will close as a result of the merger and that all frontline associates will remain employed,” according to a Sept. 8 statement by Kroger, which owns QFC and Fred Meyer, and Albertsons, which owns Safeway. Fred Meyer stores are not part of the sale.

But the fate of the 413 stores, whose locations haven’t been disclosed, isn’t so straightforward, experts say. 

For starters, the no-closure language almost certainly doesn’t bar C&S from closing or selling stores in the future. 

While the language was likely intended to “satisfy the regulators … that’s not going to be a binding clause in perpetuity,” says Arun Sundaram, a market analyst at CFRA Research who follows the grocery business. 

Some merger critics go further. Seven local chapters of the United Food & Commercial Workers, representing more than 100,000 Kroger and Albertsons employees, argue that the sale may be structured in a way that actually encourages C&S to sell certain locations as real estate, instead of trying to run them as grocery stores.

“There’s so much value that C&S can derive [selling the real estate] without ever earning $1 of profit from operating the stores successfully,” said John Marshall, a financial analyst with UFCW locals in the Pacific Northwest and in California, during a Wednesday press conference.

Such criticisms are likely to mount as the regulators and others scrutinize the proposed sale. Merging companies are typically required to sell, or divest, locations that are close to one another in order to maintain competition in those markets.

That scrutiny will be especially intense in Washington, which has a large concentration of Kroger and Albertsons stores and the biggest number of stores that could be sold.

Kroger and Albertsons hope that offering to sell the 413 locations (and up to 237 additional locations, if regulators demand it) will pave the way for a $25 billion merger that would create the second-biggest grocery chain in the U.S., behind Walmart and in front of Costco.

But in the meantime, concerns about the fate of the divested stores are roiling workers and shoppers — especially those old enough to have seen what happens after mergers, as the combined firms look for ways to cut costs or boost revenue. 

“I’m sure there’s going to be some closures because some of the stores they may be buying, you know, the real estate’s worth more than the store,” worries Yakima resident James Perez, who has worked for Safeway for nearly 43 years.

C&S, Kroger and Albertsons all declined to offer specifics on the structure of the sale, other than to say that C&S would honor all union contracts.

But Burt Flickinger, a grocery industry veteran who is working with Kroger on the merger, argues that C&S is highly motivated to keep every location it can get. 

First, C&S is eager to expand its retail operation, which is currently only around 160 stores, to achieve scale-related savings, Flickinger said during an interview Thursday arranged by Kroger.

Such efficiencies will be key in a highly competitive grocery industry dominated by Walmart, Kroger-Albertsons and Costco.

Second, C&S can make more money as a grocery retailer than it can solely as a wholesaler, which is the bulk of its current business, Flickinger said.

“Selling wholesale groceries is a penny profit on every dollar after tax, where corporate retail can be one-and-a-half- to two cents profit after tax,” Flickinger said. “So it’s more profitable for C&S to keep and expand its corporate store operations,” he said. 

But skeptics worry that the deal structure might push C&S the other way.

The $1.9 billion C&S is paying is on the low side for 413 Kroger and Albertson stores, plus eight distribution centers, three store names, including QFC, and five private label brands, several analysts have said. That discrepancy suggests the deal could include some underperforming locations that could be hard for C&S to operate profitably. 

CFRA Research, for example, estimates that, based on average store performance, 413 Albertson and Kroger locations alone would be worth $2.3 billion, or around 20% more than C&S offered, Sundaram said.

Sundaram thinks C&S has the capital and expertise to run those stores. But he also expects federal and state regulators to “have questions or concerns regarding the viability of these divested stores.”

UFCW’s Marshall thinks the deal is actually much sweeter for C&S. He estimates the stores’ real estate value alone is $2 billion-$3 billion. 

That not only “raises serious questions about the quality of the divested stores,” but also “about the incentives that C&S will have to operate them or potentially monetize them in some other way down the road,” Marshall said Wednesday.

Like many merger skeptics, Marshall bases much of his concern on the dismal experience of Haggen, the 18-store chain based in Bellingham that went bankrupt after buying 146 locations divested by Safeway and Albertson as part of their 2015 merger.

The Haggen deal involved a dual structure, with an operating company that managed grocery operations and a property company focused on the underlying real estate, according to court documents.

By some accounts, that encouraged Haggen to buy more retail locations than it could manage while also allowing Haggen’s investors to profit by selling store real estate even if store operations were failing. 

Indeed, according to bankruptcy documents, although Haggen’s investors acknowledged the increased “execution risk” of acquiring so many new stores, they also thought the deal was “‘too juicy’ to pass up, in part, because of the value of the owned real estate associated with the stores.” 

Marshall notes that the C&S sale would put the 413 stores into a separate entity, 1918 Winter Street Partners, which C&S co-owns with investors. He thinks regulators should insist on a deal structure that prevents a Haggen-style debacle by ensuring that “that the alignment of interests is intact so that C&S and their co-investors will succeed only if the stores succeed, and not in any other scenario.”

Whether regulators have that capacity isn’t clear. For example, while the Federal Trade Commission can insist on a no-sale period, it’s usually short-lived.

When C&S picked up a dozen Tops grocery stores in the Northeast in 2021 as part of another merger divestiture, C&S was barred from selling any of the locations for only three years under an FTC order.

More restrictive sales bans would likely be shot down in court, in part because they would effectively prevent companies from making otherwise legal, and normal, business decisions, said Kevin Boeh, a mergers and acquisitions expert at the University of Washington Foster School of Business.

If a newly acquired location turned out to be a poor performer, for example, “it would be unreasonable … to force them to hold on to a losing business,” Boeh said. “I mean, that’s never going to hold up in court.”

C&S, Kroger and Albertsons all declined to say whether the proposed 413-store sale contains any constraint on sales or other activities. The FTC also declined to comment when asked whether it might require a no-sales period or other restrictions.

Merger divestitures have a mixed record when it comes to closures. Many of the stores in the Haggen bankruptcy were repurchased by Albertsons, but several shut down.

In another case, when Albertsons acquired a rival in 1998, only two of 15 divested stores, in Montana and Wyoming, remain open, according to BoiseDev, a Boise, Idaho-area news site. “The stores had not been hitting sales projections since we acquired them in 1998,” one of the stores’ buyers explained in 2000.

Today, the former groceries “are dollar stores, sporting goods stores, pet stores or crafting outlets,” BoiseDev reports.

That’s unlikely to provide much solace for shoppers and workers worried about the future of their stores.

But as Jarrad Harford, chair of the finance and business economics department at the Foster School, argues, shoppers and workers were already facing uncertainty about their stores, given the volatility in the grocery business.

“There’s no guarantee that any of these stores will remain in business even if the merger doesn’t go through,” Harford said.

That leaves shoppers and workers alike in a wait-and-see limbo.

“Ok, what’s going to happen next?” said Dianne Bell, 68, of Renton, who wonders whether her nearby Safeway will be sold and what changes C&S might bring. But other than writing letters to stores management, she said, “I don’t think I have any control over it.”

It’s the same for Perez, the Yakima Safeway employee. At 59, he hopes to keep working for another four or five years, but that “depends on what direction the company wants to go,” he said. And with the merger and divestiture “there’s some uncertainty at the moment.”