Shoppers May Pay the Price of Mergers
If two guys named Henry Kravis and George Roberts succeed with their buyout of Cincinnati’s Kroger Co., owner of more than 1,300 supermarkets, they will become the largest grocers in the United States. Their finance company, Kohlberg Kravis Roberts (KKR), already owns Safeway, thanks to a leveraged buyout in 1986, and controls 30% of Vons.
Kravis, a 44-year-old MBA, and Roberts, a 45-year-old lawyer, don’t plump the lettuce or trim roasts at the meat counter, of course. Nor do they build new supermarkets, as did food retailers of old like S. M. Skaggs, a Baptist minister who founded Safeway to bring low prices to his flock, or Bernard Kroger, who pioneered the use of cash registers because he didn’t trust employees.
What Kravis and Roberts, graduates of Claremont Men’s College (now Claremont McKenna), do is funnel investors’ money into reorganizing supermarket companies--buying a chain and selling its stores. It’s a process that may well be contributing to higher grocery prices while producing big returns for KKR and its investors--including the government employee pension funds of several states.
KKR bought Safeway in 1986 for $4.6 billion, for example, and has since sold almost 1,200 of its 2,340 stores to repay debt. Sometime in the next year or two, Safeway will probably sell stock to the public again, producing a big payoff for the leveraged buyout investors. Meanwhile KKR, which has already made $60 million in fees on Safeway, according to Fortune magazine, has a new $5.6-billion leveraged buyout fund raised from investors last year and is offering a high price for Kroger.
Which is curious because Kroger, like Safeway, seems an odd company to attract smart investors--a mediocre profit performer that operates in many markets but leads in few. But Kravis and Roberts know that makes Kroger stores ideal for selling to local supermarket chains wanting to increase their share of a local market.
That’s why Vons snapped up Safeway’s Southern California stores--in a deal that put 30% of its stock under KKR’s control--and why Alpha Beta is trying to buy Lucky Stores. Vons is now neck and neck with Ralphs for market leadership in Southern California, having formally added Safeway’s 162 stores to its own 190 last Thursday. But Alpha Beta may pass both Vons and Ralphs if its acquisition of Lucky is not canceled by the courts on antitrust grounds.
Also, the chains are eager to buy because it’s cheaper than building. It costs $6 million to $7 million to build a new supermarket today, whereas Vons is paying about $2 million apiece for Safeway’s stores.
Prices Keep Rising
Consequences of the swap meet are good and bad. The marketplace may gain variety as Vons turns some of the Safeways into Tianguis Mexican markets and others into Pavilions--posh deli and gourmet stores that sell more sizzle than steak. But one result of fewer stores being built is that food companies must now pay the chains to put new products on the shelves of existing markets.
Still, whether all that makes for higher grocery prices remains an open question--although prices do keep going up, and simple logic says that high interest payments don’t keep prices down.
The debt on leveraged buyouts is enormous. The interest burden on Safeway went beyond its ability to pay from cash flow, and the $4.6-billion offer for Kroger promises the same predicament for the Cincinnati company. Even allowing that interest payments are tax deductible, it is hard to see how scrambling to pay interest to lenders, fees to financiers and returns to investors can lower prices at the checkout counter.
And KKR is a demanding owner. By the firm’s reckoning, investors in its leveraged buyouts--pension funds of five states including Oregon and Washington, major companies and Harvard and Yale universities--made annual returns of 31% to 44%. That’s a lot more than can be made in government bonds.
But a good question is where those fat returns come from. Safeway cut its employee rolls brutally, yet its grocery prices did not go down. The picture arises of burdens unequally shared, of pensions being fattened for some, by higher food bills for all.
