The Federal Trade Commission is seeking to block the biggest supermarket merger in U.S. history, Kroger's proposed $24.6 billion acquisition of Albertsons Cos., saying in part the two grocery giants' plan to sell off more than 400 stores for $1.9 billion doesn’t pass muster.

The FTC sued in federal court in Oregon on Monday to prevent the nation's biggest supermarket chain, Cincinnati-based Kroger, from closing on its purchase of the second-largest U.S. grocer, Albertsons, headquartered in Boise, Idaho. The attorneys general of Arizona, California, the District of Columbia, Illinois, Maryland, Nevada, New Mexico, Oregon, and Wyoming joined in the FTC's complaint alleging the Kroger-Albertsons merger is anti-competitive, resulting in higher grocery prices and harming workers.

Kroger and Albertsons’ proposed agreement to sell some stores to allay antitrust concerns is an “inadequate divestiture offering,” according to sharp criticism in the FTC's complaint. If Kroger’s acquisition fails to win approval, the deal for it and Albertsons to sell hundreds of stores could also be derailed.

“This supermarket mega merger comes as American consumers have seen the cost of groceries rise steadily over the past few years. Kroger’s acquisition of Albertsons would lead to additional grocery price hikes for everyday goods, further exacerbating the financial strain consumers across the country face today,” Henry Liu, director of the FTC’s Bureau of Competition, said in a statement.

He added that “essential grocery store workers would also suffer under this deal, facing the threat of their wages dwindling, benefits diminishing, and their working conditions deteriorating.”

Kroger and Albertsons immediately issued statements denying the charges made by the FTC. They've maintained that the merger will help them compete with new powerful competitors in the grocery sector, like Walmart and Amazon, that they won't close any stores, and that they won't jack up grocery prices.

"The merging parties look forward to litigating this action in court so we can deliver the benefits of this merger to communities across America — lower prices, more choices, and more good-paying union jobs for decades to come," Kroger said.

The merger has been scrutinized by regulators for more than a year now, and both Kroger and Albertsons took at least one big step to try to address the FTC's concerns. When the merger was announced in October 2022, Kroger and Albertsons said they would spin off some stores. Last September, they struck a deal to sell 413 Kroger and Albertsons stores and eight distribution centers to the operator of the Piggly Wiggly chain, C&S Wholesale Grocers.

That sale, however, was contingent on the merger winning FTC approval, according to a statement on the divestiture.

“Subject to fulfillment of customary closing conditions, including FTC and other governmental clearance, and the completion of the Kroger-Albertsons merger, C&S will pay Kroger an all-cash consideration of approximately $1.9 billion, including customary adjustments,” that statement said.

The FTC said that the proposed sale to C&S didn’t allay any of its concerns.

“To try to secure antitrust approval of their merger, Kroger and Albertsons have proposed to divest several hundred stores and select other assets to C&S Wholesale Grocers, which today operates just 23 supermarkets and a single retail pharmacy,” the FTC said in a statement.

In its complaint, the federal agency alleges that Kroger and Albertsons’ “inadequate divestiture proposal is a hodgepodge of unconnected stores, banners, brands, and other assets that Kroger’s antitrust lawyers have cobbled together and falls far short of mitigating the lost competition between Kroger and Albertsons.”

The stores slated to be sold “are not a standalone business, and C&S would face significant obstacles stitching together the various parts and pieces from Kroger and Albertsons into a functioning business — let alone a successful competitor against a combined Kroger and Albertsons,” the FTC said.

The agency also charged that the sale “completely ignores” many affected regional and local markets where Kroger and Albertsons compete today.

“In areas where there are divestitures, the proposal fails to include all of the assets, resources, and capabilities that C&S would need to replicate the competitive intensity that exists today between Kroger and Albertsons,” the FTC said. “Even if C&S were to survive as an operator, Kroger and Albertsons’ proposed divestitures still do not solve the multitude of competitive issues created by the proposed acquisition, according to the complaint.”

C&S, which is based in Keene, New Hampshire, didn’t respond when directly asked by CoStar News if it would go through with its $1.9 billion store acquisition if the Kroger-Albertson’s merger is successfully blocked. It did issue a statement about its ability to operate as a grocer.

"C&S acquiring these stores will benefit associates, customers, consumers, communities and our wholesale customers," the company said. C&S has an experienced management team with an extensive background in food retail and distribution and has the financial strength to continue investing in associates and the business. As an industry leader in wholesale grocery supply and supply chain solutions, we have a strong track record as a successful grocery retailer, currently serving more than 7,500 independent supermarkets, retail chain stores and military bases."

It added that "C&S also brings experience with the merger process, having been an FTC-approved buyer in prior grocery transactions with a strong track record of successfully transitioning union employees and their associated collective bargaining agreements."

C&S, founded in 1918, is now a supplier to more than 7,500 independent supermarkets, chain stores, military bases, and institutions with more than 100,000 different products.

Kroger operates thousands of stores across 36 states, including regional banners such as Fred Meyer, Fry’s, Harris Teeter, King Soopers, Kroger, and Quality Food Centers, the FTC said, while Albertsons has thousands of stores across 35 states under regional names including Albertsons, Haggen, Jewel-Osco, Pavilions, Safeway, and Vons.

If the merger goes through, Kroger and Albertsons would operate more than 5,000 stores and roughly 4,000 retail pharmacies, employing nearly 700,000 employees across 48 states.

Neil Saunders, managing director of GlobalData, in an email to CoStar News said if the merger is squelched he doesn’t expect Kroger or Albertsons to sell any part of their store portfolios.

“If the merger is called off, I don’t think either Kroger or Albertsons would want to dispose of stores,” Saunders said.

He, and others, said Kroger and Albertsons will mount a tough fight against the FTC in court.

“An ultimate denial of the merger would leave both Kroger and Albertsons in a tough spot,” Saunders said in a separate note to clients. “Both retailers are finding growth and profits under increasing pressure and the merger was a way of extracting economies of scale to deliver better numbers for investors.

He added that "without this they will need to double down their efforts to increase internal efficiencies, and look to expand through more organic growth, or via smaller acquisitions. As such, both companies will fight this very strongly in court.”

Arun Sundaram, vice president and senior equity analyst at CFRA Research, in a note said the FTC doesn't conclude C&S has "the necessary experience" to run the 400-plus Kroger and Albertsons' stores. He expects that the two supermarket giants will challenge the FTC's lawsuit in court.

"To win, the companies will likely need to expand their divestiture package to include more stores (potentially another 200-plus stores) and other assets," Sundaram said. "We could also see [Kroger] and [Albertsons] seeking additional buyers, including more established grocery retailers with experience running grocery stores in the markets where the divestiture is occurring."

The FTC suit follows several court challenges seeking to block the Kroger-Albertsons deal by attorneys general in states including California, Washington, Illinois and the District of Columbia. The grounds include potential worker layoffs from store closings and concerns that the merged company would still hold an unfair competitive advantage from stores proposed to be spun off but still controlled by Kroger. Those challenges were ultimately not upheld by state and federal courts.

Some landlords and commercial real estate brokers in California and other Western states have been preparing for stores to change hands amid federally required divestment of stores in regions where Kroger and Albertsons have significant service overlap.

CoStar and company data as of November 2022 showed Kroger and Albertsons combined were operating more than 1,000 stores in California, including multiple brands among the 667 Albertsons-owned locations and 356 Kroger-owned stores.

A significant issue in a merger review could be service overlaps in Southern California between Kroger-owned Ralphs and Albertsons-owned Vons, both with centurylong histories and multigenerational customer loyalties in the region.

“There are many places, like in San Diego, where you have a Ralphs and a Vons anchoring centers at the same intersection,” Steve Avoyer, president of San Diego-based Flocke & Avoyer Commercial Real Estate, a firm that handles leasing and management at more than 100 Southern California shopping centers, told CoStar News at the time. “There are changes that are going to happen, whether it’s closings or selloffs, and they’re not going to be able to avoid that in all those places.”

Maps compiled by CoStar News showed that overlap was likely to be limited in Northern California, where Kroger has traditionally had a minimal presence. There is considerably more overlap between Ralphs and Vons or Ralphs and Albertsons in Southern California, especially in Los Angeles and San Diego.

In a 2022 research note regarding the merger deal, retail analyst Scott Mushkin of R5 Capital noted there are several Western U.S. cities where high percentages of Kroger-owned stores are located within 3 miles of an Albertsons-owned store. San Diego has among the highest percentages at about 76.1%.

Mushkin noted that the proposed merger creates even higher service overlap percentages in the 3-mile radius in other Western regions, with Denver at about 90.5%, Las Vegas at 95.2%, Phoenix at 89.6%, Portland at 81.3%, and Seattle at 87.4%.