Who’s to blame for the Haggen grocery disaster?

Haggen blames Albertsons and has sued it for $1 billion. But plenty of others blame Haggen, saying the small chain had no business buying 146 Albertsons, Vons and Pavilions stores.

But I think most of the blame goes to the Federal Trade Commission. It never should have ordered those stores to be sold in the first place.

The FTC has a weird obsession with what it considers monopolies. Whenever two sizable chains merge, some nameless FTC bureaucrat uses some opaque formula – well, hey, nobody really knows whether they use any formula at all – to come up with some split-the-baby “solution” to prevent the much feared “monopoly.” So when Albertsons decided to buy the Safeway chain, the unknown FTC bureaucrat got busy playing SimCity with the West Coast grocery market. “You can keep the two stores here but you must sell that one over there. …”

In the end, the FTC said that if Albertsons and Safeway wanted to merge, they had to sell 168 stores. Haggen, an 18-store chain in the Pacific Northwest, agreed to take 146 of them, including some Vons and Pavilions stores in this area.

Why did these stores have to be sold? Well, the FTC apparently believes that a single owner could exert some kind of neighborhood monopoly power simply by owning two stores that are close to each other. (And no, I can’t explain why Starbucks apparently is exempt from this rule.)

But exactly what kind of monopoly could two neighborhood stores have, anyway? The FTC fears the two stores could raise their prices. But if they did that, what would you do if you were a customer? You’d decide that you are not stuck with only Vons, Albertsons or Pavilions. You can go to Gelson’s, Ralphs, Sprouts, Trader Joe’s, Whole Foods or a newcomer named Grocery Outlet Bargain Market. You can buy groceries when you make your biweekly trip to Costco or Target. You can stop at any convenience store or in nearly any gasoline station on the way home to get an item or two. You can have Amazon deliver groceries to your door if you want. The grocery market is vibrant, chock-full of choices and competitive – now more than ever. Why is the FTC wringing its bureaucratic hands over this phantom monopoly?

What the FTC doesn’t understand is that two stores operating close to each other would enjoy economies of scale and – since they operate in the larger, very competitive universe – would be more inclined to lower their prices, not raise them. It would be a benefit to consumers to let stores operate close to each other.

The FTC also apparently can’t distinguish between a false, benign monopoly, such as our grocery example, and a true, coercive monopoly when there is only source for a good or service. Prices do tend to go up in that situation. For an example, see the article on page 1 of this issue in which some bars claim they are forced to overpay for a package of National Football League games on Sundays because there is no competition.

But alas, because of the FTC’s weird obsession with phantom monopolies, it forced Albertsons to unload the stores earlier this year. Things unraveled quickly. Albertsons sued Haggen for allegedly failing to pay for all the inventory. The new Haggen stores were widely knocked for having high prices, and customers deserted. (Proof of the very competitive grocery market.) Haggen sued for $1 billion, claiming Albertsons provided misleading pricing information. Haggen filed for Chapter 11 earlier this month, closed 27 stores – including several in the L.A. area – and has filed papers indicating an even broader retreat. It’s a disaster.

Funny, but in announcing the decree to sell the stores in January, FTC Chairwoman Edith Ramirez said: “Absent a remedy, this acquisition would likely lead to higher prices and lower quality for supermarket shoppers in 130 communities. This settlement will ensure that consumers in those communities continue to benefit from competition among their local supermarkets.”

Instead, because of the FTC’s “remedy,” supermarket shoppers got higher prices, closed stores and a loss of competition. Some workers lost their jobs.

In the Haggen grocery disaster, the most damaging monopoly power was that wielded by the FTC.

Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].