In the ongoing lawsuit filed by the FTC and supported by the Attorneys General of nine states, Kroger is defending the proposed merger/acquisition of Albertsons Corp.  In his opening statement, Matthew Wolf representing Kroger stated, “If you sell more stuff your hourly wages go up, your costs go up, your costs of your employment go up.”  He added, “Other expenses such as warehouse fees, cleaning products and transportation costs are all real costs that really decrease your profits.”

While attaining competence in the prestige law firm of Arnold and Porter, Attorney Wolf appears to be either unaware of or was distorting the effect of volume on fixed and variable costs.  In a given supermarket, interest, depreciation, overhead, management, utilities and most of the labor costs are categorized as ‘fixed’ and are not influenced by volume within limits.  “Selling more stuff” implies increased volume and hence more revenue.  Incremental sales value offsets fixed costs and within the limits of imposing additional variable costs, additional ‘traffic’ will contribute to profitability and hence the bottom line.

The costs associated with operating a dairy cooler selling eggs are predominantly categorized as fixed costs involving capital invested, depreciation on the equipment, the salary of the dairy manager and a given number of required labor units.  It is possible by reducing the price of eggs to increase sales volume and hence revenue, depending on the unit price obtained.  The incremental margin will offset the fixed costs of operation of the dairy department and contribute to store profitability.  Obviously if the coolers require restocking beyond the capacity of the existing labor force, additional expenditure as either overtime or an additional employee will add incrementally to variable costs.

If Attorney Wolf believes that increasing volume and sales decreases profit, an economics 101 textbook may disabuse him of his misunderstanding.  It is of course accepted that the quotation from the opening statement was legal rhetoric.  Irrespective of veracity, his statement was entered into the court record but was essentially irrelevant to the ultimate disposition of case. Whether a provisional injunction is granted to the FTC to block the transaction will be decided on political considerations based on the potential to reduce competition at the expense of suppliers and consumers.