Are Divestitures an Adequate Remedy in Supermarket Mergers? An AAI Column
FTC:WATCH® NO. 526
The aai column
are divestitures the solution?
Albert A. Foer, President
American Antitrust Institute
The supermarket industry is in the midst of an unprecedented wave of concentrating mergers. Recent examples include Safeway and Dominick's, Kroger and Fred Meyer, and Ahold and Giant Food. It is estimated that Safeway, Albertson's, Kroger, Ahold and Wal-Mart now control about 33 percent of grocery sales in the U.S. (up from 19 percent for the leading five chains only seven years ago) and observers are predicting that we will see the near-term emergence of four or five chains with over 60 percent of all supermarket sales in the U.S. Concentration is already greater than this in many metropolitan areas.
To date, the Federal Trade Commission has taken a permissive posture with regard to these mergers, allowing the mergers to go forward provided that some directly overlapping stores are divested. We believe that a dangerous line may now have been crossed and a new more aggressive antitrust analysis must be developed to protect the American consumer against the price increases that likely lay ahead if the consolidation trend is permitted to continue.
In the AAI's recent letter to the FTC regarding the pending acquisition of the Pathmark chain by Ahold, we suggested that it is time for the FTC to re-focus its concerns. (See www.antitrustinstitute.org.) In that submission, our principal question was whether a "partial divestiture" remedy would suffice to protect competition. We noted the pervasive overlaps that would occur in the overall geographic region in which Ahold and Pathmark compete. We asked whether a practical effect of the merger would be to eliminate an aggressive merchant from the market (i.e., one of Ahold's chains is apparently going to change its format after the merger to take on the less-aggressive format of a Pathmark store). We pointed out that an examination of Ahold's track record in previous mergers suggests that their divested stores often suffered a large drop-off in revenues, thereby leaving competition worse off than it likely would have been in the absence of the mergers. And finally, we voiced concerns that further concentration of grocery retailing threatens consumer welfare because of the vicious cycle that occurs (since there is no vigorous Robinson-Patman enforcement) when a small group of power buyer mega-chains exercise their clout with suppliers, making it more and more difficult for smaller competitors to obtain supplies on a fairly competitive basis.
In the two weeks after we wrote about the Ahold/Pathmark merger, the FTC accepted two more important consent orders in this industry. On June 22, Albertson's was allowed to acquire American Stores, creating the second-largest grocery chain in the nation. The FTC's condition was the divestiture of 145 stores, or 8 percent of the supermarket stores in the merger. The FTC touted this as "the largest retail divestiture in Commission history". Six days later, the FTC permitted Shaw's (a Sainsbury subsidiary) to acquire Star Markets, which will create the number one supermarket chain in Greater Boston. In this case, 10 divestitures (5.5 percent of the stores), were required, but the result was creation of a duopoly with a fringe of smaller stores.
Here, we want to offer several thoughts generated by these recent supermarket merger cases.
The need to learn from the past
First, one of the great weaknesses in our federal antitrust effort is the failure adequately to study what does and what does not work. Hundreds of supermarket stores, for example, have been divested in recent years as a condition of permitting mergers to occur. But we know very little about whether local competition was in fact protected. In our letter concerning Ahold, we noted that in a prior conditional divestiture in Connecticut, divested stores appeared to average a decrease in sales of over 25 percent. This is suggestive of the possibility that the agencies might need to discount for or even rule out certain types of buyers-or recognize that divestitures don't always legitimate an otherwise anticompetitive merger.
The general attitude of the enforcers has been to let the merging parties select buyers for divested assets, subject to a rather passive agency review.. An empirical study (which could be prepared under section 6(b) of the FTC Act) could help determine which kinds of buyers have been best (or worst) for competition. Large chains from outside the market? Other chains in the market? Independent fringe players in the market? Highly profitable buyers?
Similarly, we need empirical work on the issue of efficiencies. Are the supermarket mergers, for instance, driven by some consumer-benefiting efficiencies (as is usually claimed by the merging parties) that would offset the reduction in the number of competitors? Why not compare the claims that were made in prior mergers with the after-the-fact results?
With empirical data, the agencies could develop positive policies to help them better assure that competition is not lessened by mergers. For example, in the Shaw acquisition, suppose the Commission had the choice of (a) bringing a strong new competitor into the market by structuring an appealing package of stores for divestiture or (b) allowing the stores to be sold off in small groups to relatively weak local competitors. The Commission -and the public-need systematic research to inform such choices.
The benefits of "up-front" solutions
Second, passivity has been taken to an unfortunate level in the Shaw's case. Normally, the FTC requires that the merging parties arrange for divestiture prior to its approval of a settlement agreement. In the Shaw's case, not all stores will be divested to "up-front" buyers. The merging parties will be given three months to arrange deals for three stores (30 percent of those divested) subject to the Commission's approval.
In theory, this and all other consent orders are subject to public comment. Given the inadequate information typically made available in the Commission's "Analysis to Aid Public Comment," it will be difficult enough for the public to comment on up-front buyers. It will of course be impossible to comment on the rest of the deal, which lies in the future. More importantly, the FTC will lose leverage on the three final divestitures by having to treat them as an after-thought, after the main game is over.
If divestitures are to protect competition, they deserve to be structured in a more aggressive manner, with the enforcement agency playing an active role in restoring competition. This vital function cannot be left to the parties who are disrupting the market by their merger.
Focusing the microscope
The FTC's supermarket cases sometimes focus on metropolitan areas (or regional) and sometimes on much smaller communities or community clusters. How should the microscope be focused? Our concern is that an emphasis on direct overlaps within a community, while important, does not give adequate weight to the potential competition effects that occur within a region.
Typically, it is fairly difficult for a newcomer to enter a supermarket market from outside. When two chains are operating against each other within a region, however, each has the advertising umbrella, supervision, and distribution facilities to make it a potential competitor against virtually any of the other chain's stores, even if there is not currently a store in the immediate community. Therefore, if the regional market would be highly concentrated after the merger, it could be appropriate to prohibit the merger of the two overlapping chains on the ground that it may substantially lessen potential competition.
What is the public to think?
We've already suggested that the public cannot comment on the likely effectiveness of divestitures where the buyers have not been identified. In fact, the public's ability to comment is extremely limited, because the Commission's "Analysis to Aid Public Comment gives no information on most of the other key decision points:
- Why are some relevant geographic markets deemed local, whereas in other supermarket mergers the entire metropolitan area (or a larger region) was used?
- What are the market shares and increases in concentration in the markets that were covered by the order?
- In what markets are there overlaps that were not challenged? In what markets was there an increase in concentration above the "safe harbor" level? What were the Commission's reasons for not acting in these markets?
- What entry barriers exist?
- Why was potential competition considered or not considered relevant?
- What merger-specific efficiencies were claimed by the parties? For example, what economies of scale or scope will be made possible by the merger? How much will be saved by reduction of work force? Why did the Commission accept or reject these claims?
- What impact will the merger have (regardless of divestitures) on suppliers and on the ability of horizontal competitors to be supplied on fair terms?
- Why were the particular buyers of divested assets deemed capable of maintaining competition at the same level as if the merger had not been permitted?
- Food is perhaps the major pocketbook issue for consumers. They have a right to be assured that supermarket mergers will serve their interest. This means at the least that the handling of consent orders must become far more transparent. It is time for the FTC to open up the black box of antitrust analysis.