WASHINGTON — The two supermarket chains involved in current major acquisitions are trying to catch the increasingly pro-merger wave at the Federal Trade Commission.
Both A&P, which wants to acquire Pathmark Stores, and Whole Foods Market, which has a tender offer to buy all outstanding shares of Wild Oats Markets, have in their favor the business-friendly Bush administration.
Over its two terms, the Bush FTC has become increasingly open to arguments that mergers, even when they result in the disappearance of a neighborhood supermarket, can be pro-competitive through their efficiencies, where the remaining supermarket benefits from corporate savings on administration, advertising, warehousing and other services. Those savings theoretically translate into benefits for consumers, such as lower prices, better service and more offerings.
The logic of that “efficiencies” argument was hammered home by several speakers at the FTC's conference on grocery store antitrust issues held here late last month at an FTC satellite location in the shadow of the historic Union Station near Capitol Hill. About 100 listeners heard a daylong series of presentations, none of which addressed the Whole Foods and A&P mergers directly. But the fates of those two mergers were at the front of everyone's minds.
The commission has asked for a second round of information from both A&P and Whole Foods. Under the Hart-Scott-Rodino Act, the FTC generally has 30 days from the time it receives company information in response to a second request to either stop the merger or require divestiture of stores, generally because the merger would be anti-competitive — that is, the loss of a grocery store would hurt consumers in a given neighborhood.
One attorney for one of the four companies involved in the two mergers said, “Anytime you get economists involved in something like this, it leads to a more sophisticated understanding of the current environment.”
Michael Salinger, director of the FTC's bureau of economics, which sponsored the conference, told SN that the conference had been planned well in advance of the announcement of the proposed A&P and Whole Foods acquisitions.
David Scheffman, director of the LECG consulting company, and Salinger's predecessor at the bureau of enforcement, explained in an interview, “This chairman has spoken about taking efficiencies more seriously.” That was a reference to Debra Platt Majoras, the FTC chairman. Scheffman said his firm had been involved on behalf of Rite Aid in its acquisition of Brooks and Eckerd drug stores, a deal which the FTC is still looking at. Going into that merger, Scheffman had thought Rite Aid would have to divest 125 Brooks stores in order to win FTC approval. But by underlining the efficiencies that would be gained in the merger, Rite Aid may only have to divest 25 stores.
Besides arguing on behalf of merger efficiencies, speakers urged the FTC to give greater weight to the wider range of competitors to supermarkets, especially Wal-Mart Supercenters. Traditionally, the FTC has looked at the geographic area over which two stores share customers as the basis for analyzing a prospective merger. The staff looks to see whether the closing of an acquired store would reduce competition in that geographic area for the grocery store owned by the acquiring company, which would remain in operation.
When the FTC filed an injunction against Kroger's purchase of Winn-Dixie stores in Texas in June 2000, for example, its reason was the anticompetitive effect in Fort Worth, where Kroger and Winn-Dixie were the No. 2 and No. 3 players in the market, respectively. However, at that time, many felt that the FTC should have given greater weight to grocery sales at Wal-Mart Supercenters in nearby Dallas.
But James Fishkin, a partner with Dechert LLP, who was lead attorney on many FTC supermarket investigations in the mid to late 1990s, including Kroger's effort to acquire the Texas Winn-Dixies, said in an interview that the FTC has always used the grocery sales of Wal-Mart Supercenters in the competitive analysis of a proposed merger, and did so in considering the Kroger-Winn-Dixie deal.
In addition, Debbie Feinstein, a partner at Arnold & Porter who spoke on behalf of Kroger, made a presentation at the conference during which she said Kroger had projected “synergistic” cost savings reaching $40 million by year three in Fort Worth, which the FTC paid little heed to.
MORE WEIGHT FOR EFFICIENCIES
Under the Bush administration's FTC, efficiencies and Wal-Mart Supercenters have been given more weight in supermarket merger considerations. For example, the Clinton administration forced Albertsons to divest several American Stores Co. supermarkets to Raley's in Las Vegas in 1999 when Albertsons bought American Stores, even though Albertsons alleged that Wal-Mart was about to enter Las Vegas in a big way. Three years later the Bush FTC allowed Kroger to swallow all the Raley's stores in Las Vegas, in good part because Wal-Mart had established a number of supercenters in the market.
The last and only enforcement action filed in conjunction with a supermarket merger by the Bush administration was when the commission challenged Wal-Mart's acquisition of the largest supermarket chain in Puerto Rico, Supermercados Amigo. In a consent agreement in November 2002, Wal-Mart agreed to divest four stores. That was the first investigation in which the FTC used club stores as part of the supermarket competitive environment when looking at a geographic shopping area.
That was the reason the FTC forced the divestiture of the four Amigo stores, because it considered Wal-Mart's Sam's Club stores as competitors in those four areas. However, Puerto Rico went to court to force additional divestitures, and Wal-Mart agreed, prior to the First Circuit Court of Appeals issuing a decision.
Feinstein suggested that mass merchandise stores such as traditional Wal-Marts and Targets also ought to be considered as supermarket competitors, which is not now the case. She pointed out that 54% of all laundry detergent and 25% of all snack food is sold at mass merchandise stores. “Every dollar spent at a mass merchandiser could be spent at a supermarket,” she emphasized.
She also noted the fluidity of the competitive landscape, and the need for the FTC to adjust its thinking quickly. For example, Tesco, the U.K.'s largest food retailer, is bringing its small-format convenience concept to the West Coast. Moreover, with regard to Wal-Mart Supercenters, Feinstein said that people view them as they do malls, driving much longer distances to get the variety and low prices, including groceries, even when the Wal-Mart is located on the fringe of a town, far from a city center where a grocery store may be disappearing because of a merger.