**COMMENTS OF THE**

**NATIONAL GROCERS ASSOCIATION**

**PRESENTED TO**

**THE FEDERAL TRADE COMMISSION**

**AND**

**THE ANTITRUST DIVISION OF THE**

**DEPARTMENT OF JUSTICE**

**FOR THEIR**

**JOINT WORKSHOP**

**ON**

**MERGER ENFORCEMENT**

**WASHINGTON, DC**

**FEBRUARY 17 -- 19, 2004**

The National Grocers Association (N.G.A.) is pleased to have this
opportunity to express its views on a number of issues of particular
interest and importance to its members, the retail food companies and
wholesalers that comprise the independent sector of the food
distribution industry. The issues addressed here are among those
identified in the notice of the joint workshop on merger enforcement
("Notice"). N.G.A. applauds the objective of the Commission and the
Division (together, "the Agencies") to provide greater transparency to
the process by which they analyze the potential competitive effects of
horizontal mergers.

Before addressing some of the specific legal and economic questions
posed in the Notice, N.G.A. feels it important to set forth a context in
which it responds to the specific, and often technical, issues. N.G.A.
has always supported, and argued for, compliance with all of the
antitrust laws. Those laws, in N.G.A.'s view, were enacted to protect
consumers by creating a code of competitive rules by which business must
be conducted, and, ultimately, provide consumers with the benefits of a
diverse marketplace in which they can purchase the types, variety,
selection and quality of products and services they desire at the lowest
possible prices. To achieve that broad objective, Congress banned:
contracts among business partners that imposed unreasonable restraints
on competition; attempts to monopolize whole industries and their actual
monopolization; various forms of discrimination and predatory practices
that threaten the ability of small businesses to effectively compete
with their larger rivals; mergers and acquisitions that may dampen the
competitive process in particular industries and geographic areas;
competing companies from having common officers and directors; and other
practices deemed to constitute unfair methods of competition. In all of
these enactments, the underlying theme was to allow all who wish to
compete the opportunity to do so, with success or failure determined by
how well one is able to compete, rather than by factors that give one
competitor an unfair advantage over another, or permit a competitor to
take actions that have the sole purpose of eliminating competitors from
the market.

This congressional vision is easier to state than to achieve. But one
thing is clear: a truly diverse marketplace is the one factor without
which the goal will never be reached. All of the statutes that Congress
created are designed to produce, promote and preserve diversity,
directly or indirectly. But they will do so only if those statutes are
viewed as an integrated whole. N.G.A. does not oppose all mergers. Most
mergers present no competitive problems; they are an essential means of
growth by whitioch local and regional firms can achieve scale economies,
and maintain their ability to compete effectively with their national
and international competitors. What N.G.A. does oppose, are the mergers
of those national and international rivals that result in no scale
economies or efficiencies that will benefit consumers, and mergers that
concentrate purchasing power over the supplier community. Therefore,
each statute governing competition must receive the attention of the
agencies entrusted with their enforcement, lest the mechanism for
preserving diversity get out of balance and consumers suffer the
consequences.

**[HHIs, Concentration and Market Shares]{.underline}**

The current Merger Guidelines[^1] view concentration in relevant markets
through the lens of the Herfindahl-Hirschman Index ("HHI"), focusing on
two objects: the post-merger HHI and the increase in the HHI that the
merger would produce. Using these two indices, the Guidelines then sort
mergers[^2] into three market groups:

> • those in which the post-merger HHI would be below 1,000 --
> unconcentrated markets, in which anticompetitive effects are unlikely
> and further analysis is not ordinarily needed;
>
> • those in which the post-merger HHI would fall between 1000 and 1800,
> or moderately concentrated markets, in which anticompetitive effects
> are unlikely if the HHI would be increased by less than 100 points,
> but in which concerns might arise if the HHI increase is more than 100
> points;
>
> • and, finally, those in which the post-merger HHI would exceed 1800
> -- highly concentrated markets, in which significant competitive
> concerns can arise if the HHI increase is more than 50 points.

In highly concentrated markets the Guidelines raise a presumption that
if the HHI is increased by more than 100 points, the merger will create
or enhance market power or make it easier to exercise that power.[^3]

In announcing the current workshop, the Agencies seek comments on
whether this analytical framework has significant value as an indicator
of the likelihood that an investigation will be conducted and that it
will be challenged. To assist the development of comments on this
question, the Agencies released a study of their merger challenges over
the last five years, showing the post-merger HHI levels, the HHI
increases and the number of relevant markets involved. To the extent
that §1.51 of the Guidelines has been interpreted as subjective
indications of the likelihood of a merger investigation or challenge,
the data in the study shed little light on the likelihood of
investigations; they deal only with challenged mergers. In addition, the
analysis of concentration and increases therein, is not keyed to the
number of mergers involved, only the number of relevant markets, which
in some transactions exceeded sixty.[^4]

However, the data can be read to suggest that the likelihood of
investigation and challenge are most likely to occur at concentration
levels and HHI increases that are far above the floor of the highly
concentrated market category. For example, using the number of markets
as a proxy for the number of challenged mergers, an admittedly
problematic assumption, only 6.7% of the total involved HHI increases up
to 299 points. Virtually half show up at the high end of the HHI
increase scale -- 1,200 points and above. Looking at the array of the
post-merger HHIs, roughly 14% are below 2,400, and slightly more than
70% fall above 3,000.

What is really needed, in N.G.A.'s view, is for data, similar in format
to Table 1, to be published using the number of challenged transactions,
rather than the number of markets. Transparency being the objective,
those numbers would give a much better idea of how closely actual
practice tracks the matrix of the Guidelines. And to be more
transparent, another table should be created based on the number of
formal investigations commenced.[^5]

Closely related to the questions regarding market shares and
concentration is the number of competitors that will remain in the
relevant market after the merger, and whether they will be sufficient to
keep the relevant market competitive.[^6] There is no easy answer to
that question, especially an answer that works in all merger situations.
In retail markets, such as groceries, the number of competitors needed
may be far different from the number needed in a manufacturing product
market. Much of the difference is a function of the size of the
geographic markets involved in retailing and manufacturing markets. In
retail markets, especially those involving consumables or repeatedly
used services, consumers, especially those in urban areas, traditionally
travel relatively short distances -- to go to the supermarket, the drug
store (if not in the supermarket), the bank, or the dry cleaner.

In manufacturing markets, buyers are often able to shop in a world-wide
market with far more supply alternatives than someone needing a quart of
milk.[^7] Buyers in manufacturing markets often do not visit their
suppliers in order to make a purchase. We are not suggesting that
N.G.A.'s retail and wholesale members are not also concerned about
growing concentration at the manufacturer level that results from
mergers. Those transactions may involve direct competitors in various
product categories, and one of the merging parties may be the number one
or two firm in the category. The Agencies should closely scrutinize such
transactions, and take action when necessary to assure that an affected
category is not left with one overwhelmingly dominant supplier that
would have the ability to profitably limit production or raise prices.
It may be that the question posed in the Notice can be answered, if at
all, on a case-by-case basis.

Another complicating factor on the retail side is the rural area that is
incapable of supporting the number of competing retailers one finds in
an urban or suburban area. If there *is* a magic number of retailers
needed to keep an urban market competitive, that number may make no
sense in many rural markets that do not have the population to support
that number.

New technologies are resulting in tremendous changes in purchasing
patterns in both consumer and production markets. As e-markets continue
to increase their share of total sales in various product lines,
traditional notions of geographic markets will have to change. There was
a day not long ago when bookstores were a familiar part of the
neighborhood retail mix. Amazon.com changed that. If it has not already
made the U.S. retail book market a national market, that day cannot be
far off. There is no doubt that the growth of sales on the Internet, as
well as catalog and telemarketing sales will soon require new approaches
to the definition of relevant markets in many lines of business.

From a policy perspective, N.G.A. is less interested in a bright-line
test for an elusive number of competitors required than it is in the
fundamental principle that the consumer is best served by a diverse
marketplace that provides alternative mixes of price, quality, product
selection and service. Perhaps the answer is that to keep a market
optimally competitive, it should have as many profitable competitors as
it can support.[^8]

**[Treatment of Uncommitted Entrants]{.underline}**

The introduction into the Guidelines of the notion of "uncommitted
entrants" has done little, in N.G.A.'s opinion, to clarify the merger
analysis process. As the Notice points out, the Guidelines do not tell
how to assign market shares to these entrants, nor is there any
indication of how the Agencies will evaluate the competitive effects of
their existence. The advantage gained by having renamed *potential
entrants* as *uncommitted entrants* is far from obvious. Therefore,
N.G.A. believes that merger analysis would be made somewhat simpler if
the Agencies were to return to the practice of examining the existence
of *potential entrants* as part of the competitive effects analysis,
rather than attempting to include them as participants in the relevant
market when they are not. At the minimum, this would obviate the need
for assigning them market shares, which if done, would have to be done
on some basis other than sales or actual production. In theory, at
least, this could result in less than optimal market measurements.

The Guidelines already contain criteria for evaluating the competitive
significance of potential entrants.[^9] The primary characteristic in
the Guidelines' definition of an uncommitted entrant is that such an
entrant would not incur significant sunk costs in entering (or departing
from) the relevant market. That definition would fit nicely into the
evaluation of a potential entrant under the criteria for examining
potential entrants under the Guidelines.[^10]

The Notice also asks whether the present distinction between uncommitted
entrants under §1.32 of the Guidelines, and committed entrants under §3,
has any practical value. N.G.A. suggests that the value of the
distinction is not sufficient to warrant its retention. In practical
terms, an uncommitted entrant makes its presence felt in the relevant
market within a year; the committed entrant has two years. The
difference in treatment is that the former is viewed as a market
participant, necessitating the assignment of market share, which is
often a problem. Evaluating both committed and uncommitted entrants
under §3 on the basis of when entry would occur could be dealt with
under §3.2, the *timeliness* factor. Similarly, the magnitude of the
sunk costs involved could become a *likelihood* issue under §3.3, and
perhaps a question under §3.4 affecting the *sufficiency* of the entry
to beat back a price increase.[^11]

The task of analyzing the likely competitive effects of a merger would
be simplified by eliminating the notion of uncommitted entrants and by
their inclusion as participants in the relevant market.

**[Reductions in Non-Price Competition]{.underline}**

The Notice cites product diversity as one of the ways in which a merger
might reduce non-price competition in a relevant market. It is N.G.A.'s
position that marketplace diversity is a major factor that must be
examined in every merger, especially those in or affecting the grocery
industry, because diversity is essential at every level of the
production and distribution chain for a market to be truly competitive.
Diversity of product is first affected at the production level. But the
fact that a product is available from the supplier is no guarantee that
it will be readily available to consumers. It must first be accepted by
wholesalers and retailers. Thus, mergers at all levels -- manufacturer,
wholesaler and retail -- can affect the diversity of products available
to the consumer. But, diversity does not stop there. There are the
diversities of store format, service, innovation, product quality,
flavor and size, packaging, advertising and promotion, and others that
shape the non-price competitive arena. And mergers at any level can have
just as dramatic an effect in these critical non-price areas as they can
have on the prices consumers pay. Indeed, all of these price and
non-price factors on which manufacturers, wholesalers and retailers
compete affect the overall diversity of the marketplace and the *value*
that consumers receive and the choices available to them.

N.G.A. believes that the independent sector of the food distribution
industry is the primary source of diversity in the retail grocery
marketplace. The Agencies are the gatekeepers of that diversity and,
therefore, of *value* and the choices available to the consumer. The
Agencies' mission is to maximize both diversity and value when examining
mergers, especially those involving consumer goods. The Agencies must be
concerned not only with price competition and product diversity, but
also with the other competitive factors that consumers consider in
deciding where to shop and what to buy.

**[Buying Side Market Power]{.underline}**

The Agencies ask how they should treat the creation of buying market
power in assessing the likely competitive effects of a merger.[^12] The
Notice suggests that the Agencies' concern is limited to the effect on
suppliers "who also are entitled to the protection of the antitrust
laws."[^13] N.G.A. is pleased to have the opportunity to address this
question, because, at least in the grocery industry, a recent series of
mergers has allowed the creation of a handful of power buyers. If these
mergers continue, buying side market power will eventually end
marketplace diversity as we know it today. Therefore, the issue is of
critical importance to N.G.A.'s members, and it will be addressed in the
context of mergers at the retail level of the food distribution chain.

During 2002, the FTC conducted a series of merger-related workshops, a
number of which were devoted to issues focused on improving merger
investigations and remedies. At the workshop held in New York City on
October 23, 2002, N.G.A.'s written submission contained the following:

> A handful of chains now control a share of the national market that is
> unprecedented in our history. There are predictions that unless
> something is done to reverse the present trend, the top five chains
> could represent seventy-five percent of all grocery sales by the end
> of this decade. Today it is necessary to analyze retail grocery
> mergers by looking at more than the market shares of the merging
> parties in a local geographic market, the proximity of the merging
> parties' retail outlets, and a merger's effects on competition in
> selling groceries in the geographic markets that are directly affected
> -- the micro, or selling-side, analysis. In order to understand and,
> when warranted, curtail the anti-competitive effects of growing
> national concentration, we encourage the FTC also to analyze the
> merger's effects in the macro market -- the potential impact on the
> buying side in the form of practices that can, and often do, result in
> mega-retailers receiving preferential payment terms, packaging,
> promotional allowances, product availability and pricing. These
> advantages on the macro side injure competition in the micro --
> selling side -- markets just as surely as high concentration. But
> traditional merger analysis does not consider competitive injury in
> the micro markets that stems from mergers viewed in the macro markets.
> Today, effective merger enforcement of Section 7 of the Clayton Act
> must consider both.[^14]

A footnote indicated that between 1993 and 2001 the top five grocery
chains' share of U.S. supermarket sales grew from 17% to 40.4%. The
N.G.A. position was amplified during its oral presentation.[^15] Should
present concentration trends continue the diversity discussed earlier
will gradually decline to the point at which consumers will have few
choices. As the shares of surviving chains grow, manufacturers of
grocery products will also disappear, further concentrating the
production level market, and reducing diversity and new product
innovation. The decline in the number of manufacturers, and the
accompanying increases in concentration, will take two paths. First,
defensive mergers will occur (we have already seen a number of them), as
producers seek to maintain or regain some parity of bargaining power
with the mega-buyers. Second, smaller manufacturers, many of them
suppliers of local and regional brands, will be unable to meet the
demands of the power buyers for price and other concessions, and will be
forced out of the market N.G.A. believes that the Agencies must address
this issue before it is too late to reverse current trends.

The buying market power problem is not limited to the prices that
retailers pay for products to be resold to consumers. Many of the
*services* purchased by grocery retailers represent significant costs of
doing business. The advantages of buying power in this area are
illustrated most vividly by the fees paid by grocers to Visa for various
electronic fund transfers (EFT). In an apparent attempt to dominate the
PIN debit[^16] segment of the EFT market, Visa announced a new debit fee
schedule, which took effect on January 31, 2004.[^17] But, according to
reports in the financial press, Visa has also entered into private
agreements with some of the country's highest volume retailers that
reduce those retailers' transaction costs below the new publicly
announced schedule. It is widely believed that those agreements, such as
one with Wal\*Mart, reduced transaction fees on all types of Visa card
payments, signature and PIN debit, as well as credit card transactions.

The result of these special deals for the largest grocery chains has
widened the cost-of-doing-business gap between retailers with buying
side market power and the rest of the retail grocery industry.
Currently, this cost differential is one of the critical issues facing
independent grocery retailers, as well as other large grocery chains
that operate on a local or regional basis. Industry estimates place the
cost of debit and credit transaction fees at .5% of sales in
supermarkets, a cost that exceeds the net profits of some retailers, and
represents between 25% and 50% of profits for most others. Because the
use of plastic, especially PIN debit, is growing dramatically in
supermarkets, the disparity in costs of transaction processing service
places the majority of supermarket firms at an unfair competitive
disadvantage.

There is another aspect of this situation that warrants examination --
the question of whether there are any real savings in the cost of
servicing these largest retailers, as opposed to the cost of serving
others, savings that would arguably justify lower transaction costs,
including interchange rates,[^18] to customers like Wal\*Mart. It
appears that the overwhelming amount of processing costs are *fixed*,
rather than *variable* costs.[^19] Assuming that a processor has
sufficient volume to cover its fixed costs, processing additional
transactions add virtually nothing to the cost of doing business.[^20]

Variable costs do exist in the processing stream, but their amounts are,
at most, minute. In some instances, variable costs might include
communication services, which often are not based on the number of
transactions at all, but on the time the communications system is used.
Other examples of variable costs can include software licenses and
outsourcing costs. However, one source stated that its total variable
costs are well below one cent per transaction. What we have, therefore,
is a predominantly fixed-cost-per-transaction system in which retailers
are charged for processing, at least in part, based on their size -- the
number and dollar value of the transactions to be processed. There is no
difference in the cost of processing a transaction that is related to
the size of the retailer in which the sale occurred, or to the dollar
value of the transaction processed.[^21] The cost of processing a \$5.00
transaction from a one-store grocery operator is the same as the cost of
processing a \$5,000.00 transaction from a Wal\*Mart outlet. And there
is no additional transaction-based cost for processing transactions
generated by a new retail customer. Therefore, we see no rational
justification for lower prices to high volume retailers, like Wal\*Mart.
The number of transactions to be originated, or their value, does not
reduce the processor's dollar cost on a per-transaction basis.[^22]

N.G.A. urges the Agencies to consider not only the creation, enhancement
or facilitation of buyer power when examining mergers, but also to
investigate the obvious anticompetitive effects of Visa's special
pricing agreements, and to take appropriate remedial action.[^23]

[^1]: 1992 Department of Justice and Federal Trade Commission Horizontal
    Merger Guidelines ("Guidelines").

[^2]: The term *mergers* as used in these comments also includes
    acquisitions and consolidations.

[^3]: Guidelines, §1.51.

[^4]: Tables 1 and 2 of the data reveal that a total of 173 mergers were
    challenged by the Agencies during the five fiscal years covered by
    the study, and those mergers involved 1,263 markets, an average of
    7.3 markets per merger.

[^5]: A proxy for that purpose could be the number of transactions in
    which second requests were issued under the Hart-Scott-Rodino Act.

[^6]: The loss of a single competitor in even the most atomistic market
    is bound to lessen competition among the remaining firms. The
    purpose of §7 is only to interdict those mergers in which the
    lessening of competition is *substantial.*

[^7]: N.G.A. has previously pointed out the need to use different
    approaches when dealing with mergers in retail and manufacturing
    markets. *See*, Transcript of FTC Merger Workshop, October 23, 2002,
    at 28-29 (hereafter "2002 Transcript").

[^8]: Those who sell below cost, or at prices above cost but that do not
    result in a profitable operation, are not literally profitable
    competitors. The Agencies must determine whether these practices
    result from inefficiency or from an objective of eliminating
    competition. In these cases, enforcement action is necessary to
    prevent other competitors from being forced out of business due to
    the predatory practices of others and the loss of otherwise
    profitable retailers.

[^9]: Guidelines, §3, more specifically §§3.2, 3.3 and 3.4.

[^10]: *Id.*

[^11]: N.G.A. does not question the use of the §3 entry criteria --
    timeliness, likelihood and sufficiency -- when the Agencies
    formulate their opinion on the likely competitive effects of a
    merger. However, N.G.A. notes the position of the U.S. Court of
    Appeals for the D.C. Circuit, set forth in *United States v. Baker
    Hughes**, ***908 F.2d 981 (1990), that the government cannot shift
    the burden to the merging parties to prove that new entry *will be*
    timely, likely and sufficient.

[^12]: N.G.A. reads the question to include the enhancement and
    facilitation of using buying market power, as well as its creation.
    The question also seeks guidance on whether the treatment of buying
    and selling market power should be different. The nature of buying
    and selling market power are different in their marketplace effects,
    but the potential for consumer injury from the exercise of that
    power exists in both markets. The fundamental notion of §7 of the
    Clayton Act is that mergers having the potential to adversely affect
    competition in any relevant market should be prevented before actual
    anticompetitive affects occur. Thus, if the creation, enhancement or
    facilitation of market power flows from a merger, the Act is equally
    applicable to the possible exercise of market power in both buying
    and selling markets.

[^13]: N.G.A. assumes that the Agencies did not mean to limit the
    request for comments to the adverse affects that buyer market power
    can have on suppliers, because, obviously, those buyers'
    *competitors* "also are entitled to the protection of the antitrust
    laws."

[^14]: N.G.A. Submission at 2. The current problem of buying power
    growth has been triggered by the growth in Wal\*Mart's increasing
    share of grocery sales. Although buying power issues must be
    addressed in merger analysis, N.G.A. believes that the Agencies must
    also address the broader question of buying power itself *and its
    abuse,* even when that power has not resulted from a merger.

[^15]: Transcript at 29. The written submissions of all participants, as
    well as transcripts of all workshop sessions are available at the
    FTC web site
    [www.ftc.gov/bc/bestpractices](http://www.ftc.gov/bc/bestpractices).

[^16]: PIN (personal identification number) debit, or on-line debit
    transactions are those in which the customer enters a PIN in a key
    pad at the point of sale. No signature is needed. The other type of
    debit transaction is the signature, or off-line, debit transaction,
    which uses a process similar to that used for charge purchases,
    including a receipt signed by the customer. Concord EFS (in the
    process of being acquired by First Data Corp.) is the largest
    processor of PIN debit transactions. The signature debit sector is
    dominated by Visa, which also dominates the credit card segment of
    the EFT market.

[^17]: These fees are somewhat higher than those charged by Visa during
    the previous five months, following the settlement of a suit brought
    by Wal\*Mart and many other retailers against Visa and MasterCard.
    The new fees are lower, however, than those in effect prior to the
    settlement of the private litigation. As part of that settlement,
    Visa agreed to an interim price reduction for PIN debit
    transactions. It also agreed to discontinue the "honor all card
    rule," which forced retailers that accepted Visa's credit cards also
    to accept its debit cards, mainly signature debit cards.

[^18]: Interchange rates represent the largest portion of total
    transaction fees paid by retailers. Interchange rates are set by the
    credit card associations, such as Visa and MasterCard. Processors
    collect the interchange fees from the retailers and transmit them to
    the credit card associations.

[^19]: N.G.A. is indebted to members of the processing community for
    their cooperation and candor in answering questions about processing
    costs, fees and related issues. Discussions were held on the promise
    of anonymity.

[^20]: This statement further assumes that the processing system is not
    operating at its transactional capacity. Should additional
    transactional volume require additional investment, that cost would
    also be a fixed cost, not a variable cost.

[^21]: Virtually all fees in this country have a component that is based
    on the dollar value of the transaction. For example, Visa's most
    recently announced fee schedule, effective January 31, 2004,
    establishes a cost for supermarkets on POS debit transactions of
    1.23% of the value of the transaction. On a \$40.00 purchase, this
    amounts to \$0.48, and \$1.23 on a \$100.00 purchase. Despite this
    percentage formula, however, Visa caps the charge to supermarkets at
    \$0.35, regardless of the size of transaction size. Perhaps the only
    area in which it can be argued that there is a relationship with the
    size of the transaction is the risk factor, especially in the use of
    charge cards. But the risk of fraud falls on the banks, not the
    transaction processors.

[^22]: The EU has recognized the "disconnect" between transaction fees
    and processors' costs, and has ordered drastic reductions over a
    five-year period on all cross-border transactions. Interchange rates
    on debit transactions will have to be at a fixed rate; no portion of
    the fee can be based on the value of the transaction.

[^23]: In N.G.A.'s view, the legality of these Visa agreements can be
    challenged and remedied as violations of §1 of the Sherman Act. The
    remedy would not be subject to the type of criticism that has been
    leveled at the traditional remedy for differences in prices paid for
    goods to be resold. Some argue, although N.G.A. disagrees, that in
    the latter situation, the favored retailers' retail prices are
    forced to rise, thereby injuring consumers. In the case of EFT
    transaction fees, there is no evidence that Visa's favored retailers
    are passing the savings in transaction fees through to consumers in
    the form of lower grocery prices or other identifiable and
    measurable benefits. Ending the price disparity, therefore, would
    have no adverse effect on consumers. Of course, the issue can be
    avoided altogether by a remedy that requires Visa to lower its
    prices to all customers, rather than prohibiting the lower prices to
    the favored few.