# Presentation: 905116

## Federal Trade CommissionBureau of EconomicsGrocery Store Antitrust RoundtableMay 24, 2007

**Christopher J. MacAvoy**

*This presentation contains the author’s personal views and is not being submitted on behalf of any client of Howrey LLP.*

## How Should the FTC Analyze Grocery Retailing Mergers?

- Recognize The Dynamism Of Retail Grocery Markets
- Do Not Force Deals Into The Procrustean Beds Of The “One-stop Shopping” Market Definition Or *Staples*-Type* *Unilateral Effects
- Apply A Consistent (Or At Least Transparent) Approach To Geographic Market Definition
- Do Not Presume Store Closings Are Anticompetitive
- Revisit Efficiencies

## Recognize the Dynamism ofRetail Grocery Markets

- The *Kroger/Raley’s *and *Wal-Mart/Amigo* decisions (2002) were positive developments, but it is unclear whether the FTC’s approach has progressed in the meantime.
*Kroger/Raley’s* – FTC closed its investigation of Kroger’s acquisition of 18 Raley’s supermarkets in Las Vegas, which Raley’s had acquired only three years earlier as part of the FTC-ordered divestitures when Albertsons acquired American Stores.
- Kroger essentially was allowed to make the same acquisition Albertsons was not permitted to make three years earlier.
- The FTC would not have allowed Albertsons to divest the Las Vegas stores to Kroger in 1999.
- According to the FTC’s statement, “unanticipated entry and expansion” since the 1999 *Albertsons *consent order made it unlikely the Kroger/Raley’s transaction would be anticompetitive.

- “[T]he rapid growth of the market, along with the presence of four major competitors, vitiates any concern of potential coordinated interaction arising from the transaction.”
- Yet one could argue that the Las Vegas market did not change very much between 1999 and 2002.
- Las Vegas was already expanding rapidly in 1999, and Wal-Mart’s entry was imminent.
- As of 2002, there were five Wal-Mart Supercenters in Las Vegas. The other entrant cited by the Commission, King Ranch, had only three supermarkets with a fourth under construction.
- Still, the Commission’s 2002 assessment was clearly correct, and by 2005, there were *nine *Wal-Mart Supercenters and *nine *Wal-Mart Neighborhood Markets in the Las Vegas MSA.

*Wal-Mart/Amigo *– The FTC complaint included club stores in the relevant market, citing consumer survey evidence and pricing behavior:
- “In Puerto Rico a substantial portion of retail purchasers regard full-service supermarkets, supercenters, and club stores as reasonably interchangeable for the purpose of purchasing substantially all of their weekly food and grocery shopping requirements in a single shopping visit.”
- “In Puerto Rico, full-service supermarkets, supercenters, and club stores” price-check one another “often” and modify their prices based on those of nearby full-service supermarkets, supercenters, and club stores.
- Inclusion of club stores in the relevant market was not unprecedented.  *See The Grand Union Co.*, 102 F.T.C. 812, 1041-47 (1983) (concluding, on full hearing record, that the product market in a supermarket merger included all retail grocery stores, not just supermarkets).

- The FTC staff should not rely on static analysis of current market shares, nor should the staff presume that retail grocery markets are slow to change or generally characterized by high barriers to entry.
*Kroger/Winn-Dixie (2000) *– an egregious example:  Winn-Dixie wanted to sell its ailing Dallas-Fort Worth Division to Kroger. The parties abandoned the transaction after the FTC filed for a preliminary injunction. Two years later, Winn-Dixie exited DFW in pieces; many of its stores were permanently shuttered.
- The parties argued that DFW was growing rapidly and attracting new entry – principally Wal-Mart Supercenters and Neighborhood Markets – and incumbent operators were also expanding.
- At the time of the FTC investigation, Wal-Mart had 14 Supercenters or Neighborhood Markets in DFW (nine in Dallas; five in Fort Worth). Available evidence indicated that Wal-Mart had major expansion plans in DFW.

- The FTC’s P.I. brief devoted two scant paragraphs to entry and concluded:
- 	“none of the entrants is likely to attain within two years the scale needed to counteract the anticompetitive effects of this acquisition.”
- But by 2002, Wal-Mart had ***41**** *Supercenters and Neighborhood Markets in DFW (27 in Dallas; 14 in Fort Worth).
- And by 2005, there were ***88**** *Wal-Mart Supercenters and Neighborhood Markets in DFW, and Wal-Mart was by far the largest grocery retailer in Dallas and Fort Worth, with a share of nearly 35 percent (double Kroger’s).  [Source: Trade Dimensions *Market Scope – 2006 Mid-Year Update*]

- The FTC should continue the trend suggested by its *Kroger/Raley’s *decision and question long-held assumptions that grocery retail markets are static and that there are high barriers to entry.
- In the past there was too much focus on the purported necessity of large-scale entry or “critical mass.”
- Entry and expansion by Wal-Mart is not the entire story; other firms are also entering, expanding, or repositioning.
- Many grocery retailers now operate a portfolio of formats; for example:  supercenters; limited-assortment/price impact; warehouse-format; small-footprint/urban; and convenience/gasoline stores.   Repositioning is a continuing process for grocery retailers.
- Conventional supermarkets continue to adjust their offerings and strategies to react to consumer trends and competitive opportunities.

## Do Not Force Deals Into The Procrustean Beds Of The “One-stop Shopping” Market Definition Or Staples-Type Unilateral Effects

- The FTC should continue to reexamine the “one-stop weekly grocery shopping” product market definition.
- The one-stop weekly grocery shopping theory assumes the existence of substantial transaction costs for consumers to switch purchases to formats other than conventional supermarkets.
- Today, there is no unique core of grocery products that is available only at supermarkets.  All product categories – including meat, produce, and other perishables – are available in “alternative” format grocery stores, including club stores.  Alternative-format grocery retailers have closed the quality gap.

- At current prices consumers are already shopping at alternative-format grocery stores. Whatever transaction costs may be associated with further disaggregating consumers’ grocery purchases may be modest.
- The median size of a supermarket transaction in 2006 was only $29.  Many grocery store visits are fill-in trips, not weekly stock-ups.  [Source: Food Marketing Institute, *FMI Speaks (2007)*]
- In a recent FMI survey, when consumers were asked where they shopped for food in the past 30 days, 87% identified a supermarket – a figure that has been steadily declining – and 44% mentioned a supercenter (up from 38% in 2005 and 41% in 2006). [Source: Food Marketing Institute, *FMI Trends 2007*.]
- The same survey asked consumers to rank the factors that drive their grocery store choices:
- Low prices	                  31%
- Convenient location            13%
- Sales/specials	                    9%
- High-quality produce             7%
- Conventional supermarkets do not have a lock in any of these areas; in fact, the survey cited ongoing declines in supermarkets’ share of several food categories, including cereal, frozen food, meat, and poultry.

*Wal-Mart/Amigo *suggests the FTC may no longer view SKU-overlap and price-checking history as definitive evidence on market definition
- The FTC’s reference to consumer survey evidence was tantalizing but incomplete.  It is unclear whether the Puerto Rico surveys looked at switching in response to a price increase or simply asked consumers where they currently shop.
- Survey evidence – including responses to questions on switching – has been presented to the staff in past supermarket merger investigations.
- A consumer survey presented to the staff during the 1990s found the following:
- More than half of the surveyed households said they would definitely or probably start or increase shopping at club stores if prices at conventional supermarkets increased.
- 22% of survey respondents shopped at a club store at least once a month.
- 65% of respondents said that a club store would be easy to reach.
- Club stores attracted some of the most desirable grocery shoppers – those who spend the highest amount per week on groceries.

- Econometric evidence also has been presented in grocery retail merger investigations, but it is unclear whether it has been given weight.
- A multi-market econometric analysis presented to the staff in a grocery merger investigation found, among other things, that the presence of club stores in a market exerted a significant downward effect on supermarket prices.
- With the tools at its disposal, there is no reason for the FTC staff to fall back on “one-stop shopping for food and groceries” as a catch-phrase to define the relevant market.
- The FTC has already reached this conclusion in its analysis of department store mergers.  *Federated Department Stores/The May Company*.

**Every Retail Merger Is Not A Reprise Of *****Staples***
- The FTC should be wary of attempts to over-extend unilateral effects analysis and force every retail merger into the *Staples *mold.
*Kroger/Winn-Dixie *again illustrates the danger. The staff concluded, and the Commission agreed (5-0), that Kroger and Winn-Dixie were substantially differentiated not only from club stores and other alternate format grocery retailers, but also from other conventional supermarket competitors in Dallas-Fort Worth.
- The staff concluded that Kroger and Winn-Dixie were differentiated from other conventional operators in DFW such as Albertsons, Safeway, and Minyards (a regional chain), as well as from Wal-Mart Supercenters and Neighborhood Markets.
- Though Winn-Dixie was a fading presence in DFW, the staff apparently concluded that Winn-Dixie uniquely constrained Kroger’s prices.

## Apply A Consistent, Transparent Approach To Geographic Market Definition

- At one time, it was generally accepted that metropolitan areas (MSAs) were relevant grocery retail markets, in the absence of physical barriers that restricted cross-shopping.
- Trade areas of grocery stores in an MSA typically form an overlapping and continuous grid, such that no store or group of stores could profitably sustain an anticompetitive price increase.
- Many of the FTC’s grocery merger complaints in the 1980s and early/mid-1990s defined the relevant markets as encompassing MSAs.

- The FTC’s approach to geographic market definition became less consistent after the mid-1990s. While this may reflect greater attention to the unique facts of each case, some of the results appear arbitrary.
- In some cases the staff focused on small neighborhoods, but the factors that led the staff in that direction were not clearly articulated.
- FTC complaints offer little guidance, especially when they define the relevant market as “the XYZ metropolitan area and smaller markets contained therein.”

## Do Not Presume Store Closings Are Anticompetitive

- It is not unusual for the acquiring firm to have plans to close underperforming stores after the merger.  Is this evidence of anticompetitive effects – a reduction in output?
- The acquiring firm hopes it will be able to retain a significant percentage of the closed stores’ customers, but does this prove the acquiring company could raise prices in an anticompetitive manner and still retain those customers?
- In other industries, post-merger closures of old, poorly located, underperforming assets are not summarily condemned and indeed may be seen as procompetitive.

## Revisit Efficiencies

**	****“****The efficiency claims that defendants asserted before the Commission are largely unsubstantiated, not merger-specific, and in any event are unlikely to be passed on to consumers. Those efficiency claims cannot save this transaction.”**
**	*****FTC’s Preliminary Injunction Brief in******Kroger/Winn-Dixie (2000)***

- Why don’t grocery retailers and their counsel push harder on efficiencies in FTC merger investigations?
- The government’s “scorched-earth” treatment of efficiencies in cases such as *Staples*, *Cardinal Health*, and *Heinz *deserves some of the blame.
- For many practitioners, the message of these and other matters was: don’t waste time and money on an elaborate efficiencies pitch at the FTC.
- This is not to say that parties in supermarket mergers have “punted” on efficiencies. Too often, though, there has been little constructive engagement with the staff.

- Efficiencies asserted by parties in supermarket merger investigations have included scale and scope economies in distribution and administration, reductions in cost of goods, and expansion into new markets.
- Distribution savings may include:
- Overhead (e.g., reduced procurement staff, reduced administrative overhead)
- Purchasing improvements (e.g., private label, seasonal goods, general merchandise/HBC, pharmacy, corporate contracts)
- Freight savings
- Other savings in operations may include:
- Discontinued corporate systems
- HQ and division office overhead
- Advertising
- Improvements in store operating costs
- Improvements in engineering standards
- Warehouse parts and supplies

- Cost savings in grocery retailing mergers are real and substantial, but do not appear to have fared well in the *Guidelines’ *efficiencies gauntlet (“not proven . . . not big enough . . . not merger specific . . . you haven’t demonstrated that they will be passed on”).
- In grocery retailing, more so perhaps than in other industries, there is a heavy focus on “best practices,” and the language of best practices tends to permeate retailers’ merger synergies analyses.
- In the past the staff may have too readily dismissed best-practice efficiencies as not merger-specific.

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