GAO: FTC's Grocery Merger Policy Needs Review; Small Firms, Consumers May Be Short-Changed, Bond Says

9/26/2002

From: Craig Orfield of the Senate Committeee on Small Business, 202-224-4086

WASHINGTON, Sept. 26 -- A new General Accounting Office (GAO) report raising concerns that the Federal Trade Commission's policies on grocery and retail store mergers may short-change small businesses, today prompted Senator Kit Bond to call for a review of FTC divestiture agreements to analyze their impact on competition.

The report (GAO-02-793) focuses on how the FTC requires two merging companies to sell off or divest some of their stores when a merger would result in the consolidating firms gaining a dominant share of a retail market. It also reveals that the FTC "has not studied the effect" of its divestment strategies on the viability of buyers of divested assets or on competition in the marketplace.

"Small firms may be losing prime opportunities to gain a foothold in thriving retail markets under the FTC's merger guidelines known as 'clean sweep' and 'single buyer' strategies. Unfortunately, consumers also may be losing out on expanded choice and reduced costs as a result," said Bond, Ranking Member of the Senate Committee on Small Business and Entrepreneurship. "Small business owners have told us that in the grocery business when competition is limited to large, chain-store competitors, the result may be two Goliaths working together to exclude would be Davids from the market."

Both The Food Marketing Institute (FMI) and the National Grocers Association (NGA) -- the two largest associations that represent grocers -- have submitted comments to the FTC stating that its divestiture practices "have hindered the ability of small businesses to purchase divested assets," the GAO said.

Bond said he is troubled by the FTC's apparent reversal of policies in place a decade ago, whereby the agency ordered divested retail stores divided among several buyers. By the mid 1990s, the FTC began to favor a process known as "clean sweep" in which one of the parties must sell off all of its assets in a single geographic area to another party, known as a "single buyer." The strategy has been supported by the FTC on grounds that it essentially restores the retail marketplace to its previous state and, in turn, preserves competition.

"It seems that allowing small and independent firms to acquire part of the stores divested under these agreements would have a beneficial impact on competition as well as the consumer," Bond said. "Given the size and frequency of mergers in the retail grocery business, there is simply too much at stake to rely on a one-size fits-all formula when the FTC decrees that some assets must be spun-off before a merger can take place."

To illustrate the market impact of consolidation in the grocery industry, the Department of Agriculture's Economic Research Service (ERS), reviewed grocery store mergers and found that in 1992, the top-five supermarket chains had 19 percent of the national market. By 1999, that share had increased to at least 33 percent.

Additionally, ERS found that the number of chain supermarkets increased from 17,460 in 1990 in to 20,825 in 2000. Over the same period, the number of independent supermarkets declined from 13,290 to 11,005.

As a result, Bond urged FTC Chairman Timothy J. Muris to direct the agency's Bureau of Competition and Bureau of Economics to conduct a study of divestiture orders made final since 1994, focusing on orders that required divestitures in the retail sector. In accord with the GAO's recommendations, the review should assess those orders in terms of the viability of buyers of divested assets and competition in the marketplace following divestitures, Bond said.