FOOD 1NDUSTR% MERGERS : ANKU LOOK Chairperson: Bill Lesser, Cornell University The Structural and Performance Effects Of Retail Mergers by Bruce W. Marion Agricultural Economist Economic Research Service, USDA and Professor University of Wisconsin, Madison We are in the midst of a tidal wav’e National Tea, the number five chain of mergers. The distinctive feature of in Minneapolis , acquired Applebaums, the the present merger wave is the large number three chain-- resulting in a number involving huge corporations. merged market share about equal to the Observers of the food manufacturing and leading chain. I opposed the merger food distribution industries have not because Applebaums was one of the strong- previously seen mergers on the scale of est competitors in the market and Nation- Nabisco-Standard Brands, Beatrice’s acqui- al Tea had a proven ability to turn sition of Esmark which had not yet diges- “silk purses into sow’s ears.” I was ted Norton Simon, Nestle’s acquisition of afraid National would do the same with Carnation, R. J. Reynold’s acquisition of Applebaums, a rather unusual basis for Heublein, Grand Union’s acquisition of opposing a merger. The merger was al- Colonial Stores, Kroger’s acquisition of lowed and National Tea began to work Dillon, and most recently, American its magic. By 1983--four short. years Store’s acquisition of Jewel Cos., the later-- the Applebaum and National Tea biggest in the history of food retailing. stores were sold to Gateway Foods (the And this is far from a complete list. Applebaum family was also involved). The market share of the merged company I have been asked to talk about the had plunged to about.one-third the level effects of retail mergers. As some of at.the time of the merger. Even econom- you may know, I was a pro bono economist ists are right once in a while. for the government in challenging Nation- al Tea’s acquisition of Applebaums and Little did I know that. a similar Grand Union’s acquisition of Colonial. scenario would be played out in the Both mergers occurred in late 1978 or Grand Union case. There were 13 SMSAS early 1979. The National Tea-Applebaums involved in that case--one of which merger was horizontal; Grand Union-Colon- Colonial had exited by the time of the ial was a market extension merger. case. Of the remaining 12, Grand Union Journal of Food Distribution Research February 85/page 79 has since withdrawn from seven, includ- following ten-year period was one of ing two where they were the leading firm tough enforcement of the merger laws by (Norfolk and Newport News) and another the antitrust agencies. Overall merger where they were second . In the five activity increased during this period; SMSAS in which Grand Union still oper- however, the mergers were channeled to ates, their market share has dropped by smaller companies. From 1975 through more than half in two and by nearly 25 1978, the top 20 chains were once again percent in Atlanta, the most important the major acquirers. Possibly because market in the acquisition. Only in Fay- the Grand Union-Colonial merger was etteville and Raleigh-Durham has Grand challenged and initially found illegal, Union been able to hang onto the market large chains cooled their merger appe- share it bought. From the tradespeople tites somewhat in the next four years, I talk with, it. t30und8 like Grand Union and especially during 1981 and 1982. In raided the assets of Colonial, It may 1983, the large chains jumped back into have been a profitable investment for Sir the merger arena with enthusiasm. And, James Goldsmith and Cavenham--I don’t large chain mergers in 1984 may even know--but it has been devastating for surpass those in 1983. Colonial as a chain. Antitrust enforcement. today is very What has been the effect on competi- selective; there is little interest in tion? It really depends on who took over challenging mergers. Thus, evidence con- the Grand Union stores and market share, cerning the effects of mergers during an which I have not attempted to track. If earlier period may provide no basis for they went to fringe companies so as to judging the effects of the present wave weaken the oligopolistic core in these of mergers. Because of this, I want to markets, competition may have been spend some time discussing the changes strengthened. If the stores and sales in antitrust enforcement and the key went to the market leaders, competition factors that may influence future merger may have been weakened. It is clear that enforcement act.ivit.ies. a viable competitor has been lost in at least six SMSAS. Since the mid 1970s, the antitrust agencies have increasingly turned their It is difficult to evaluate the ef- backs on mergers, large and small. In fects of retail mergers, in part because the last two or three years, even sub- this depends upon the number and type of stantial horizontal mergers have been mergers that are allowed by the antitrust ignored. In my home town of Madison, laws and the agencies responsible for Wisconsin, the number one chain, Eagle, enforcing those laws. Since the Clayton was recently acquired by the number two Act was amended by the Cellar-Kefauver chain, Kohls (which was acquired by A&P Act in 1950, there has been market varia- in 1983). The estimated market shares tions in the int.erpretat.ionand enforce- of these chains in 1983 were 21.5 and ment of this law. Acquisitions of food 17.4 percent (Metro Market Studies, retailing stores and companies from 1949 1984). Although their combined market to 1983 are shown in Figure 1 and Appen- share is probably something less than 39 dix Table A. The retail sales (in 1967 percent because of the sales gains of dollars) acquired through mergers peaked warehouse stores and one or two store in 1967-68 and has had a series of peaks closings, the merged chain clearly domin- from 1978 to the present. ates the market. Sentry is the only other market-wide operator of convention- The retail sales acquired by the top al supermarkets and superstores is a 10 and top 20 grocery chains are also voluntary group. plotted on Figure 1. Whereas these chains accounted for a high percentage In California, Lucky recently ac- of the sales acquired from 1949-1964, the quired Smith Food King with no response February 85/page 80 Journal of Food Distribution Research from antitrust agencies. The two were was number one (17.8%) and Smith Food competitors in four SMSAS; of particular King number two (15.0%) in 1983 accord- concern is Santa Barbara where Lucky ing to Metro Market Studies. Figure 1. Acquisitions of Food Retailers, 1949-83 (amounts in millions of 1967 dollars) 4000 4 3600 I I i ,3200 I 2800 2400 A, 2000 t ~1600 i I o 1200 800 I 400 k II (1 Journal of Food Distribution Research February 85/page 81 In Birmingham, Alabama, Brunos, the ler) . This argument was reinforced by number one chain with 22 percent of the William Baumol’s new theory of contest- market was allowed to acquire ten A&P able markets, which emphasizes that stores in 1979. A&P ranked fifth in the concentration has no effect if there is market according to Metro with a 7 per- completely free entry and exit into an cent share. The list goes on. Clearly, industry. In spite of its extreme and the precedent established by the Von’s simplistic assumptions (see Shepherd’s case has been abandoned. Since the Feder- critique), contestable market theory al Trade Commission has been primarily has attracted followers in part because responsible for antitrust enforcement in of its mathematical elegance. the food distribution industries, it is primarily this agency that must be credi- This debate will not soon end. The ted with opening the merger flood gates. stakes are too high. Perhaps the most Although the Commission largely endorsed telling evidence comes from studies of the Merger Guidelines issued by the Jus- concentration-price relationships. If tice Department in 1982, it has subse- the revisionists are right, prices in quently ignored horizontal mergers that concentrated markets should not be high- seriously violated the Guidelines. er and might be lower than prices in unconcentrated markets. Either a nega- What do we make of this? Is the tive or no relationship between concen- recent lapse in enforcement simply a tration and prices would be expected. reflection of the political philosophy of this administrat.ion or are there legal or Roughly twenty studies have exam- economic explanations? Although one can ined concentration-price relationships chalk up the FTC’s paralysis to politics, across local markets for gasoline, of equal importance is the economic Welt- drugs, groceries, bread, beer, business anschaung held by Chairman Miller and his loans, life insurance, auto loans and economist colleague, Commissioner Doug- other product-services. After reviewing las. This is the first time an economist these studies, Greer (1984) concludes, has served on the Commission; now we have II.*. prices and concentration are two in extremely powerful positions. As positively related” (p. 296). F.~ a result, economic doctrine probably has Scherer agrees. In the 1980 edition more influence over the present Commis- of his highly respected book, Scherer sion than anytime in history. Armed with comments on the various studies relating the new theories and empirical evidence prices to concentration: of “revisionist” industrial organization economists, the Commission has charted a Although one can, as always, new course for ant.it.rustenforcement. quarrel with the particular samples, controls, and methods Let me depart for a moment to com- employed in these studies, ment.