Corporate & Transactions

There was a time when a quick estimate of market shares might have been enough to provide a reasonable assessment of antitrust risk for a potential combination between two brick and mortar retail chain stores.

Not anymore.

The playbook for evaluating competitive concerns from a potential combination of two brick and mortar retailers has evolved considerably. In recent years, the Federal Trade Commission (FTC) has reviewed proposed transactions between well-known retailers, including Office Depot/OfficeMax (2013), Dollar Tree/Family Dollar (2015), Albertsons/Safeway (2015), Walgreens/Rite Aid (2017), Bass Pro Shops/Cabela’s (2017), and 7-Eleven/Sunoco (2018). Public statements from recent transactions investigated by the FTC confirm that the agency is using more sophisticated data-driven tools during investigations with important implications for future deal activity.

As the tools used by the U.S. antitrust enforcement agencies have evolved, so too must the tools used to gauge antitrust risk at the pre-deal stage. These risks include the potential for a long and costly antitrust investigation, including compliance with a Second Request (a giant subpoena for documents, data, and other information from the merging parties), the potential that divestitures may be required to resolve competitive concerns raised by the agency, as well as the possibility that the agency may seek to block the transaction entirely.

That’s why brick and mortar retailers contemplating a merger need to adjust their thinking about pre-deal risk assessment. A modern approach to retail M&A involves five key areas, including:


Consumer substitution patterns—not market shares—are central to assessing the antitrust risk of a potential retail merger. In an investigation, the FTC is trying to figure out whether the consolidation will “substantially lessen competition.” Naturally, a key aspect of answering that question is to determine how closely the two retailers compete with one another. Closeness of competition is evaluated along a variety of dimensions, including geographic proximity as well as similarities in pricing, promotion, and product assortment. The closer two retailers are along these dimensions, the more likely it is that the FTC will conclude that consumers view them as close substitutes.

A before/after analysis is a standard practice at the antitrust agencies for assessing customer substitution patterns and whether the proposed transaction is likely to give rise to competitive concerns. One of the most common types of before/after analysis used by the FTC is to compare the parties’ store-level sales before and after a competitor store opens nearby. In undertaking this type of analysis, the agency is attempting to develop evidence to answer questions related to consumer substitution patterns, such as: How big of a hit to sales does the store suffer when a competitor store opens nearby? Is the hit to sales from entry bigger for some categories of products than others? Is the hit to sales bigger when one specific competitor (e.g., one of the parties to the proposed transaction) enters compared to other competitors?

In general, if the hit to sales from entry by a variety of competitors are all similar, then it is more likely the agency will conclude that consumers do not view the parties to the proposed transaction as particularly unique or especially close substitutes in the marketplace. The same is true if the hit to sales from the entry is small.

In a FTC merger review, the impact on sales from a competitor’s entry are translated into consumer substitution patterns, which are referred to, in antitrust jargon, as “diversions” or “diversion ratios.” The amount—and value—of that diversion provides a numerical measure used by the FTC to assess how closely the parties to the proposed transaction compete. The agency views “high” diversion ratios as indicating that those two retail chains are close competitive alternatives for consumers. Consequently, antitrust risk typically increases if the FTC, using its own analytical framework, would likely find high diversion ratios between the parties to the proposed transaction.

Evidence about the extent of customers’ cross-shopping across multiple retailers is also useful, but must be interpreted with care. While cross-shopping often reflects consumers’ ability and willingness to substitute purchases of the same goods across different retailers, such cross-shopping could well reflect that consumers satisfy different needs at different retailers or through different channels of sale.


Online sales as a percentage of overall retail sales continues to grow significantly. Few brick and mortar retailers have escaped at least some competitive pressure from e-commerce retailers. The constraint from online retailers, however, is not the same in every retail setting. Nearly everyone buys online these days, but not everyone considers buying everything online all the time—or even most of the time for certain types of retail purchases.

That has implications for the antitrust analysis of retail mergers. In some retail settings, like the retail sale of office supplies (Office Depot/OfficeMax) and children’s toys (Toys ‘R Us), the FTC has credited online competition as a constraint on brick and mortar retailers. But in other retail settings, like the sale of tailored men’s suits (Jos. A Bank/Men’s Wearhouse) and supermarkets (e.g., Albertsons/Safeway, Ahold/Delhaize), the FTC has not viewed online retailers as a significant constraint on brick and mortar retailers despite the growth of online sales. Therefore, determining how much credit the antitrust agency is likely to give online retail competition is critical.


Understanding the business rationale for the choice of pricing strategy is a central issue in the antitrust agency’s competitive assessment of a proposed transaction. While zone-level or store-level pricing may be driven by differences in costs to serve, the FTC typically considers prices, pricing policies, and price zones that vary locally based on the presence or absence of key competitors to be a major factor in their antitrust analysis. A price zone allowing for higher prices when a competitor (or type of competitor) is absent, or lower prices when the competitor is present, is likely to affect how the agency defines the relevant set of competitors and is almost always a critical factor in the agency’s ultimate assessment of the competitive effects of the merger itself.

National and omnichannel pricing—in which prices and promotions do not vary across stores, e-commerce, and hardcopy mailings such as catalogs—may mean there are different competitive constraints compared to localized pricing strategies. Indeed, it is not uncommon for parties to a proposed transaction to point to their national-pricing policies to explain why the transaction will not change pricing in any local area where the parties both have stores. But even here, the reason for the choice matters.

National pricing may be driven by a desire to provide a singular experience because many consumers purchase across multiple stores and through multiple channels—both in-store and online. A decision to use national pricing may also be driven by vigorous competition from omnipresent e-commerce alternatives. National pricing may also stem from vigorous competition from thousands of diverse mom-and-pop retailers across the country. Those are benign to affirmatively helpful facts for parties that propose to merge.

National pricing, however, is not a silver bullet. If the reason for national pricing is that the other party to the transaction has a nationwide, or nearly nationwide, footprint of stores, making nationwide pricing an efficient way to price against that key competitor, national pricing may raise antitrust scrutiny.


The ability to lower costs often motivates a potential combination. That’s almost always a good thing because it is important to be able to articulate a strong pro-competitive rationale for the proposed transaction. The focus of the antitrust agency’s investigation is not on how the consolidation will benefit the merging parties, but rather: “How will the transaction benefit consumers?” A merger premised on lowering costs and passing those savings on to consumers through lower prices is viewed favorably by the FTC.

But not all synergies are inevitably pro-competitive. While cost synergies are often viewed as pro-competitive, synergies that stem from transaction-related store closures can create a red flag.


One thing that has not changed over time is the use of the traditional investigation tools and types of evidence. In retail merger investigations, these include: documents discussing competition and efficiencies that are submitted with the merging parties’ premerger notification Hart-Scott-Rodino filings; interviews of competitors of the merging parties and other industry participants; and the merging parties’ ordinary-course documents focusing on how the merging parties assess competition, their competitors, and, yes, their market shares.

The five areas described here represent a modern, pre-transaction risk assessment approach that is aligned with the analytical tools the antitrust agencies rely on when reviewing a merger. The tools described here play a key role in assessing internally the competitive issues that may arise during the antitrust merger-review process and that affect the ultimate outcome of that review.

This original version of this article appeared in Retail Leader.

On January 6th, the Mexican Government published a new list of apparel and textile goods with “estimated prices.” These prices are the minimum reference price that goods ranging from raw materials to finished products may be imported into Mexico and is categorized by Harmonized Tariff Schedule classification number. Shipments entered below these prices will be considered “undervalued” and would likely be subject to an investigation and potential penalties. If the parties to the transaction are related entities, this may also trigger larger questions as to the intercompany pricing (i.e., transfer pricing policy) behind the transactions as well. The measure entered into force on January 18, 2016. The announcement is attached here (in Spanish). Continue Reading Mexico Publishes List of Minimum Reference Price for Textile and Apparel Imports

General Growth Properties has completed the spin-off of 30 shopping malls into a publicly traded real estate investment trust called Rouse Properties, the Chicago-based company announced.

The properties in question are scattered across 19 states and are located in either small U.S. cities or in what are viewed as second-tier centers in larger cities, according to Bloomberg. The transaction, which was approved by General Growth’s board in December, allows the company to focus on managing properties with higher rents and tenant sales as it continues to pay down debt, Bloomberg reports.

In 2009, General Growth filed restructuring plans for itself and most of its subsidiaries to exit bankruptcy. The company filed for Chapter 11 protection in April of that year with almost $27 billion in debt. It exited bankruptcy in November 2010.

It was General Growth’s 2004 purchase of Columbia, Maryland–based Rouse Company for $7.2 billion that helped fuel its financial problems. General Growth took on debt to pay for that acquisition, then was unable to refinance that debt once the recession hit, according to the Baltimore Business Journal. General Growth is the second-largest U.S. mall operator behind Simon Property Group. 

Content for this post was provided by Daniel A. Sasse, partner in the Orange County office of Crowell & Moring.

As previously reported, Simon Property Group, Inc. recently acquired Prime Outlets Acquisition Company, LLC. This gained the attention of the FTC, which determined that the merger would result in reduction or elimination of competition among outlet centers in southwest Ohio; Chicago, and Orlando. Now, as part of a settlement with the FTC, Simon will divest some of its property and modify certain tenant leases.

Continue Reading Simon Reaches Agreement with FTC over Prime Outlets Acquisition; Comments Due December 10

Based on my recent survey of retail experts, retailers are starting to feel cautious optimism about the industry and its recovery. Current trends in the industry include luxury retailers bringing their lower-priced lines and outlet stores out of the shadows and into the forefront. Retailers are focusing on inventory management to meet changes in customer demand and preferences. They are looking outside the U.S., pursuing global opportunities in more stable, less saturated markets. Retailers are also looking for effective ways to use social media and other technological tools. Another trend in shopping centers across the country is an increase in non-traditional tenants moving into vacant retail space.

At the link is a recent article I wrote on recent trends in retail.

Case: Federal Trade Commission v. Whole Foods Market, Inc., No. 07-5276 (D.C. Cir. 11/21/08)

The One Sentence Summary: The Federal Trade Commission sought a preliminary injunction to block the merger of premium supermarket chains Whole Foods and Wild Oats; after the trial court denied the injunction and the merger took place, a sharply divided three-judge panel of the Court of Appeals for the District of Columbia Circuit reversed the trial court’s order, possibly signaling a lower threshold for the FTC to obtain a preliminary injunction to block potential mergers.

What They Were Fighting About: There were two key issues in this case: (1) the standard the FTC must meet in order to show it is entitled to preliminary injunction to block a merger; and (2) what role customers’ particular preferences play in determining what is a “relevant market” (the market in which competition takes place) for purposes of antitrust analysis.

Before their merger, Whole Foods and Wild Oats were the largest operators of what the FTC called “premium, natural and organic supermarkets” (or “PNOS”). In February 2007, they announced they would be merging, a move the FTC alleged would create monopolies in eighteen cities where Whole Foods and Wild Oats operated the only PNOS. The FTC sought a temporary restraining order and preliminary injunction to stop the merger while it conducted an administrative proceeding to decide whether to block the merger permanently under the federal antitrust laws. The FTC argued that in order to assess the anticompetitive effects of the merger, the “relevant market” included only PNOS. The defendants disagreed, arguing that PNOS compete in a larger market including other grocery stores and supermarkets and, accordingly, that the merger did not pose antitrust concerns.

The U.S. District Court for the District of Columbia denied the injunction, holding that the FTC failed to meet the standard required to obtain a preliminary injunction under the Federal Trade Commission Act, 15 U.S.C. section 53(b). Specifically, the District Court held that because PNOS compete with regular supermarkets and grocery stores, PNOS were not themselves a distinct market in which Whole Foods and Wild Oats would actually have market power. Thus, the District Court reasoned, the FTC was not entitled to an injunction because it could not show that it was likely to succeed on the merits of its case.

Although the merger actually took place in August 2007, the FTC nevertheless appealed to the U.S. Court of Appeals for the District of Columbia Circuit, arguing that the District Court applied the wrong legal standard. On July 29, 2008, a three-judge panel of the Court of Appeals reversed, sending the case back to the District Court for further proceedings. Although it first appeared that there was a majority opinion filed by Judge Janice Rogers Brown, the Court of Appeals subsequently issued an amended opinion on November 21, 2008 that made it clear that Judge David S. Tatel concurred in the judgment only, not Judge Brown’s opinion. Thus, although two Circuit Judges formed a majority in reversing the decision of the District Court, there were three separate opinions filed: Judge Brown’s opinion, Judge Tatel’s opinion concurring in the judgment, and Judge Brett M. Kavanagh’s dissenting opinion. Accordingly, it is difficult to know what weight will be given to the decision of the Court of Appeals and its reasoning in future cases.

Both Judge Brown and Judge Tatel stated that section 53(b) set a lower threshold for the FTC to obtain a preliminary injunction than, say, a private litigant seeking an injunction would face. Both also concluded that the FTC will usually be able to obtain a injunction by raising questions as to the merits “so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation. . . .”

Judge Brown characterized the proper analysis as to whether a merger should be enjoined as a “sliding scale” under which a court should balance the FTC’s likelihood of succeeding on the merits of its case against the “equities” resulting from an injunction. Under this sliding scale test, Judge Brown determined that the District Court had erred by underestimating the FTC’s likelihood of succeeding on the merits of its case. Specifically, the District Court had considered only “marginal consumers” — those who would switch to other non-PNOS stores in response to a price increase by PNOS. According to Judge Brown, the District Court should have also considered “core customers” of the PNOS — those who were committed to natural and organic products, health and ecological sustainability. Judge Brown seemingly concluded that because these core customers were unlikely to switch to standard grocery stores should prices increase, the relevant market could be limited to PNOS. Moreover, the FTC’s evidence suggested that although Whole Foods and Wild Oats competed with other grocery stores on prices of “dry goods,” they did not compete with regard to the natural and organic perishable goods that made up the bulk of their business.

Judge Tatel relied on evidence presented by the FTC suggesting that customers did not consider the products of PNOS reasonably interchangeable with those of other stores. He also cited evidence that Whole Foods and Wild Oats could sustain “statistically significant non-transitory increase in price,” including evidence that indicated that defendants raised their prices when they operated the only PNOS in particular cities.

Notably, the majority rejected defendants’ arguments that the issue was moot because the merger had been consummated. The majority noted that if a preliminary injunction issued, the status quo could be preserved (for example, by preventing future actions taken to close additional stores).

Although the majority held that the District Court erred, the Court of Appeals remanded for further proceedings because the District Court had not yet examined the “equities” involved in granting a preliminary injunction. Thus, the Court of Appeals directed the District Court to examine and weigh those equities against the FTC’s likelihood of success.

Judge Kavanagh strongly dissented, accusing the majority of diluting the requirement that the FTC show a likelihood of success on the merits. Judge Kavanagh further criticized the majority for relying on older cases such as Brown Shoe Co. v. United States, 370 U.S. 294 (1962) while ignoring more modern cases such as Munaf v. Geren, 128 S. Ct. 2207 (2008), which Judge Kavanagh argued rejected the “serious questions” standard cited by the majority.

On November 21, 2008, the same day the revised opinions were issued, the Court of Appeals denied Whole Foods’ petition to have the entire Court of Appeals rehear the appeal en banc. In denying the petition, two Circuit Judges expressly stated that the judgment set no precedent beyond the facts of the case.

Key Points:

  • Although there is no majority opinion, both Judge Brown and Judge Tatel suggested that the FTC should be entitled to a presumption (which defendants could rebut) that an injunction should issue if the FTC can establish that there are “serious, substantial, difficult and doubtful” questions as to the merits.
  • The opinions also indicate that even if a merging businesses compete for customers in a larger market, a court may consider whether they have “core,” dedicated consumers that prefer their specialized or premium products even when prices increase.
  • Because there is no actual opinion of the Court of Appeals stating the bases for reversing the District Court’s denial of an injunction, it is unclear what weight the D.C. Circuit, let alone other federal courts, will give to the reasoning set forth in Judge Brown’s and Judge Tatel’s opinions.