Analysis to Aid Public Comment
The Federal Trade Commission ("Commission") has accepted for public comment from The Kroger Co. ("Kroger") and The John C. Groub Company, Inc. ("Groub") (collectively "the Proposed Respondents") an Agreement Containing Consent Order ("Order"). The Order, requiring the divestiture of three supermarkets to Roundy's Inc., is designed to remedy likely anticompetitive effects arising from Kroger's acquisition of substantially all of the assets of Groub.
Kroger is an Ohio corporation headquartered in Cincinnati, Ohio. It is the largest supermarket firm in the United States, with 1997 fiscal year sales in excess of $26 billion. Kroger operates more than 2,200 supermarkets and convenience stores in 37 states. Kroger operates 89 supermarkets in Indiana. Two Kroger supermarkets directly compete with four Groub stores subject to this transaction.
Groub, an Indiana corporation headquartered in Seymour, Indiana, operates 30 retail supermarkets in southern and central Indiana under the names "Jay C," "Foods Plus," and "Ruler." Groub sales for the 1997 fiscal year were approximately $252,000,000.
The proposed complaint alleges that the relevant line of commerce (i.e., the product market) is the retail sale of food and grocery items in supermarkets. Supermarkets provide a distinct set of products and services for consumers who desire one-stop shopping for food and grocery products. Supermarkets carry a full line and wide selection of both food and nonfood products (typically more than 10,000 different stock-keeping units ("SKUs")), as well as a deep inventory of those SKUs. In order to accommodate the large number of food and nonfood products necessary for one-stop shopping, supermarkets are large stores that typically have at least 10,000 square feet of selling space.
Supermarkets compete primarily with other supermarkets that provide one-stop shopping for food and grocery products. Supermarkets primarily base their food and grocery prices on the prices of food and grocery products sold at other nearby supermarkets. Supermarkets do not regularly price-check food and grocery products sold at other types of stores, and do not significantly change their food and grocery prices in response to prices at other types of stores. Most consumers shopping for food and grocery products at supermarkets are not likely to shop elsewhere in response to a small price increase by supermarkets.
Retail stores other than supermarkets that sell food and grocery products, such as neighborhood "mom & pop" grocery stores, convenience stores, specialty food stores (e.g., seafood markets, bakeries, etc.), club stores, military commissaries, and mass merchants, do not effectively constrain prices at supermarkets. These other stores operate significantly different retail formats. None of these stores offers a supermarket's distinct set of products and services that enable consumers to one-stop shop for food and grocery products.
Kroger and Groub are direct competitors in the retail sale of food and grocery items in supermarkets in Columbus and Madison, Indiana. Columbus has a population of approximately 34,000 people; Madison's population is around 40,000. According to the proposed complaint, the Columbus and Madison relevant markets are highly concentrated, whether measured by the Herfindahl-Hirschman Index (commonly referred to as "HHI") or by two-firm and four-firm concentration ratios.(1) The acquisition would substantially increase concentration in each market. Kroger and Groub would have a combined market share in the geographic markets of Columbus and Madison of near or greater than 66% and 54%, respectively. The post-acquisition HHIs would be 5,254 in Columbus and 4,262 in Madison. According to the proposed complaint, entry is difficult and would not be timely, likely, or sufficient to prevent anticompetitive effects in the relevant geographic markets.
According to the proposed complaint, Kroger's acquisition of Groub may substantially lessen competition in the relevant markets in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, by eliminating direct competition between supermarkets owned or controlled by Kroger and supermarkets owned or controlled by Groub; by increasing the likelihood that Kroger will unilaterally exercise market power; and by increasing the likelihood of, or facilitating, collusion or coordinated interaction among the remaining supermarket firms. Each of these effects increases the likelihood that the prices of food, groceries or services will increase, and the quality and selection of food, groceries or services will decrease, in the relevant sections of the country.
To remedy the antitrust concerns in these markets, under the terms of the Order, the Proposed Respondents must divest three supermarkets in the relevant markets. The Proposed Respondents must divest: (1) one Groub "Jay C" and one Groub "Foods Plus" in Columbus, Indiana, and (2) one "Kroger" in Madison, Indiana, to Roundy's, Inc. ("Roundy's"). Roundy's is one of the largest food wholesalers in the United States and an operator of company-owned supermarkets.
These divestitures include every Kroger supermarket or every Groub supermarket in each relevant market. Roundy's owns no supermarkets in the same market where it is acquiring one or more divested supermarkets from the Proposed Respondents. The specific supermarkets that the Proposed Respondents must divest to Roundy's are:
From the time Kroger acquires substantially all of the assets of Groub until the divestitures have been completed, the Proposed Respondents are required to maintain the viability, competitiveness, and marketability of the assets to be divested, must not cause their wasting or deterioration, and cannot sell, transfer, or otherwise impair their marketability or viability.
The Order, which was executed on July 13, 1999, specifically requires that the divestitures occur no later than 20 days after Kroger acquires substantially all of the assets of Groub or four months after the proposed Respondents signed the Order, whichever is earlier. The Order also requires Kroger and Groub to include rescission provisions in their up-front buyer agreements that allow them to rescind the transaction(s) if the Commission, after the comment period, decides to reject any up-front buyer(s). If Kroger divests the supermarkets to be divested prior to the date the Order becomes final, and if, at the time the Commission decides to make the Order final, the Commission notifies Kroger or Groub that the up-front buyer is not an acceptable acquirer or that any of the up-front buyer agreements is not an acceptable manner of divestiture, then Kroger or Groub must immediately rescind the transaction in question and divest those assets within three months after the Order becomes final. At that time, Kroger or Groub must divest those assets only to an acquirer that receives the prior approval of the Commission and only in a manner that receives the prior approval of the Commission.
The Commission's goal in evaluating possible purchasers of divested assets is to maintain the competitive environment that existed prior to the acquisition. When divestiture is an appropriate remedy for a supermarket acquisition, the Commission requires the parties to find a buyer for the divested stores. A proposed buyer must not itself present competitive problems. For example, the Commission is less likely to approve a buyer that already has a large retail presence in the relevant geographic area than a buyer without such a presence. The Commission is satisfied that the purchaser presented by the parties is well qualified to run the divested stores and that divestiture to that purchaser poses no separate competitive issues.
For a period of 10 years from the date the Order becomes final, Kroger is required to provide notice to the Commission prior to acquiring supermarket assets located in, or any interest (such as stock) in any entity that owns or operates a supermarket located in, Bartholomew or Jefferson counties, Indiana. Kroger may not complete such an acquisition until it has provided information requested by the Commission. This provision does not restrict Kroger from constructing new supermarket facilities on its own; nor does it restrict Kroger from leasing facilities not operated as supermarkets within the previous six months.
For a period of 10 years, the Order also prohibits Kroger from entering into or enforcing any agreement that restricts the ability of any person that acquires any supermarket, any leasehold interest in any supermarket, or any interest in any retail location used as a supermarket on or after July 13, 1999, to operate a supermarket at that site if such a supermarket was formerly owned or operated by the Kroger in Bartholomew or Jefferson counties, Indiana. In addition, Kroger may not remove fixtures or equipment from a store or property owned or leased in Bartholomew or Jefferson counties, Indiana, that is no longer in operation as a supermarket, except (1) prior to a sale, sublease, assignment, or change in occupancy or (2) to relocate such fixtures or equipment in the ordinary course of business to any other supermarket owned or operated by Kroger.
The Proposed Respondents are required to provide to the Commission a report of compliance with the Order within 30 days following the date on which they signed the consent agreement and every 30 days thereafter until the divestitures are completed; and Kroger must report annually for a period of 10 years from the date the proposed order becomes final. The obligations of Groub under the Order will terminate upon the date it becomes final.
The Order has been placed on the public record for 60 days for receipt of comments by interested persons. Comments received during this period will become part of the public record. After 60 days, the Commission will again review the agreement and the comments received and will decide whether it should withdraw from the agreement or make the Order final.
By accepting the Order subject to final approval, the Commission anticipates that the competitive problems alleged in the complaint will be resolved. The purpose of this analysis is to invite public comment on the Order, including the proposed sale of supermarkets to Roundy's, in order to aid the Commission in its determination of whether to make the Order final. This analysis is not intended to constitute an official interpretation of the Order nor is it intended to modify the terms of the Order in any way.
1. The HHI is a measurement of market concentration calculated by summing the squares of the individual market shares of all the participants.