Top 10 Antitrust Issues in CPG Mergers
Most consumer packaged goods transactions close without antitrust issues. But a 2018 lawsuit filed by the Federal Trade Commission (FTC) to block a deal that would have combined two branded cooking oils is a reminder that antitrust concerns can delay, or even stop, CPG deals from happening.
Here, we identify 10 key issues relating to how the U.S. antitrust agencies—the FTC and Department of Justice (DOJ)—analyze CPG mergers.
- High-End vs. Low-End
Antitrust agencies often define the market for the merging parties’ products quite narrowly. In one notable example, the FTC defined a market limited to “intense mints” (think Altoids), which excluded traditional mints (think Life Savers).
The antitrust agencies often defined markets around product sub-segments based on distinct prices, characteristic, or measures of quality within a broader category. Frequently, the antitrust agencies segment CPGs along a spectrum from high-end to low-end products.
On the high end, the agencies have defined markets such as premium priced vodkas and superpremium ice cream.
At the low-end, the agencies have drawn market boundaries around value shampoo and conditioner. Recently, news outlets reported that the FTC is scrutinizing E. & J. Gallo’s proposed acquisition of various beverage products, including low-priced wines.
- Pre-Deal Pointer: The attributes of the parties’ products and rivals’ products, such as price-points, quality, and industry recognition, may suggest market boundaries around a sub-segment. Analyzing ordinary course of business reports on consumers’ price sensitivity and switching/loyalty studies may provide useful insights on these topics.
- In-Store Product Location
A CPG’s shelf-space location in a retail store or positioning on the shelf may also affect how the antitrust agencies define the product market and assess the merger’s effect. This is a frequent issue in food and beverage mergers.
For example, in 2002, the FTC sued to block a merger that would have combined Vlasic and Claussen pickles. The agency alleged that refrigerated pickles constituted a separate market. While acknowledging that shelf-stable pickles sold in the center aisles put some competitive pressure on refrigerated pickles, the FTC argued that consumers did not consider shelf-stable pickles sufficiently close substitutes.
- Pre-Deal Pointer: Reviewing plan-o-grams may help gauge whether the antitrust agencies might view products as closer (or more distant) competitors using in-store or shelf-space location as a factor.
- Branded vs. Private Label
There is no bright line rule on whether the antitrust agencies will consider private label products “in” or “out” of the market. It depends on the facts.
Private label products were excluded when the FTC defined the market for branded seasoned salt products. In contrast, the FTC reportedly cleared Energizer Holdings’ acquisition of Spectrum Brands’ battery business (Rayovac branded batteries) because the evidence confirmed that branded batteries face strong competition from private-label batteries.
Recently, the FTC’s challenged Smucker’s, owner of the Crisco-branded cooking oil, proposed acquisition of Wesson cooking oils, and alleged two separate markets. One market consisted of branded canola and vegetable (CV) oils, largely based on the prices, attributes, and perception of branded oils being substantially different than private label oils. The other alleged market included both branded and private label oils.
- Pre-Deal Pointer: Analyzing consumer switching surveys, focus group studies, and quantitative analysis based on point-of-sale data (scanner data) often helps to assess whether the antitrust agencies may distinguish between branded and private label products.
- Sales Channels
The agencies may also limit the market to particular sales channels. For example, in the cooking oil case, the FTC alleged that the market for CV oils was limited to sales made to retailers, thereby excluding sales to other channels. In 2011, the DOJ alleged that hairspray sold in retail stores was a separate market from the sale of such products in salons because of differences in price, location convenience, and breadth of brands carried.
Additionally, although online sales are an everyday reality for CPG manufacturers, there is no bright-line guidance for whether online retail sales will be “in the market.” The FTC noted in a prior retail matter that there has been an “explosive growth of online commerce,” but even with this precedent, only transaction-by-transaction assessment will determine how online sales factor into market definition and competitive-effects analysis.
- Pre-Deal Pointer: Analyzing data on sales by channel, how prices compare across channels, and how consumers switch, if at all, across channel helps assess whether the antitrust agencies may exclude certain sales channels from the market.
- Geographic Markets
The agencies typically define the relevant geographic market in CPG mergers as national or no broader than national. High transportation costs, differences in brands, U.S. regulations that make it difficult for customers to purchase products sold outside the U.S., or a lack of imports, may contribute to the agencies’ assessment.
Geographic markets may also be limited to certain regions, states, or metropolitan areas, at least where the seller can charge different prices to retailers based on differing competitive conditions.
Pre-Deal Pointer: To assess the relevant geographic market, consider three questions: (1) where are the parties’ products sold? (2) are there any meaningful differences in competitive conditions across these geographies? and (3) are there examples CPG suppliers expanding from one geography into another?
- Merger’s Effect on Competition
The ultimate question in any merger investigation is whether the transaction will “substantially lessen competition.” In short, the investigating antitrust agency tries to assess whether a merger is likely to result in higher prices, lower quality, or reduced innovation.
In CPG transactions, the concern about potentially diminished price competition isn’t limited to higher shelf prices or lower discounts to consumers. The agencies are also concerned about the potential for the merger to reduce promotional discounts, slotting allowances, and trade spend paid to retailers.
- Pre-Deal Pointer: Consumer surveys, evidence of consumer switching among products, and evidence on the extent to which the parties compete at the wholesale level for retail carriage and shelf space is helpful to analyzing a deal’s potential competitive effects.
- Brand Equity and Entry Requirements
Brand is often a key ingredient for success. But brand may also be a key reason the FTC or DOJ raises concerns about barriers to entry, expansion, or repositioning. In many of the agencies’ enforcement actions, brand equity was deemed to be one of the most significant barrier to entry because it could make it time-consuming and costly for a new entrant to convince retailers to stock their product or gain consumer acceptance.
- Pre-Deal Pointer: Be prepared to address why brand equity, as well as any distribution requirements, does not impede rapid entry, expansion, or repositioning. Real-world examples can be persuasive.
The merging parties’ documents are a key factor in whether the FTC or DOJ opens a detailed investigation and, ultimately, whether the agency decides to clear the merger or attempt to block it in court.
Two types of documents can be pivotal:
- Describing the effect of the merger. Documents that describe a procompetitive rationale for the transaction are most helpful. Documents suggesting the merger will enable the combined firm to raise prices, reduce discounts, or eliminate a key competitor are most damaging.
- Describing “the market”. The agencies put significant weight on how the parties analyze their “market” and calculate “market share” in the ordinary course of business when analyzing the closeness of competition and competitive strength of the parties and their rivals.
- Pre-Deal Pointer: The importance of documents cannot be overstated. Agency complaints in merger challenges are replete with cites to documents created by the parties.
Customer views carry significant weight in merger investigations. During investigations, the agencies typically call the parties’ largest customers, such as retailers and distributors, to learn how they view the merging parties’ products and which other products may be good alternatives to the parties’ products.
- Pre-Deal Pointer: Assess realistically how customers will react to the proposed deal. If customers might raise concerns to the antitrust agencies, consider developing a customer-communications strategy.
The antitrust agencies also routinely rely on data-driven analyses to assess the likely competitive effects of the transaction and help define markets. Two common analyses in a CPG merger are:
- Natural Experiments. The agencies typically seek to use scanner data to evaluate the impact of certain events on the parties’ sales and prices. For example, did sales or prices of the parties’ products change after a rival product went out on recall or a new branded product was introduced?
- Diversion analysis. A common technique is to use an event, such as an entry, an exit, or a promotion, to quantify the amount by which sales were diverted from one product to another. If a substantial volume of sales shift, the antitrust agencies are likely to view the parties’ brands as particularly close substitutes.
- Pre-Deal Pointer: Consider a pre-deal risk assessment using the standard tools employed by the agencies to evaluate the inferences they are likely to draw from these standard tools.
When evaluating potential mergers and acquisition in the CPG space, antitrust risk can be a key consideration. With guidance, careful planning, and early read-outs on anticipated economic analyses, that risk can be carefully managed in order to meet business objectives.
Alexis Gilman is a Partner in Crowell & Moring LLP’s Antitrust Group in Washington, DC. From 2010-2017, he worked at the FTC, including from 2014-2017 as head of the Mergers IV Division, where he oversaw investigations of mergers involving branded consumer products, retail, and other industries. Elizabeth M. Bailey is an economist and academic affiliate at NERA Economic Consulting in San Francisco where she handles CPG mergers and acquisitions. The views in this article are the authors’ and do not necessarily reflect the views of their firms or clients.