VIEWPOINT: FTC MUST WEIGH MORE THAN LOW PRICES IN MERGERS LIKE STAPLES

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I don't think the Federal Trade Commission has a very good grasp of how the merger between Staples and Office Depot would have worked-and still might work if Staples beats the agency in court.

FTC attorneys worry the merger would eliminate a superstore competitor and thus allow the new entity to drive up prices. "This merger is all about eliminating head-to-head competition," a senior antitrust official of FTC told The Wall Street Journal. If the acquisition of Office Depot isn't blocked, "consumers will pay millions of dollars more for their copy paper, envelopes, pens and file folders."

But that isn't what happens in the real world. The merger would have caused havoc, all right, but not among consumers. The Staples-Office Depot combo, with 1,100 stores and sales of more than $11 billion, would have been able to beat up suppliers unmercifully, exacting much bigger discounts than either company demands now-including fattened co-op trade allowances. The company would have been nuts not to pass some of these savings along to consumers, if only to keep a competitor like OfficeMax from coming in and undercutting the new company.

As a matter of fact, OfficeMax was looking forward to the opportunity. Staples, to seal the deal, offered to sell 63 stores to OfficeMax. The plan would have enabled OfficeMax to move quickly into new markets and give Staples a real run for its money. "For us, this was going to be an early Christmas present if it happened," the CEO of OfficeMax told the Journal. Now OfficeMax will have a harder time competing against Staples and Office Depot, but other big retail sellers of office supplies, like Wal-Mart Stores, will have it easier.

My belief is that whether a merger will trigger higher consumer prices shouldn't be the sole criterion for approval by the feds. For instance, if FTC thought the Staples-Home Depot merger would result in lower prices, the agency would have approved the deal with open arms-despite the fact it would have caused smaller suppliers to lower their already low margins, jeopardizing their very existence. Now that, to me, seems like a reason to question a merger.

The consumer has the right to lower prices under our antitrust laws, but doesn't anybody else have any rights? Here's the dilemma: Lower prices at the consumer level keep inflation at bay, and that makes the Federal Reserve happy. But putting the squeeze on suppliers could drive some out of business. (Of course, that would also make the Fed happy because higher unemployment rates put less inflationary pressure on wages.)

The bottom line here is that our entire economy is driven by lower prices, either to make our companies more competitive with each other and in world markets and/or to keep inflation under control.

Phyllis Wasserman, senior VP of corporate communications and advertising at Staples, told me that her company has "looked at the numbers every which way, and there are significant efficiencies in the deal"-despite the "mysterious econometric model" the FTC is using to oppose it.

She cited this example: A merged Staples-Office Depot would probably use only one manufacturer to source, say, file folders. And when that happened, the winning vendor would be able to print 40 million folders for Staples rather than half that number when it was supplying one of the superstores. And, of course, economies of scale come into play here. "We're going to be sure we pass the savings on to our customers," Ms. Wasserman said. "Otherwise, they'll go somewhere else"-to OfficeMax, Wal-Mart, a ware- house club or even the corner drugstore if the customer is looking for the lowest price Bic pen and the corner drugstore has Bic on sale.

She said Staples prices aren't driven by superstore competition as FTC claims. "Our overall pricing strategy is far more complicated than that."

The way the game is played in the real world of retailing is that one supplier of file folders is the loser, but thousands of customers are the winners. If too many file folder guys can't compete, however, a lot of those customers won't be able to afford file folders at any price.

Besides, how can you be sure you're getting the lowest prices if you're using only one file folder supplier?

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