On the heels of the Federal Trade Commission (FTC) lawsuit against Amazon in June, which accused the Seattle retail juggernaut of duping millions of consumers into subscribing to Prime by utilizing “manipulative, coercive or deceptive” tactics, left-leaning chairwoman Lina Khan also accused “Godzilla” of inducing consumers to sign up for its paid Prime subscription service and then impeded them if they wanted to cancel.
Now comes word via Bloomberg that the FTC shortly plans to file “a far-reaching antitrust suit focused on Amazon’s core online marketplace,” adding that “Amazon leverages its power to reward online merchants that use its logistics service and punish others who don’t.”
If successful, the impact of this potential FTC litigation could be devastating to Amazon whose cut of products sold through its third-party network surpassed 50 percent for the first time in 2022.
As for the Prime lawsuit, which we reported on last month, suit, Khan said “Amazon tricked and trapped people into recurring subscriptions without their consent, not only frustrating users but also costing them significant money.”
Amazon responded by stating that FTC’s claims are “false on the facts and the law” and that “by design we make it clear and simple for customers to both sign up for or cancel their Prime membership.” Amazon also said the federal agency filed its suit without advance notice, while the two sides were still discussing the case.
Currently, there are more than 200 million Prime members who pay $139 a year to get free and/or faster shipping of products as well as discounts on other offerings including streaming movies and groceries from corporately-owned Whole Foods. Amazon last year grossed more than $35 billion just from the revenue generated by its Prime subscriptions.
The lawsuit also stated that Amazon “substantially revamped its Prime cancellation process for at least some subscribers” shortly before the legal action was filed. However, “prior to that time, the primary purpose of the Prime cancellation process was not to enable subscribers to cancel, but rather to thwart them.”
Clearly, Khan’s been tracking Amazon since at least 2017 when she published a paper in The Yale Law Journal titled “Amazon’s Antitrust Paradox,” which took the position that interpretations of antitrust law should be broadened to address tech companies like Amazon, effectively upending decades of established antitrust doctrine. “As Amazon continues both to deepen its existing control over key infrastructure and to reach into new lines of business, its dominance demands the same scrutiny,” she stated.
It’s clear that the big tech companies with deep pockets and the time to wade through the legal bureaucracy are ready to do long-term battle with Khan.
However, that might not be the case with the proposed Kroger-Albertsons merger which fits directly in the wheelhouse of deals Khan objects to. In 2017, while a law student at Yale, she co-wrote another paper called “Market Power and Inequality: The Antitrust Counterrevolution and Its Discontents,” in which she cited the 2015 Albertsons acquisition of Safeway as ineffective.
If she sues to block the Kroger-Albertsons deal, which the FTC is expected to rule on by next summer, one might question whether both retailers could afford to wait out a potential years-long battle.
But Khan Is Finally Facing Some Pushback; NGA Heartened By New FTC Merger Guidelines
Lina Khan has pretty much had it her way over the past 26 months. The activist anti-big business gunslinger, who has tried to kill nearly a dozen mergers since she was named head of the federal agency in June 2021, is finally seeing her formerly unfettered power being challenged. On July 13 she had her first day of reckoning when the Republican-led House Judiciary Committee met with her to discuss the agency’s aggressive stance against big business mergers.
A few days later, Khan and her fellow committee acolytes received more than a tongue-lashing when a federal judge allowed Microsoft’s deal to acquire video game publisher Activision Blizzard for $68.7 billion to go forward. A subsequent appeal by the FTC, which sued to block the deal in December 2022, was also denied. The FTC originally sued to block that deal last December.
As for the House Judiciary Committee hearing, as expected the four-hour session was divided along party lines with Democrats generally praising Khan for tackling difficult issues concerning business concentration in certain areas of the U.S. economy.
But the Republicans on the committee, led by chairman Jim Jordan, went full scorched earth on Khan. The firebrand Ohio Republican, who termed Khan’s 25-month tenure, a “disaster,” opened the hearing by stating, “She centralized the decision making at the commission within her office, eliminating any pretext of due process or transparency in that decision making. Her approach is best characterized as one of intimidation, followed by inaction.”
Later during the hearing, Rep. Kevin Kiley, (R-CA) asked if Khan was challenging deals she expected to lose in court, citing the recent approval of Microsoft’s decisions to acquire Activision Blizzard and earlier court decision that allowed Meta (Facebook) to acquire virtual reality content maker Within Unlimited. Khan responded by stating, “Absolutely not, we fight hard when we believe there was a law violation, and unfortunately things don’t always go our way.”
Even though most of the hearing centered around tech companies, Rep. Thomas Massie (R-KY) expressed concern that large grocery retailers and suppliers are using monopolistic practices against independent grocers. The FTC commissioned a study 17 months ago to review those practices, but no final report has yet been issued. Khan told Massie that the issue is an important one, but the agency is still collecting and studying data from the nine retailers, wholesalers and CPG firms it ordered to supply detailed information about such areas as supply chain and pricing.
While Khan would not supply a specific timeline on when the agency’s report would be issued, her belief that dominant businesses often hold unfair leverage over smaller competitors has recently borne fruit for the National Grocers Association (NGA), which has pressed the FTC for more than a year about the advantages that some large food retailers have over rivals with their ability to squeeze grocery suppliers for more favorable terms, including through price, promotions, payment terms and product availability.
Shortly after the House Judiciary Committee hearings, the FTC and the and Department of Justice released a proposed update to merger enforcement guidelines. The proposed draft significantly re-writes merger enforcement standards to include new considerations for mergers that enhance buyer power. Specifically, one of the 13 proposed guidelines directly addresses buyer power (i.e., monopsony power) where a merger of competing buyers lessens competition for other sellers. The proposed changes mark a significant shift in merger enforcement to incorporate the concerns that NGA brought forth to federal enforcers.
The NGA noted that, in a significant shift, the proposed guidelines strongly consider how buyer power impacts competition amongst rival firms, which is a strong contrast to the current guidelines that largely ignore how buyer power abuses impact competition.
“NGA is pleased to see federal antitrust enforcers take seriously the competitive concerns that arise when dominant firms abuse their buyer power to impose discriminatory terms on their rivals,” said NGA SVP-government relations and counsel Chris Jones. “NGA and its members have consistently warned federal antitrust officials about how U.S. consumers are worse off due to buyer power abuses in an increasingly consolidated grocery sector. This problem has been laid bare by pandemic-era supply chain disruptions and increasing food price inflation where independent grocers have been put at critical disadvantage relative to their dominant competitors, especially those who serve rural and urban communities.”
The Washington, DC-based trade association, whose primary members include independent grocers, said the top four national grocery retailers account for 69 percent of all U.S. grocery sales. Two of these top four retailers, Kroger and Albertsons, have submitted plans to federal enforcers to merge by early 2024.
While the organization has not publicly condemned the proposed Kroger-Albertsons deal, NGA’s president and CEO Greg Ferrara expressed his association’s concerns shortly after the deal was announced in October 2022.
“A merger of the nation’s top two grocery chains should raise serious questions about a single supermarket giant gaining unprecedented dominance over the nation’s food supply chain,” said Ferrara. “A merger would not only put smaller competitors at an unfair disadvantage, but also increase anticompetitive buyer power over grocery suppliers, which ultimately would harm consumers. It is our expectation that this deal will receive rigorous scrutiny from federal antitrust enforcers.”
As for the impact of newly proposed merger guidelines on independent retailers, NGA said it will provide comments on the updated draft guidelines ahead of the deadline which closes in 60 days.
‘Round The Trade
There’s been a lot of bandwagon-jumping from politicians and consumer groups opposed to the Kroger-Albertsons merger. It would be hypocritical if I didn’t admit there are some steep hurdles to clear before the FTC completes its final review and renders a decision. That said, I was happy to hear that a San Francisco judge has thrown out a lawsuit filed by citizens in California, Texas and Florida which sought to challenge the deal. In his ruling U.S. District Court Judge Vincent Chhabria said the plaintiffs failed to prove how the merger would impact them personally, adding that the claims made by these citizens were also made prematurely since the FTC has yet to rule on the deal. Chhabria noted that the plaintiffs “have a lot of work to do to prove their case.” What the world needs is fewer lawsuits, especially frivolous ones like this. After remaining virtually mem about the merger for the first six months after its October 2022 announcement, Kroger CEO Rodney McMullen and Albertsons chief executive Vivek Sankaran recently released a video highlighting the benefits that the combined company would have. “The combination of Kroger and Albertsons is about creating more opportunities – more opportunities for our customers to find the food that they love at lower prices, more opportunities for associates to grow their careers with us now and in the future, and the growth extends well outside of our doors. We see more opportunities for our farmers to see more of their crops in more places, and more opportunities to bring communities across America the food families need to thrive,” said McMullen. Sankaran noted: “For our customers, it’s about offering lower prices and more choices. Together we will provide a wider and better selection of the products our customers need, want and love, with all the personalized offers that help families everywhere put food on the table.” He added that the merger would also create opportunities for its employees (the UFCW International, Kroger and Albertsons largest labor union, has said it strongly objects to the deal)…and while the clock is ticking on Amazon’s legal and operational problems, we can’t forget that “Godzilla” remains a dynamic juggernaut, as witnessed by the Seattle company’s recent second quarter sales and earnings which ended June 30. Net sales increased 11 percent to $134.4 billion and net profit grew to $6.7 billion, a significant jump from the $2.9 billion loss Amazon suffered in Q2 of 2022. And its 2023 “Prime Day” event held last month set a new sales record for the eight-year-old “sales-a-palooza.” According to Adobe Analytics, U.S. consumers spent $12.7 billion over the two-day period, a 6.1 percent increase over last year’s take. Gains were made in average order size ($54 vs. $52) and the average household spend was $155. All told, the number of total purchases reached 375 million, another record. And not be undone, Amazon has scheduled a second “Prime Day” promotion this October. Bloomberg reports that, in an effort to simplify and accelerate its e-commerce grocery business, America’s fastest growing company is making several changes, including combining three of its websites (amazon.com, wholefoods.com and amazonfresh.com) into one efficient platform. It is also trying to upgrade its failing Amazon Fresh (AF) brick-and-mortar stores (good luck with that) by “freshening” its current group of 44 stores, revamping its merchandising and adding Krispy Kreme donut and coffee stands near the front of its units. Digitally, Amazon Fresh will now provide grocery delivery for non-Prime members in 12 major markets (in areas where it doesn’t operate physical stores). While the Krispy Kreme, store “freshening and new merchandising approach is a nice step, it won’t change much because the core concept of AF’s model is flawed. Shortly after the Bloomberg story appeared, The Washington Post reported that AF is continuing to shed “hundreds of jobs,” including zone leads. Amazon keeps talking about its long-term interest in growing its grocery portfolio (especially brick-and-mortar), but so far is nearly clueless on how to approach and execute that desire…inflation continues to moderate as the Consumer Price Index rose an overall 3.2 percent increase last month, a slight uptick from June. However, food prices, while still moderating, have increased 4.9 percent year-over-year. While that’s better than the double-digit inflation levels of 2022, when analyzing price hikes over the past two years, food prices have increased above 20 percent, a number which is of great concern to retailers. While most retailers have benefitted sales and earnings-wise from food price inflation over the past 24 months, continued price hikes (even at moderating levels) have begun to adversely affect comp store revenue (still positive, but down about 50 percent from a year ago) and profits (now trending toward flat or slightly negative). That trend is expected to continue, creating worry that declining spending will have a severe impact on all-important Q4 results…Save A Lot (SAL), the St. Ann, MO-based discount retailer, which has struggled for the past half-decade, has completed a deal to sell its hometown market stores, which was the only area where SAL still operated corporately-owned units. The buyer for those 18 stores is current SAL licensee Leevers Supermarkets, which currently owns 29 SAL units in the Denver and Delaware Valley markets. We’ve already heard reports that Leevers might be looking to unload their 17 stores around Philly which it acquired in 2021…and speaking about Philadelphia, Wawa is testing an all-digital store on the campus of Drexel University (located on the 3100 block of Chestnut Street). While the highly successful c-store chain said the catalyst behind the test unit is to offer the greatest level of convenience to its customers, methinks retail shrink via theft might have also been a strong consideration in its planning…how many U.S. leaders can Lidl have? Apparently, the answer is – as many as they need to. Last month, the German discounter, whose U.S. headquarters are in Arlington, VA, named Joel Rampoldt as its new U.S. chief executive, replacing Michal Lagunionek, a veteran Lidl executive who spent his entire career in Europe before being named top dog for its U.S. operations in April 2021. Rampoldt becomes the fifth U.S. leader since the company first announced its intention to enter the market in 2013. Before Lagunionek came the mysterious Johannes Fieber who followed in the footsteps of Brendan “Doctor” Proctor. “Doctor” Proctor replaced the first Lidl U.S. president Kenneth McGrath, who left the company only later to emerge as CEO of rival Save A Lot. After four years at SAL, McGrath quit and rejoined Lidl as chief executive of the entire company (go figure?). As for Rampoldt, who comes from global consulting firm Alix Partners (and before that Oliver Wyman), he’s an excellent speaker and a brilliant mind. But he’s never actually been directly on the retail playing field, so some might view this decision as a bit of a stretch. If he can improve Lidl’s middling performance and manage to stay on the job for more than two years, I’d consider that a victory.
Local Notes
Publix, the nation’s most profitable supermarket chain, is serious about entering the Tidewater market with the recent announcement that the Lakeland, FL ESOP will open a new store in Carrollton, VA. The 48,387 square foot location will be Publix’s fourth planned unit in the Hampton Roads market and 19th Virginia store. Earlier, Publix said it would open stores in Norfolk, Suffolk and Virginia Beach. The new Tidewater stores, along with its 15 current Richmond area supermarkets, will be supplied by the company’s newest distribution center in Greensboro, NC which opened late last year…more Lidl news to report: late last month, the division of the Schwarz Group opened its newest Virginia store in Lorton at the site of the former Lorton Reformatory. The 30,000 square foot unit puts Lidl at 74 stores in the Old Dominion. That piece of good news was tempered by the announcement that the company closed or will be closing unprofitable units in Brooklyn Park, MD; Oxon Hill, MD; Charlottesville, VA; Richmond, VA; Thomasville, NC; Florence, SC; and Howell, NJ…the obit section of the column this month is filled by four people who all brought brilliance and uniqueness to their crafts. Paul Reubens, the eerily talented comedian who brought fame and shame for his creation of child-like adult Pee-wee Herman, died last month at the age of 70. Reubens, who was a failed comedian for about 10 years in the late 60s until the late 70s, hit it big with his seminal character which the New York Times described as being “aimed at children but tapping into adult sensibilities and ambiguities.” First, there was his first feature film – “Pee-Wee’s Big Adventure” (1985) – directed by another weird dude Tim Burton, then his Saturday morning memorable TV show, “Pee-wee’s Playhouse” which debuted in 1986. That show featured surreal characters who also seemed child-like, but like Pee-wee, would often deliver lines that made adults turn their heads. After it was announced that Reubens had died, I watched an old episode of “Playhouse.” There were stretches of the show that bored me, but some of the over-the-top humor made me laugh out loud. Unfortunately, Reubens’ career derailed in 1991 when he was arrested on a charge of indecent exposure at an adult movie theater in his hometown of Sarasota, FL. Reubens continued to perform after the arrest (he even received an Emmy Award nomination for his six-episode appearance on “Murphy Brown” in 1995), but his light never shined as brightly again…another talent with a controversial side, Sinead O’Connor, 56, has also passed away. The Irish singer-songwriter, who possessed a beautiful multi-octave voice, released 10 albums (including the brilliant “I Do Not Want What I Haven’t Got” in 1990 for which she received a Grammy Award) and sold-out large concert halls for a five-year period. And then it all came apart after a “Saturday Night Live” appearance in 1992 when she ripped up a photo of Pope John Paul II after singing Bob Marley’s classic song “War.” “Fight the real enemy,” said O’Connor, who targeted the song at the Roman Catholic Church’s stance on sexual abuse (which she endured as a child). Over the next 30 years, O’Connor continued to perform sporadically, never losing her powerful voice despite being plagued by the demons of mental illness. If you’ve never heard her sing, listen to her and Willie Nelson (an unlikely partner) sing Peter Gabriel’s “Don’t Give Up.” The song will stay in your head for a while…one of the members of one the greatest American bands over the past 60 years has also left us. Robbie Robertson, lead guitarist and primary songwriter of the seminal rock band The Band died earlier this month at the age of 80. Born in Toronto and raised by his Mohawk mother, Robertson began playing music at clubs in his teens and joined Arkansas rockabilly artist Ronnie Hawkins’ band the Hawks, which included talented young drummer and singer Levon Helm. The group also included singer and bass player Rick Danko, singer and pianist Richard Manuel and keyboardist and sax player Garth Hudson. In 1964, they broke away from Hawkins and formed Levon and the Hawks. A year later, they became Bob Dylan’s backup band and lacking a name, they simply called themselves “The Band.” The release of their debut album, “Music From Big Pink” (1968) is not only one of the finest first albums of all time, but also one of the best albums ever recorded. The group, consisting of four Canadians and Helm, continued to tour and record until 1976 before Robertson left and culminated with a filming of their final concert – The Last Waltz” (1978) – at the Winterland Ballroom in San Francisco. The movie, directed by Martin Scorsese, is arguably the finest rock ‘n roll concert ever filmed. Robertson, who after leaving the group released several solo albums (1987’s “Robbie Robertson,” his solo debut, is my favorite) and continued to work with Scorsese – Robertson’s last project was as music supervisor for the soon-to-be-released “Killers of the Flower Moon.”…and then there’s Tony Bennett, who stands in a league of his own. The iconic singer and master of the Great American Songbook, died last month after a career that spanned eight decades. Born Anthony Benedetto in Queens, his first love was painting (a passion that he continued to pursue his entire life) but his calling card was his voice and his interpretations of some of America’s greatest standards. He also crooned a few songs not in the “Songbook” including his monster hit “I Left My Heart in San Francisco” (1962), which brought Bennett everlasting fame. In his later years, his career received a boost when he began recording duets of some of the music industry’s most popular singers including Lady Gaga, Celine Dion, Barbra Streisand, Stevie Wonder, Wille Nelson, Amy Winehouse and Aretha Franklin. Through my friendship with the late David Finkelstein and John Kluge, I was fortunate to meet Bennett about half a dozen times. He was such a nice man – no ego and no pretentiousness; you could chat with him as you would with your neighbor. And as a singer – well perhaps Frank Sinatra summed it up best: “For my money, Tony Bennett is the best singer in the business,” he told Life Magazine in 1965. He excites me when I watch him. He moves me. He’s the singer who gets across what the composer has in mind, and probably a little more.”
