Shaw's Supermarkets, Inc., et al.; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[Docket No. 9910075]

Shaw's Supermarkets, Inc., et al.; Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaint that accompanies the consent agreement and the terms of the

consent order--embodied in the consent agreement--that would settle

these allegations.

DATES: Comments must be received on or before September 7, 1999.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 600 Pennsylvania Avenue, NW, Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: Phillip Broyles, FTC/S-2105, 601

Pennsylvania Avenue, NW Washington, DC 20580, (202) 326-2805.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, Sec. 2.34 of the

Commission's Rules of Practice, 16 CFR 2.34, notice is hereby given

that the above-captioned consent agreement containing a consent order

to cease and desist, having been filed with and accepted, subject to

final approval, by the Commission, has been placed on the public record

for a period of sixty (60) days. The following Analysis to Aid Public

Comment describes the terms of the consent agreement, and the

allegations in the complaint. An electronic copy of the full text of

the consent agreement package can be obtained from the FTC Home Page

(for June 28th, 1999), on the World Wide Web, at ``htp://www.ftc.gov/

os/actions97.htm.'' A paper copy can be obtained from the FTC Public

Reference Room, Room H-130, 600 Pennsylvania Avenue, N.W., Washington,

DC 20580, either in person or by calling (202) 326-3627.

Public comment is invited. Comments should be directed to: FTC/

Office of the Secretary, Room 159, 600 Pennsylvania Avenue, NW,

Washington, DC 20580. Two paper copies of each comment should be filed,

and should be accompanied, if possible, by a 3\1/2\ inch diskette

containing an electronic copy of the comment. Such comments or views

will be considered by the Commission and will be available for

inspection and

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copying at its principal office in accordance with Section

4.9(b)(6)(ii) of the Commission's Rules of Practice (16 CFR

4.9(b)(6)(ii).

Analysis of the Draft Complaint and Proposed Consent Order To Aid

Public Comment

I. Introduction

The Federal Trade Commission (``Commission'') has accepted for

public comment from J Sainsbury plc, owner of Shaw's Supermarkets, Inc.

(``Shaw's'') and Star Markets Holdings, owner of Star Markets Company

(``Star'') (collectively ``the Proposed Respondents'') an Agreement

Containing Consent Order (``the proposed consent order''). The Proposed

Respondents have also reviewed a draft complaint contemplated by the

Commission. The proposed consent order is designed to remedy likely

anitcompetitive effects arising from Shaw's proposed acquisition of all

of the outstanding voting stock of Star.

II. Description of the Parties and the Proposed Acquisition

Shaw's Supermarkets, Inc., a Massachusetts corporation

headquartered in Bridgewater, Massachusetts, is a wholly owned

subsidiary of J Sainsbury plc, a United Kingdom company. Shaw's

operates 126 supermarkets in Connecticut, Maine, Massachusetts, New

Hampshire, Rhode Island, and Vermont. All of Shaw's supermarkets

operate under the ``Shaw's'' trade name. Shaw's total sales for its

1998 fiscal year were approximately $2.8 billion. Shaw's is the second

largest supermarket chain operating in Greater Boston. After the

merger, Shaw's will become the number one supermarket chain in Greater

Boston, controlling almost 40% of all supermarket sales.

Star is a Massachusetts corporation headquartered in Cambridge,

Massachusetts. Star operates 53 supermarkets in Massachusetts, forty-

nine under the ``Star'' trade name and four under the ``Wild Harvest''

trade name. Star also operates a wholesale food business that serves

mostly small independent supermarket customers throughout New England

and New York State. Star's wholesale customer base includes 11

supermarkets that contractually use the ``Star Markets'' trade name

though Star has no ownership interest in them. Star's revenues for

fiscal year 1998 are more than $1 billion, $966 million of which are

from its retail operations. With its 53 supermarkets, Star is the third

largest supermarket chains operating in Greater Boston.

On November 25, 1998, J Sainsbury plc, Star Markets Holdings, Inc.,

Star Markets Company, Inc. and certain stockholders of Star Markets

Holdings Inc., entered into a Stock Purchase Agreement for J Sainsbury

plc to acquire all of the outstanding voting securities of Star Markets

Holdings, Inc. The value of the transaction is approximately $490

million.

III. The Draft Complaint

The draft 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 to one-stop shop 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 an extensive inventory of those

SKUs in a variety of brand names and sizes. In order to accommodate the

large number of 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 base

their food and grocery prices primarily on the prices of food and

grocery products sold at nearby supermarkets. 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, limited

assortment 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. The retail format and variety of items sold at these

other stores are significantly different than that of supermarkets.

None of these other retailers offer a sufficient quantity and variety

of products to enable consumers to one-stop shop for food and grocery

products.

The draft complaint alleges that the relevant sections of the

country (i.e., the geographic markets) in which to analyze the

acquisition are the areas in or near the following incorporated cities

or towns in Massachusetts: (a) Waltham area that includes Waltham,

Auburndale, Watertown, Newton, West Newton, Weston, and Lexington; (b)

Quincy-Dorchester area that includes Quincy, N. Quincy, Milton,

Dorchester, Boston, S. Boston, Braintree, and Weymouth; (c) Norwood

area that includes Norwood, Walpole, Westwood, Dedham, Wrentham, and

Sharon; (d) Milford area that includes Milford, Hopedale, Mendon, and

Upton; (e) Salem-Lynn area that includes Salem, Lynn, Peabody,

Swampscott, Danvers, Nahant, and Marblehead; (f) Norwell area that

includes Norwell, Hanover, Rockland, Pembroke, Hanson, Scituate,

Halifax, Hingham, Weymouth, Cohasset, and Hull; (g) Hudson-Stow area

that includes Stow, Hudson, Sudbury, Marlborough, and Bolton; and (h)

Saugus-Melrose-Stoneham area that includes Saugus, Melrose, Stoneham,

and Wakefield.

J Sainsbury through its Shaw's subsidiary and Star Markets are

actual and direct competitors in the all of the relevant markets.

The draft complaint alleges that the post-merger markets would all

be highly concentrated, whether measured by the Herfindahl-Hirschman

Index (commonly referred to as ``HHI'') or four-firm concentration

ratios. The acquisition would substantially increase concentration in

each market. The post-acquisition HHIs in the geographic markets range

from 2205 points to 5136 points.

The draft complaint further alleges that entry is difficult and

would not be timely, likely, or sufficient to prevent anticompetitive

effects in the relevant geographic markets.

The draft complaint also alleges that Shaw's acquisition of all of

the outstanding voting securities of Star, if consummated, may

substantially lessen competition in the relevant line of commerce 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 Shaw's and supermarkets

owned and controlled by Star; by increasing the likelihood that Shaw's

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 geographic markets alleged in the complaint.

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IV. The Terms of the Agreement Containing Consent Order (``the

Proposed Consent Order'')

The proposed consent order will remedy the Commission's competitive

concerns about the proposed acquisition. Under the terms of the

proposed consent order Shaw's and Star must divest ten supermarkets,

seven stores operating under the ``Star Markets'' trade name and three

under the ``Shaw's'' trade name.

In the eight relevant markets, the Proposed Respondents will divest

either all of the Shaw's or Star supermarkets to buyers who do not

currently operate supermarkets in these markets. Divesting all of one

party's assets in a particular market achieves the goals that the

proposed consent order is designed to achieve--ensuring that the merger

will not increase concentration in any relevant market and maintaining

the number of firms in the market that existed before the merger.

Seven of the supermarkets to be divested are being sold to two

experienced up-front buyers, firms that the Commission has pre-

evaluated for their competitive and financial viability. The

Commission's evaluation process consisted of analyzing the financial

condition of the proposed acquirers and the locations of their current

supermarkets to ensure that divestitures to them would not increase

concentration or decrease competition in the relevant markets, as well

as, determining that these purchasers are well qualified to operate the

divested stores. The remaining three supermarkets are to be divested by

the Proposed Respondents within three months of the date on which they

signed the proposed consent agreement, to an acquirer approved by the

Commission and in a manner approved by the Commission. Public comments

may address the suitability of the designated up-front buyers to

acquire supermarkets under the proposed consent order.

The following is a discussion of the two up-front buyers, Victory

Super Markets (``Victory'') and Foodmaster Super Markets, Inc.

(``Foodmaster''). Victory, headquartered in Massachusetts and founded

by the DiGeronimo family in 1923, will acquire five supermarkets from

Shaw'--Shaw's Supermarket stores No. 193 in Waltham, No. 196 in North

Quincy, and No. 122 in Norwood; and Star Markets Stores No. 169 in

Milford, and No. 128 in Norwell, MA. Foodmaster, headquartered in

Chelsea, Massachusetts, will acquire two supermarkets from Shaw's--Star

Markets No.144 in Lynn and No. 129 in Swampscott.

The proposed consent order further requires Shaw's and Star to

divest three additional supermarkets, Star Markets No. 152 in Stow,

Star Markets No. 118 in Sudbury, and Star Markets No. 173 in Saugus to

a proposed buyer that will be selected by Shaw's and approved by the

Commission within three months of the date on which the Proposed

Respondents sign the proposed consent agreement.

Paragraph II.A. of the proposed consent order requires that the

divestiture to Victory must occur no later than the earlier of (1)20

days from when the merger is consummated, or (2) four months after the

Commission accepts the agreement for public comment.\1\ Paragraph II.B.

of the proposed consent agreement requires that Shaw's divest the two

supermarkets to Foodmaster within ten days of the date on which the

proposed consent order becomes final. If Shaw's consummates the

divestitures to Victory and Foodmaster during the public comment

period, and if, at the time the Commission decides to make the order

final, the Commission notifies Shaw's that Victory or Foodmaster is not

an acceptable acquirer or that the asset purchase agreement with

Victory or Foodmaster is not an acceptable manner of divestiture, then

Shaw's must immediately rescind the transaction in question and divest

those assets to another buyer within three months of the date the order

becomes final. At that time, Shaw's must divest those assets only to an

acquirer that receives the prior approval of the Commission and only in

a matter that receives the prior approval of the Commission. In the

event that any Commission-approved buyer is unable to take or keep

possession of any of the supermarkets identified for divestiture, a

trustee that the Commission may appoint has the power to divest any

assets that have not been divested to satisfy the requirements of the

proposed consent order.

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\1\ Acceptance of the proposed consent agreement for public

comment terminates the HSR waiting period and enables Shaw's to

immediately acquire all of the outstanding voting securities of Star

Markets.

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The proposed consent order also enables the Commission to appoint a

trustee to divest any supermarkets or sites identified in the order

that Shaw's and Star have not divested to satisfy the requirements of

the proposed consent order. In addition, the proposed order enables the

Commission to seek civil penalties against Shaw's for non-compliance

with the proposed consent order.

Among other requirements related to maintaining operations at the

supermarkets identified for divestiture, the proposed consent order

also specifically requires the Proposed Respondents to: (1) Maintain

the viability, competitiveness and marketability of the assets to be

divested; (2) not cause the wasting or deterioration of the assets to

be divested; (3) not sell, transfer, encumber, or otherwise impair

their marketability or viability; (4) maintain the supermarkets

consistent with past practices; (5) use best efforts to preserve

existing relationships with suppliers, customers, and employees; and

(6) keep the supermarkets open for business and maintain the inventory

at levels consistent with past practices.

The proposed consent order also prohibits Shaw's from acquiring,

without providing the Commission with prior notice, any supermarkets,

or any interest in any supermarkets, located in the county or counties

that include the incorporated cities and towns in Massachusetts:

Waltham, Auburndale, Watertown, Newton, West Newton, Weston, Lexington,

Quincy, N. Quincy, Milton, Dorchester, Boston, S. Boston, Braintree,

Hopedale, Mendon, Upton, Salem, Lynn, Peabody, Swampscott, Danvers,

Nahant, Marblehead, Norwell, Hanover, Rockland, Pembroke, Hanson,

Scituate, Halifax, Hingham, Cohasset, Hull, Stow, Hudson, Sudbury,

Marlborough, Bolton, Saugus, Melrose, Wakefield, and Stoneham for ten

years. These are the areas for which the supermarkets to be divested

draw customers. The provisions regarding prior notice are consistent

with the terms used in prior Orders. The proposed consent order does

not, however, restrict the Proposed Respondents from constructing new

supermarkets in the above listed areas; nor does it restrict the

Proposed Respondents from leasing facilities not operated as

supermarkets within the previous six months.

The proposed consent also prohibits Shaw's, for a period of ten

years, from entering into or enforcing any agreement that restricts the

ability of any person acquiring any location used as a supermarket, or

interest in any location used as a supermarket on or after January 1,

1998, to operate a supermarket at that site if that site was a formerly

owned or operated by Shaw's or Star Markets in any of the areas listed

in the paragraph above. In addition, the Proposed Respondents are

prohibited from removing fixtures or equipment from a store or property

owned or leased

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by Shaw's in any of the cities or town listed above that is no longer

operated 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 the Proposed Respondents.

The Proposed Respondents are required to file compliance reports

with the Commission, the first of which is due within thirty days of

the date on which Proposed Respondents signed the proposed consent, and

every thirty days thereafter until the divestitures are completed, and

annually for ten years.

The proposed consent order also has a provision relating to the

settlement agreement negotiated by the State of Massachusetts. If the

State of Massachusetts fails to approve any divestiture that has not

been completed, even though the parties are in compliance with the

other provisions of the proposed consent agreement, the time period in

which the divestiture must be completed will be extended 60 days during

which the parties must exercise utmost good faith and best efforts to

resolve the concerns of that particular state.

V. Opportunity for Public Comment

The proposed consent 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 proposed consent

order and the comments received and will decide whether it should

withdraw from the agreement or make the proposed consent order final.

By accepting the proposed consent 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 proposed consent order, including the proposed

sale of supermarkets to Victory and Foodmaster, in order to aid the

Commission in its determination of whether to make the proposed consent

order final. This analysis is not intended to constitute an official

interpretation of the proposed consent order nor is it intended to

modify the terms of the propsed consent order in any way.

By direction of the Commission.

Benjamin I. Berman,

Acting Secretary.

[FR Doc. 99-16993 Filed 7-2-99;8:45 am]

BILLING CODE 6750-01-M