On May 4th, the FTC declined to issue a second request in response to Foot Locker's purchase of Footstar, allowing Foot Locker to consummate its $225 million purchase of the bankrupt owner of Foot Action. Despite concerns raised by competing bidders that the combination would hinder competition in the sales of specialty premium athletic footwear, the FTC decided that the merged entity would not possess enough market power to pose an anticompetitive threat to the market.
Foot Locker has previously announced that it intends to continue to operate all 2,891 Foot Locker stores and all 350 Foot Action stores. To prevent the two retailers from cannibalizing each other, Foot Locker will change Foot Action from a retailer of premium athletic footwear to a discount athletic footwear store, radically altering Foot Action's traditional line of business.
Many antitrust observers thought that the purchase of Footstar by Foot Locker would pose significant anticompetitive concerns warranting a second request. The observers hypothesized that the relevant product market could have initially been defined as the market for premium athletic footwear sold by specialty athletic footwear retailers. Under such a theory, other shoe retailers, such as department stores, discount stores, and name brand stores, such as The Nike Store, would have been excluded from the relevant product market definition. The theory has some support as premium athletic footwear manufacturers do not supply premium athletic shoes to department or discount stores, and the target customers, athletic and street fashion conscious males between the ages of twelve and twenty-four, do not consider the shoes offered by other retailers to be substitutes for the premium athletic shoes sold by stores like Foot Locker. In addition, premium athletic footwear retailers consistently sell sneakers for 20 percent more than general sporting goods stores and 28 percent more than department stores, indicating that consumers do not consider the shoes offered by sporting goods and department stores as substitutes. Prior to the acquisition, only four premium specialty athletic footwear retailers (Foot Locker, Foot Action, Finish Line, Inc., and The Athlete's Foot) competed in this line of business, and, more troubling, only three would service it after the acquisition.
Another noteworthy point with respect to the FTC's review of this retail merger is that many antitrust observers believed the FTC would define the geographic market narrowly, possibly restricting its review to individual zip codes or even individual malls. Again, the facts relating to this merger lend some support for such a theory. Of the 350 Foot Action stores, 248 were located in the same malls in which a Foot Locker was located. Thus, a significant overlap existed. Some observers believed that an aggressive FTC staff could possibly force Foot Locker to divest some Foot Action stores in a number of malls where the acquisition would result in Foot Locker having a monopoly on premium athletic footwear retailers.
Although the FTC would normally have thirty days following the filing of the Hart-Scott Rodino notification to review a proposed purchase of a company, the Commission only had fifteen days to review Foot Locker's purchase of Footstar because Footstar was under bankruptcy protection. Given this shortened time frame, many antitrust observers thought that the FTC would issue a second request to investigate the overlaps more thoroughly.
Even though there appeared to be enough facts to support a second request, one factor was noticeably absent: a complaining customer. While complaints from losing bidders or competitors are helpful in building a case against a merger, the staff normally views these complaints with skepticism unless accompanied by credible customer testimony. Indeed, most significant mergers prompt large customers or suppliers to express concerns. In this case, however, the FTC probably found few customers or suppliers willing to complain. Consumers of high end athletic shoes, generally males between the ages of fifteen and twenty-five, individually lacked the financial incentive to complain about the merger before the FTC. Suppliers of premium athletic footwear to specialty athletic footwear retailers, such as Reebok, Adidas, and Nike, probably did not complain because they probably believe that they are free to market and distribute their premium athletic shoes to any of a number of retail stores. Furthermore, the suppliers of premium athletic footwear are financially strong enough to deter any anticompetitive price increases by Foot Locker by denying Foot Locker access to the latest brands of premium athletic footwear and instead offering new products through their own stores.
In the end, the FTC staff correctly decided that a second request was not warranted because under any market definition the staff was not likely to insist on divestitures since no credible customers or suppliers were complaining. The FTC might have also determined that a broader product market definition is more appropriate (including retailers of all athletic and leisure footwear). The inclusion of major department and discount stores as competitors lessens the concentration levels significantly.
If the FTC decided to approve Foot Locker's acquisition of Footstar based upon a broader product market definition, it may have indicated that the merger between prescription eyeglass retailers Cole National Corporation, owner of Pearle Vision, and Luxottica Group SpA, owners of Lens Crafters, has a better chance of being approved, despite the FTC having issued a second request. Luxottica and Cole National may argue that chains selling premium eyewear, like chains selling premium athletic footwear, must compete against all retailers of a similar product. The FTC may distinguish the two mergers, however, by holding that the suppliers in the prescription eyewear market lack the relative clout of the suppliers of premium athletic footwear, and force the merged entity to divest certain locations where the merger would diminish competition. In addition, department and discount stores serviced by Cole National may complain to the FTC about the merger, which would give the FTC more evidence with which to work than it would have had in an action challenging Foot Locker's purchase of Footstar. Given these significant differences in the two merger investigations, the approval of Foot Locker's purchase of Footstar probably has few implications for the FTC's ongoing investigation of the Luxottica and Cole National merger.
The approval of Foot Locker's purchase of Footstar indicates that the FTC, after broadening the product market definition beyond premium athletic shoes and after finding few complaining parties, conceded that it could not build a case against the merger. If the FTC's decision marks a new willingness to use broad product market definitions, then merging parties will find the approval process considerably easier. More likely, though, approval came more from apathy amongst the affected parties than from a change in the FTC's practices, and merging parties will find the approval process as difficult as ever.
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