Office Depot, Staples fuel a super fuss Challenge to merger may end up breaking new legal ground; Loss of competition feared; FTC says huge stores charge more when alone in a market


WASHINGTON -- The Federal Trade Commission's challenge to the merger of Staples Inc. and rival Office Depot Inc. stems from fundamentally different views of American retailing, and may break new legal ground that could have a broad impact on future retail consolidation, antitrust experts say.

From the start, the companies and the federal antitrust investigators have wrangled about whether office-supply superstores are merely a small part of a much larger market for fax paper and pencils, or have carved their own, unique place in the retail landscape.

Last week, the companies said they will hold off on their merger plans while a federal judge considers the Federal Trade Commission's request for a court order to block the proposed $4 billion acquisition.

"Department stores and the 'category killer' stores -- computer stores, linen stores, anything that's a big specialty store -- and many others would all have to be concerned if the government prevails," said Mary Lou Steptoe, former head of the antitrust staff at the FTC.

"Retailing companies will have to assess very carefully their next merger steps, in a way they wouldn't have had to before." In the past, federal antitrust agencies have generally taken a broad view of retail mergers, concluding that customers have so many options about where to shop that even a large acquisition wouldn't have a significant impact on overall competition.

Staples and Office Depot have pressed that view since they announced their plans last fall. While they compete vigorously, they argued that they couldn't unilaterally raise prices because shoppers would buy their pencils, paper clips, fax paper, computers and office furniture from mail-order firms, supermarkets, drugstores or discount stores such as Wal-Mart Stores Inc.

The niche case

The FTC, however, will try to prove in court that the office-supply superstores have created their own, distinctive market niche, in which competition would be destroyed if the two largest superstore chains were permitted to merge.

Laying out the agency's case a week ago, the FTC's top antitrust official said price studies by the agency clearly showed that Staples, Office Depot and No. 3 OfficeMax Inc. set prices based on competition from each other -- regardless of whether customers could buy the same items elsewhere. "They've created their own unique competitive environment," said William Baer, director of the FTC's Bureau of Competition. "What affects the prices of the superstore firms? The presence or absence of another superstore."

Baer recited a list of comparative prices showing that Staples and Office Depot charge significantly less for some items in cities with superstore competition than they do in similar markets where only one superstore operates.

Baer cited Charlottesville and Fredericksburg, Va. In Charlottesville, where two superstores compete, Staples charges $8.99 for a box of address labels and $2.99 for a package of adhesive-backed note paper; in Fredericksburg, where Staples has no superstore competition, the same address labels cost $11.89, and the note paper is $5.79.

The FTC found similar pricing patterns in other markets.

In Orlando, Fla., where all three superstore chains have stores, Office Depot charges $17.99 for a box of copy paper and $1.95 for a box of file folders, the FTC said. Fifty miles away in Leesburg, where only Office Depot has a store, the same copy paper costs $24.99 and the file folders sell for $4.17.

"You wouldn't have to pay 24 bucks in Leesburg, Florida, if the nearby Wal-Mart were putting competitive pressure on Office Depot. It isn't. And as a result they can charge seven bucks more for a box of paper than they charge in Orlando," Baer said.

The FTC's price examples will "make a big, splashy entrance into the court," as the FTC tries to convince a judge, for the first time, that category-killers and specialty superstores constitute their own, distinct market for antitrust purposes, Steptoe said.

"The question will be what the other side can show to knock down that evidence," she said.

Staples disagrees

Staples vigorously contests the FTC's price examples, saying the agency focused on a few products and ignored the big picture.

Staples says most of its sales revenue doesn't even come from office supplies.

Computers, business machines, furniture and services accounted for 63 percent of 1996 revenue, the company said. The company also says that, during 1996, it didn't raise prices more than the inflation rate in any of the markets where it competes.

The company released statistics saying that, even if Staples could raise office-supply prices by 10 percent in areas where it currently competes with Office Depot, it would amount to price increases of about $19 million a year. That amount, the company said, "is swamped" by its estimates that the merger would save $4.9 billion over five years through greater efficiencies.

"The Federal Trade Commission had decided to put itself between ourselves and lower prices," Staples Chairman and Chief Executive Thomas G. Stemberg said.

In an aggressive advertising campaign, Staples has cited that potential efficiency savings, promising to pass its lower costs on to customers in lower prices nationwide.

Pub Date: 4/14/97

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