For consumer, scant gain in mega-mergers

THE BALTIMORE SUN

Is bigger better?

Business analysts and economists have mixed opinions about the impact of the gargantuan mergers being done or hashed out behind closed doors in recent months, including yesterday's announced $57 billion merger of Procter & Gamble Co. and Gillette Co.

The marriages, or contemplated ones, include some of the biggest and most storied names in American business: SBC Communications Inc. and AT&T; Corp., the original "Ma Bell"; retail giants Federated Department Stores and May Department Stores; wireless providers Sprint Corp. and Nextel Communications; Kmart and Sears, Roebuck and Co.; and brewers Molson Inc. and Adolph Coors Co.

Generally, the fewer, larger players that survive mean less price competition and less incentive to innovate. But experts said the impact of mega-deals varies by industry, by the partners involved and by the role of technology.

Wall Street and others generally reacted favorably yesterday to headlines that Procter & Gamble Co., the Cincinnati-based maker of Crest, Head & Shoulders, Pampers and Pringles, plans to purchase Boston-based Gillette, the top maker of shaving supplies as well as Duracell batteries and Right Guard deodorant, for $57 billion in stock.

The deal, which requires approval from shareholders and regulators, joins two of the biggest names in consumer products. The two hope that that will produce a stronger force to market products in Asia and Eastern Europe. With more than $60 billion in revenues, the merged company will eclipse Unilever, maker of Dove soap and Lipton tea, as the largest consumer products company in the world.

Maker vs. retailer

"I think we're seeing so many mergers because the benefits of scale and size have never been so meaningful," said Adam Hanst, chief executive officer of Hanst Unlimited, a marketing and branding company in Manhattan. "There's a huge war going on between manufacturers and retailers. As retailers are getting bigger and more powerful, it requires an equally powerful manufacturer."

Many analysts said yesterday that they believe joining Procter & Gamble, the U.S. top maker of household products, with Gillette will help strengthen the combined company's position against the pricing muscle of top retailer Wal-Mart Stores Inc. Theoretically, that could push prices higher for consumers.

But the combination could produce greater innovation in products. Analysts predict that P&G; will use its marketing and creative expertise to boost Gillette's products. This merger of strong players is seen more positively than that of, say, Kmart and Sears, both of which have struggled to find their niche between the discount chains and the luxury stores.

"What Procter & Gamble is unparalleled at is developing platforms and offering more innovative choices to consumers," Hanst said.

Generally, consolidations can leave too few players in the market, reducing incentives for research and cost-cutting.

"What it does is reduce competition," said Dr. Jack Taylor, the Joseph S. Bruno Professor of Retailing at Birmingham-Southern College in Alabama. "It will take one or more players out of game. Consumers have one less entity fighting for their business. That lost competition affects everything - quality of service, pricing, variety and sometimes a lost store location. Mergers likely close one of the stores that merged because they're no longer competing. That's the downside."

Antitrust lawyers predict that Procter & Gamble Co. might be forced to divest some brand-name personal-care products such as deodorants, dental floss and shaving cream to win government clearance for the merger. The companies, for example, control 62 percent of the market for battery-powered toothbrushes, according to a report by Chris Ferrara, an analyst at Merrill Lynch & Co. Inc.

The question of reduced competition also resonated in last week's announcement by Michael K. Powell that he will step down in March as chairman of the Federal Communications Commission.

Critics contended that Powell helped the largest phone and cable companies get bigger at the expense of potential new competitors. Consumer groups complained that the price of various services has risen as the largest companies "bundle" multiple services and consumers have less ability and choice to go elsewhere for Internet, wireless and landline phone service.

Smarter consumers

But today's consumer products market is also much more competitive than it was a decade ago. The Internet has helped to create smarter consumers, who can research their purchases online. In such an environment, getting rid of a rival or two isn't always enough to affect price.

Also, the growth of marketing and credit continues to reshape consumer behaviors in ways much different from the past.

Even though growth in worker wages and benefits slowed in the fourth quarter and prices rose faster in 2004 than in 2003, the government reported yesterday, consumer spending remained torrid.

Consumers boosted spending in the fourth quarter at a 4.6 percent annual rate. For all of 2004, spending rose 3.8 percent - the strongest since 2000.

"In the retail world, it's even more cutthroat," said Joel Naroff, of Naroff Economic Advisors. "We'll buy any product anywhere if we like it."

Some analysts say that shareholders, who inherit a company that is bigger and more efficient, see the most benefits from consolidations.

"There's a benefit to shareholders, but it is pretty invisible to consumers," said Ken Bernhardt, chairman of the marketing department at the Robinson College of Business at Georgia State University and a consultant for Chick-fil-A Inc., the second-largest chicken restaurant chain.

"You're not going to see lower prices, although competition is likely to prevent higher prices. It's harder to raise prices these days because there's so many alternatives for the consumer."

In certain industries, losing any competitor is bad news, analysts said. A merger between May and Federated, the two largest department store companies, could in the short run mean closing stores. And some believe it could lead to less variety in clothing and other merchandise on the shelves.

"The danger is we lose our alternatives," said Edward Fox, an assistant professor of marketing with the JCPenney Center for Retail Excellence at Southern Methodist University. "Retailers start to look more and more like each other."

Bloomberg news service contributed to this article.

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