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2019 Feb 26, 3:12am
The Federal Government Is Rigging the Game Against Small Businesses - An FTC-approved merger will help Staples and Amazon crush the independent office-supply industry.
A few weeks ago, the Federal Trade Commission gave Staples the green light to buy one of the two wholesalers that sell to independent office supply dealers. The decision, passed by a party-line 3-2 vote, hardly made a blip in the news cycle. But it sheds enormous insight into the origins of the big-get-bigger U.S. economy.
Small and independent businesses have been disappearing in this country for long enough that their decline has come to seem inevitable. And indeed, it often is treated that way in media stories and policy debates. Many economists assure us that small businesses are simply not as efficient as big ones, and point to their demise as evidence that this collective belief is correct. But like so many of the stories we’re told about the economy, this one doesn’t hold up under exposure to reality. There’s something else driving the eradication of independent businesses: The government is systematically structuring markets so that that even the most competitive ones face almost impossibly long odds.
The office supply industry is a perfect case study. Despite the pervasiveness of Staples and Amazon, independent dealers account for about 20 to 25 percent of the market, according to the National Office Products Alliance. There are hundreds scattered across the country. There’s probably one in your area, though you wouldn’t necessarily know it, because these dealers generally do not have storefronts. Most office supplies are purchased not by individuals, but by companies, government agencies, school districts, and the like. To serve these customers, independent dealers rely on sales representatives, warehouses, and delivery trucks.
These businesses are significant to local economies. Many employ a few dozen or a few hundred people. “I have drivers who’ve worked for me for 30-plus years,” said Kim Leazer, who owns Forms & Supply, Inc. in Charlotte, N.C.
They’re also highly competitive. Most have offered next-day delivery for 30 years or more, and many have had e-commerce since before Amazon existed. They routinely win contracts from school districts and mid-sized companies, evidence of their ability to beat larger rivals on price. According to one study, had a California school district purchased supplies from Amazon Business—Amazon’s business- and government-facing platform—rather than its local independent office dealer, the district would have paid about 10 percent more. And the independents offer a high level of service and customization. “My driver will put the paper by the copy machine even if it’s on the third-floor,”Leazeradded..
In short, there’s nothing inherent in their size that keeps these independent businesses from competing against the giants on quality and cost. Which brings us back to the Staples merger.
There are only two office-supply wholesalers in the U.S.: Essendant and S.P. Richards. For independent office supply dealers, those two firms are their only tethers to the supply chain. Now the FTC has let Staples (and its parent company, the private equity firm Sycamore Partners) buy Essendant, taking control of one of those lifelines.
“They have given our biggest competitor ownership of our biggest supplier,” said David Guernsey, who started Guernsey, Inc., a Virginia-based office supply company more than 45 years ago. “We have never been exposed to anything like this before.”
One big risk for independent dealers is that this merger will allow Staples to crawl inside their businesses and look around. That’s because Essendant does more than ship products to these dealers; it’s intimately involved in their operations. When a dealer is competing for a contract, for example, Essendant often knows the details of the bid, including the service terms the dealer is offering to set itself apart. And it knows its pricing, because dealers typically work closely with Essendant to secure the best prices from manufacturers.
“If I were [Staples] bidding against [an independent dealer] for one of these deals, I’d love to have that information,” said Guernsey.
“Dealers are rightfully concerned this data will be weaponized against them,” noted Rohit Chopra, one of the two dissenting FTC commissioners. The majority did not dispute his assessment, writing in their decision that “Staples would gain access to the competitively sensitive information of Essendant’s dealer customers… which could enable Staples to engage in anticompetitive conduct.” But rather than block the deal, the FTC imposed a flimsy remedy, ordering Sycamore Partners to set up a “firewall” between Staples and Essendant.
Many in the industry are skeptical that a firewall is enforceable, given the ability of employees to share information verbally. Indeed, the idea of a “firewall” did not even originate with the FTC. Sandy Douglas, the CEO of Staples, floated the idea last fall as opposition to the merger gained momentum.
A second risk is that Staples will raise the prices that Essendant charges independent dealers, who would then have to pass the increases along to their customers. Faced with higher prices, some of these customers might switch to Staples. Remarkably, the FTC majority insists this won’t happen because Staples is not a significant player in the market for these customers, who are mostly mid-sized businesses and local government agencies. Yet Staples, which saw its revenue in North America plunge 10 percent between 2013 and 2016 as consumers flocked to Amazon, has been openly going after these very customers. “Staples Inc. is overhauling its marketing as part of a high-stakes pivot away from what it was built on—selling low-priced office supplies at big stores—and toward a stronger focus on selling a wide range of products and services to businesses,” Bloomberg reported in 2017. Buying Essendant appears to be part of this strategy.
The FTC also insists that the ability of independent dealers to switch to the one remaining independent wholesaler, S.P. Richards, will keep Staples from abusing its power over them. For an office supply dealer, though, switching wholesalers is less like swapping toothpastes and more like undergoing a kidney transplant. S.P. Richards can absorb only so many dealers at a time, and it doesn’t have a presence in every region of the country. Even if it did. the FTC, established by Congress to safeguard competition, would be essentially consigning independent dealers to a monopoly supplier, with little leverage to negotiate.
There’s no guarantee that S.P. Richards will remain independent, either. In fact, its parent, Genuine Parts Co., has been looking to offload it. One potential suitor is Office Depot, which is contending with many of the same dynamics as Staples is.
A third risk is the one that Chopra raised most forcefully in his dissent: the FTC failed to investigate what Sycamore Partners might have in mind for Essendant. Sycamore is a notorious private equity firm that, according to the Wall Street Journal, “often buys struggling retailers and sells off their most valuable pieces.” A recent study by Retail Dive found that more than 15 percent of retailers acquired by private equity firms over the past 15 years have filed for bankruptcy.
A final risk, perhaps the most serious, is that this merger will accelerate Amazon’s push to dominate the office supply market, including its bid to capture the spending of thousands of cities and school districts, which my organization reported on last year. While Staples and Office Depot offer little to differentiate themselves from Amazon among these customers, independent dealers have distinct strengths that Amazon cannot match. Yet the FTC seems happy to weaken them as viable competitors.
More than anything, the FTC’s approval of this merger shows its lack of regard—arguably even contempt—for the ecology of industries: the mix of businesses of different sizes, operating from various vantage points, in relationships with one another both cooperative and competitive. A healthy ecology is regenerative and naturally optimizing; a monoculture is not. Another term for this is “market structure.” Before Robert Bork and the Reagan administration turned antitrust enforcement on its head, a healthy market structure was an important lens for evaluating mergers.
Today this lens has largely been abandoned in favor making decisions based on narrowly modeling a merger’s potential to increase “efficiency.” And it’s not clear that even these models can deter the FTC’s predilection for approving mergers. “I believe that staff identified significant evidence of likely harm to competition,” in this merger, wrote Commissioner Rebecca Kelly Slaughter in her dissent.
Slaughter’s dissent rightfully situates the approval of this merger in the context of a “great debate” that is “taking place in Washington policy circles and even around the country at family dinner tables” about “the consequences for America citizens of fewer and more dominant companies controlling large swaths of industries.”
That debate has advanced far enough to produce a 3-2 decision in a case that might have been 5-0 not that long ago. But it must advance even further, and quickly, if we are to salvage an economy that includes independent businesses.
“I look at the younger people in this industry and I fear for them,” says Guernsey. “It will be much harder for them to succeed.”
https://washingtonmonthly.com/2019/02/26/the-federal-government-is-rigging-the-game-against-small-businesses/
A few weeks ago, the Federal Trade Commission gave Staples the green light to buy one of the two wholesalers that sell to independent office supply dealers. The decision, passed by a party-line 3-2 vote, hardly made a blip in the news cycle. But it sheds enormous insight into the origins of the big-get-bigger U.S. economy.
Small and independent businesses have been disappearing in this country for long enough that their decline has come to seem inevitable. And indeed, it often is treated that way in media stories and policy debates. Many economists assure us that small businesses are simply not as efficient as big ones, and point to their demise as evidence that this collective belief is correct. But like so many of the stories we’re told about the economy, this one doesn’t hold up under exposure to reality. There’s something else driving the eradication of independent businesses: The government is systematically structuring markets so that that even the most competitive ones face almost impossibly long odds.
The office supply industry is a perfect case study. Despite the pervasiveness of Staples and Amazon, independent dealers account for about 20 to 25 percent of the market, according to the National Office Products Alliance. There are hundreds scattered across the country. There’s probably one in your area, though you wouldn’t necessarily know it, because these dealers generally do not have storefronts. Most office supplies are purchased not by individuals, but by companies, government agencies, school districts, and the like. To serve these customers, independent dealers rely on sales representatives, warehouses, and delivery trucks.
These businesses are significant to local economies. Many employ a few dozen or a few hundred people. “I have drivers who’ve worked for me for 30-plus years,” said Kim Leazer, who owns Forms & Supply, Inc. in Charlotte, N.C.
They’re also highly competitive. Most have offered next-day delivery for 30 years or more, and many have had e-commerce since before Amazon existed. They routinely win contracts from school districts and mid-sized companies, evidence of their ability to beat larger rivals on price. According to one study, had a California school district purchased supplies from Amazon Business—Amazon’s business- and government-facing platform—rather than its local independent office dealer, the district would have paid about 10 percent more. And the independents offer a high level of service and customization. “My driver will put the paper by the copy machine even if it’s on the third-floor,”Leazeradded..
In short, there’s nothing inherent in their size that keeps these independent businesses from competing against the giants on quality and cost. Which brings us back to the Staples merger.
There are only two office-supply wholesalers in the U.S.: Essendant and S.P. Richards. For independent office supply dealers, those two firms are their only tethers to the supply chain. Now the FTC has let Staples (and its parent company, the private equity firm Sycamore Partners) buy Essendant, taking control of one of those lifelines.
“They have given our biggest competitor ownership of our biggest supplier,” said David Guernsey, who started Guernsey, Inc., a Virginia-based office supply company more than 45 years ago. “We have never been exposed to anything like this before.”
One big risk for independent dealers is that this merger will allow Staples to crawl inside their businesses and look around. That’s because Essendant does more than ship products to these dealers; it’s intimately involved in their operations. When a dealer is competing for a contract, for example, Essendant often knows the details of the bid, including the service terms the dealer is offering to set itself apart. And it knows its pricing, because dealers typically work closely with Essendant to secure the best prices from manufacturers.
“If I were [Staples] bidding against [an independent dealer] for one of these deals, I’d love to have that information,” said Guernsey.
“Dealers are rightfully concerned this data will be weaponized against them,” noted Rohit Chopra, one of the two dissenting FTC commissioners. The majority did not dispute his assessment, writing in their decision that “Staples would gain access to the competitively sensitive information of Essendant’s dealer customers… which could enable Staples to engage in anticompetitive conduct.” But rather than block the deal, the FTC imposed a flimsy remedy, ordering Sycamore Partners to set up a “firewall” between Staples and Essendant.
Many in the industry are skeptical that a firewall is enforceable, given the ability of employees to share information verbally. Indeed, the idea of a “firewall” did not even originate with the FTC. Sandy Douglas, the CEO of Staples, floated the idea last fall as opposition to the merger gained momentum.
A second risk is that Staples will raise the prices that Essendant charges independent dealers, who would then have to pass the increases along to their customers. Faced with higher prices, some of these customers might switch to Staples. Remarkably, the FTC majority insists this won’t happen because Staples is not a significant player in the market for these customers, who are mostly mid-sized businesses and local government agencies. Yet Staples, which saw its revenue in North America plunge 10 percent between 2013 and 2016 as consumers flocked to Amazon, has been openly going after these very customers. “Staples Inc. is overhauling its marketing as part of a high-stakes pivot away from what it was built on—selling low-priced office supplies at big stores—and toward a stronger focus on selling a wide range of products and services to businesses,” Bloomberg reported in 2017. Buying Essendant appears to be part of this strategy.
The FTC also insists that the ability of independent dealers to switch to the one remaining independent wholesaler, S.P. Richards, will keep Staples from abusing its power over them. For an office supply dealer, though, switching wholesalers is less like swapping toothpastes and more like undergoing a kidney transplant. S.P. Richards can absorb only so many dealers at a time, and it doesn’t have a presence in every region of the country. Even if it did. the FTC, established by Congress to safeguard competition, would be essentially consigning independent dealers to a monopoly supplier, with little leverage to negotiate.
There’s no guarantee that S.P. Richards will remain independent, either. In fact, its parent, Genuine Parts Co., has been looking to offload it. One potential suitor is Office Depot, which is contending with many of the same dynamics as Staples is.
A third risk is the one that Chopra raised most forcefully in his dissent: the FTC failed to investigate what Sycamore Partners might have in mind for Essendant. Sycamore is a notorious private equity firm that, according to the Wall Street Journal, “often buys struggling retailers and sells off their most valuable pieces.” A recent study by Retail Dive found that more than 15 percent of retailers acquired by private equity firms over the past 15 years have filed for bankruptcy.
A final risk, perhaps the most serious, is that this merger will accelerate Amazon’s push to dominate the office supply market, including its bid to capture the spending of thousands of cities and school districts, which my organization reported on last year. While Staples and Office Depot offer little to differentiate themselves from Amazon among these customers, independent dealers have distinct strengths that Amazon cannot match. Yet the FTC seems happy to weaken them as viable competitors.
More than anything, the FTC’s approval of this merger shows its lack of regard—arguably even contempt—for the ecology of industries: the mix of businesses of different sizes, operating from various vantage points, in relationships with one another both cooperative and competitive. A healthy ecology is regenerative and naturally optimizing; a monoculture is not. Another term for this is “market structure.” Before Robert Bork and the Reagan administration turned antitrust enforcement on its head, a healthy market structure was an important lens for evaluating mergers.
Today this lens has largely been abandoned in favor making decisions based on narrowly modeling a merger’s potential to increase “efficiency.” And it’s not clear that even these models can deter the FTC’s predilection for approving mergers. “I believe that staff identified significant evidence of likely harm to competition,” in this merger, wrote Commissioner Rebecca Kelly Slaughter in her dissent.
Slaughter’s dissent rightfully situates the approval of this merger in the context of a “great debate” that is “taking place in Washington policy circles and even around the country at family dinner tables” about “the consequences for America citizens of fewer and more dominant companies controlling large swaths of industries.”
That debate has advanced far enough to produce a 3-2 decision in a case that might have been 5-0 not that long ago. But it must advance even further, and quickly, if we are to salvage an economy that includes independent businesses.
“I look at the younger people in this industry and I fear for them,” says Guernsey. “It will be much harder for them to succeed.”
https://washingtonmonthly.com/2019/02/26/the-federal-government-is-rigging-the-game-against-small-businesses/
http://www.centralvalleybusinesstimes.com/stories/001/?ID=28767