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To: LindyBill who wrote (36671)	3/28/2004 5:58:19 AM
From: LindyBill	Respond to of 793897

Required reading - A Lesson From Wal-Mart By Peter J. Solomon Sunday, March 28, 2004; Page B07 Recent news reports indicate that federal regulators have refrained from pursuing monopsony antitrust action against Wal-Mart for putting the squeeze on its suppliers because of the price benefits to consumers. If those agencies, in particular the Federal Trade Commission, want to be consistent and also act in the buying public's long-term interest, they need to be equally hands-off as those suppliers and other retailers increasingly consolidate in response to the Wal-Mart challenge. The FTC should move immediately to modernize the historical, and now outdated, definition of "markets" that it uses in evaluating corporate mergers. As the regulators recognize, Wal-Mart's pricing practices have had a positive influence on the economy. They have helped dampen inflationary pressures and improved Americans' standard of living by lowering prices, forcing competitors to lower theirs also, and requiring efficiencies from direct suppliers of products as well as, in turn, their suppliers. Wal-Mart is changing marketplaces -- not simply the marketplace for buying and selling goods to consumers but the corporate marketplace -- by creating mergers, acquisitions, sales and liquidations among competitive retailers and domestic manufacturers. In category after category, Wal-Mart is fast becoming the leading competitor. Take toys. Wal-Mart does 20 percent of the retail toy business. KB Toys, the fifth-largest toy retailer, has filed for bankruptcy, citing Wal-Mart's practice of "discounting toy prices sharply." Or food. Wal-Mart now sells 14 percent of all groceries in the United States, making it the nation's second-largest supermarket. That share is expected to reach 20 percent by 2008. Largely as a result of that growth, the public value of pure supermarket companies has declined by 50 percent over the last three years, while the general market has risen. To meet the Wal-Mart challenge, consolidation is an imperative for both competitors and suppliers. Size can provide retailers with the product offerings and price flexibility to help keep customers from migrating to Wal-Mart. It can also allow suppliers to drive their manufacturing and logistics costs down and give them more countervailing negotiating power. The size of Wal-Mart relative to its competitors and suppliers is so vast that the principal strategic question for every American retailer and consumer goods manufacturer is: "What's my relationship to Wal-Mart?" After a firm's management answers this question, it can decide how to answer other strategic questions. For many companies, that will mean getting to a size not attainable by internal growth, which will inevitably lead them to consolidation. There is no reason to believe that the Wal-Mart economic juggernaut -- with $250 billion of sales (larger than the next five retailers combined) and $240 billion of market equity -- will slow down. The FTC needs to update its historical, now largely anachronistic definition of "markets" to reflect more accurately Wal-Mart's dominant position and allow others to join forces to compete. If the FTC acts too aggressively against future mergers, there ultimately will be fewer competitors, not more, and weaker competition, not stronger. Eventually, Wal-Mart's everyday low prices may not need to be so low. The need to change its definition of "markets" to account for Wal-Mart should have been apparent to the FTC in 1997, when it blocked the proposed merger between Staples and Office Depot (on whose board of directors I have served for 14 years). The FTC ruled that the two "category killer" superstores made up their own "relative market" despite the fact that at the time Wal-Mart alone probably sold more disposable paper office products than Staples, Office Depot and Office Max combined. Seven years later, the FTC still has not broadened its criteria in the face of the radically altered marketplace. The last dominant retailer to have such influence was Sears, Roebuck and Co. in the late 1920s, when its explosive growth ignited a wave of consolidation in the retail business. Locally based department stores merged to create Federated Department Stores, Allied Stores and Associated Dry Goods and emerged as powerful competitors. Wal-Mart's success is stimulating countervailing forces. In evaluating the inevitable flood of mergers to come, regulators should avoid unwittingly handicapping the emerging competition. The writer is founder and chairman of Peter J. Solomon Co., an investment banking advisory firm. © 2004 The Washington Post Company