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total market, and this has misled some into believing that the acquisitions which have taken place raise no serious competitive consequences.

The present Federal statute prohibiting harmful mergers (primarily section 7 of the Clayton Act) seems adequate in this particular respect since it applies "in any line of commerce in any section of the country" where there may be a substantial lessening of competition or a tendency toward monopoly. It is urged that both the Department of Justice and the Federal Trade Commission exercise their jurisdiction with relation to mergers of retail-food concerns in a manner that takes into account the relatively narrow geographic limits of the markets that prevail in this industry.

In addition, it is recommended that these governmental agencies apply the statute with careful regard for the fact that it was intended by Congress to prevent a probable future lessening of competition and not necessarily an actual immediate effect. It is not in keeping with the basic purpose of the law to adopt an enforcement policy which requires an actual injury to competition before acting. Here, also, the statute seems adequate, providing it is vigorously as well as intelligently administered.

This means timely action, avoiding insofar as possible long-drawn-out proceedings during which the lethal effects of the merger are allowed to take place. Where the merged companies control such a substantial share of the relevant market that there eixsts a probable future injury to competition, extensive and prolonged examination into actual market effects of a merger serves to delay unnecessarily final disposition of the case. When this happens it results in an instance where "justice delayed is justice denied."

EFFECTS ON PRODUCERS AND PROCESSORS

Attention has been directed to the need and desirability of testing each questionable merger by considering its probable future consequences in the particular market where it takes effect. This should be done from the point of view of protecting consumers.

However, there is another point of view to consider. This relates to the impact the present merger trend in retail food distribution has on producers and processors.

The interest of the Nation is concentrated now on devising a program that will aid farmers to attain a larger share of the prosperity which other segments of the economy enjoy. It is generally acknowledged that farm families have not earned sufficient income to keep up with current prosperity. This situation is one of national concern not only for reasons of elemental justice, but also because it is doubtful if the present prosperity can continue with farmers being squeezed as they are now.

In view of this situation, what implications are raised by the present merger trend in retail food distribution? Since the necessary result of such trend is to accentuate the concentration of buying power into fewer hands, it is clear that farmers will be adversely affected. Producers must sell in a truly competitive market to receive a fair price for their products. Any pronounced tendency toward concentration of retail food sales in the hands of few giant distributors cannot be anything but adverse to farmers' interests and those of the public generally.

Already there is substantial evidence of danger in the fresh produce industry. Last November, at a meeting of the Western Growers Association, fear was voiced that the trend of mergers by retail grocery combines was placing many farmers as well as jobbers and shippers in a precarious position. It was charged that there is considerable danger of large buyers offering a price below the market and, when it is refused, withdrawing from the market. Since the products for sale are perishable, action like this lasting only a few days can produce the result of forcing the grower to sell at the buyer's price.

The charges made at this meeting of Western Growers were denied, but irrespective of whether they are true, it is clear that unrestrained mergers of retail grocery stores can create the power to squeeze growers especially during the critical shipping season. The mere existence of such power involves a serious threat to agricultural groups. Once there arises a substantial concentration of buying power, so as to make it possible for one or more large buyers to manipulate the going market price at which produce is sold, it will become virtually impossible to prevent recurrent abuses and the harm they create. The only adequate safeguard against this is to prevent the concentration in buying power that makes such abuses possible. As has been show'n, a partial survey of mergers in this industry last year resulted in a few large firms taking over previously independently operated facilities responsible for over $1 billion worth of retail food sales. It would not take long, if this trend were to continue, before domination by mass buyers of the produce markets could very seriously threaten the existence of growers.

OTHER EFFECTS

It is equally possible that similar abuses of buyer power would be practiced in the purchase of processed and manufactured products. Canners and manufacturers of branded merchandise, faced with the loss of a sizable portion of their market, could be forced to sell at the buyer's price. Already there is evidence of a growth in discriminatory pricing in favor of large buyers. Retailers who compete with such favored competitors cannot withstand the squeeze any better than can farmers and growers.

Since the prices retail food merchants pay suppliers for processed and manufactured products run about 85 percent of the prices consumers pay at the store, the competitive strength of nonfavored retailers will be lessened if they are unfairly discriminated against by suppliers and manufacturers. In a market where the net profit is often only 1 or 2 percent of net sales, a discrimination of only a fraction of a cent on an item can be a serious disadvantage.

There is no argument against manufacturers passing on to large buyers actual cost savings reflected in their purchases. These price differentials are justified, but price discriminations occur where a favored buyer pays less for his merchandise because of the coercive influence of his buying power on a supplier who cannot afford to deny the favoritism.

Consumers are injured by discriminations not only because they deprive the majority of retailers of their ability to compete in a market, but also because the favored buyer-distributor is under less economic compulsion to reflect his price advantage in the form of lower consumer prices. If instead of a discrimination, the supplier offers the price cut proportionally to all his buyers competing in a market, then competition is likely to force a compensating reduction in resale prices charged by such buyers to their customer—the con

In some cases it has been shown that a large buyer used a discriminatory advantage in a harmful manner by helping it to obtain a dominant position in the market.

PYRAMIDING EFFECT One of the most alarming features of the present merger movement in retallfood distribution is that it leads to competitive mergerism where one merger leads to another until the process develops into a floodtide. The desire by company executives to protect their market position in the industry is almost irresistible. It then becomes a matter of self-defense and agents are sent into a market to find efficient operations which can be acquired. The pyramiding of one merger on top of another brings about a strong influence promoting concentration of economic power out of proportion to normal industry development. The more desirable and stabilizing growth through internal means, based on superior efficiency and technological advancement is supplanted by a merger race that upsets the sound development of the industry. If allowed to continue, undesirable mergers even from the point of view of the companies themselves will take place, and the result may well be losses to stockholders as well as unemployment for many workers. It is not likely that an industry held in the grip of such evil can remain efficient, promote cost-saving innovations in techniques, stabilize employment, and perform the other functions and responsibilities that society imposes on it.

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TAX IMPLICATIONS

Another important cause of undesirable mergers is the present Federal tax laws.

The current high rates on individual and corporate income place a heavy burden on all businesses. But the burden is particularly heavy on small- and medium-size concerns in a market experiencing such growth as that in retail. food distribution. The tax structure multiplies the difficulties food retailers face in acquiring capital for current needs as well as for expansion purposes. As a general rule, these retailers depend to a large extent on retained earnings for improvement and expansion purposes. And, because their access to the capital market is limited, they frequently pay higher costs for borrowed capital.

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At the present time, the first $25,000 of corporate income is taxed at 30 percent, and all additional income bears a 52-percent tax. The ability of independent enterprise to acquire the capital it needs to grow would be substantially increased if the present 22-percent surtax on corporations was applied to income in excess of $30,000 (instead of $25,000 as at present) for the current taxable year, with the provision that each year this amount be raised until it reached at least $50,000 for the taxable year beginning in 1960. The effect would be to encourage independent enterprise to expand with the market and discourage mergers induced by the inability of such enterprise to acquire needed capital. The loss of revenue to the Government would be more than offset by the advantage to the competitive economy in preventing increasing concentration of markets by very large concerns.

There is also a need to consider the adverse effect that income, 'estate, and capital-gains taxes have in encouraging mergers that are uneconomic from the industry's point of view and undesirable from the public interest.

The present rates and administration of these taxes combine to create a strong pressure on major owners of closely held retail food businesses to merge with large concerns. The tax incentive on such owners is considerable. And the more successful they have been in building the value of their business, the greater is the presure on them to sell out or merge. This is perhaps one of the major reasons why so many mergers in this industry resulted in highly successful local grocery operations being acquired. The present tax laws have the effect of encouraging such acquisition.

This comes about when the value of the stock held by the major owner places him in a high estate tax bracket. When this stock is his largest investment holding so that he does not have other assets sufficient to pay the estate tax, and the marketability of such stock to the public is narrowly limited (if such a market exists at all), continuation of the business may impose an economic hardship on his wife and family who survive him. The tax on an estate of $400,000 could amount, under current rates, to almost $100,000. To pay this might require the redemption of all his stock from the financial resources of the business. If it could not meet this burden, a distress situation would develop, not only for the heirs of the owner but for the business as well. In addition, in situations where a major owner of a closed corporation dies, the Treasury Department can place a high valuation on the stock, making the estate tax that much greater. Thus, if such an owner were to remain in business and retain his holdings, the taxes his estate would have to pay could leave his heirs with little or nothing.

However, should he sell his stock to a large concern, which could pay a handsome price by reason of its financial strength, the gain from such sale would be taxed at a rate of only 25 percent, or he could exchange his stock for valuable marketable securities of the large acquiring concern and pay no tax at all. As an added inducement, he could enter into a personal service contract with the acquiring corporation at a high salary for a given number of years. An instance of this was reported as an aftermath of the ACF-Brill mergers when some former operators of concerns taken over by Brill entered into 5-year contracts under which they received $75,000 per year.

So great is the tax incentive on owners of closely held local retail food concerns to sell their interest to (or merge with) large operators that it is more than probable Federal tax laws and their administration by the Treasury Department played an important part in encouraging the present waive of mergers. In effect, the tax laws are motivating the very economic concentration which the antitrust laws are designed to prevent. These laws are now working at cross purposes insofar as mergers are concerned.

RECOMMENDED PROGRAM FOR PREVENTING FURTHER HARM CAUSED BY MERGERS

The harm referred to here is twofold. First, there is lessening of competition in retail food distribution. Second, there is the undesirable concentration of economic power. Both are inevitable consequences if the tide of mergers in this industry continues as it has in 1955. Last year over 1,400 food stores selling annually in excess of $1 billion were acquired through a waive of merger activity by a small group of large concerns. So far in 1956 there has been no sign of an end to this alarming trend. Its further continuation will increase the heavy toll of stores already taken over. Virgorously competitive distribution of food and grocery products to consumers is so essential to the welfare of every American, so necessary to the stabilization of the cost of living and farm income, and so indispensable to the preservation of free competitive opportunity, that urgent steps

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are required to stem the tide of mergers in this industry which now threatens the Nation. The following are the actions recommended to meet this threat. They are not all that can be suggested, and nargus may add to them at a later date.

NARGUS RECOMMENDATIONS 1. The officers and directors of NARGUS pledge the resources of this association, together with their time and energies, in aiding independent retail food merchants to become stronger and more efficient operators, They will endeavor to give every legitimate assistance possible to enable them to grow in size and service to the Nation. They will call on all those who supply and work with independent market operators to cooperate in a joint effort directed toward these ends. They will work with suppliers, their representative groups and all others who desire, as they do, to preserve competitive opportunity and vigorous economic rivalry in this industry. They will endeavor to prevent a dangerous concentration in the industry from robbing the consumer and squeezing the farmer

2. In keeping with these principles, we recommend to the Congress the following proposals as being the minimum necessary to preserve vigorous competition in retail food distribution.

(a) Amend the Clayton Act to provide that section 7 (the merger provision) shall apply where either the acquiring corporation or the acquired corporation is engaged in commerce. Under present law both corporations must be engaged in commerce. In retail food distribution, this requirement creates a serious loopbole in the act, because it has the effect of allowing acquisitions of local retail food distributors by large interstate concerns that would otherwise violate the act.

The purpose of section 7 is to prohibit mergers that may substantially lessen competition or tend to create a monopoly in any section of the country. It cannot be doubted that swallowing up local retailers operating only in intrastate commerce can produce the evil effects on competition which the act was intended to prevent. As already shown, many of the questionable mergers previously considered in this statement involved the acquisition of local concerns. Considering the large number of local enterprises in retail food distribution and their importance to preserving vigorous competition within local markets, it is essential to make the law applicable whether or not the corporation to be acquired is in interstate commerce.

(6) Amend the Clayton Act to require that merging corporations with combined assets of $10 million or over notify the Attorney General and the Federal Trade Commission at least 90 days before the proposed merger is to take place. The amendment should require that the parties provide the enforcement agencies with such pertinent information as the statute generally describes, providing it is requested within 30 days after the notice of the proposed merger is filed. This amendment should also contain a procedure for preventing the merger if there is a failure to give notice, or a failure to file the required report. Since this proposal will not require approval by the Department of Justice or the Federal Trade Commission of a merger before it can take place, it should also .be made clear that failure of either agency to act will not be construed as approval of the merger or affect its right to institute proceedings against the merger at a later date.

Premerger notification and reporting of this type is not an unreasonable requirement. In essence, it merely prevents the merger from taking place for 90 days and provides for filing essential information by which its competitive consequences may be judged. At present the Government obtains its information from financial periodicals, trade journals and other publications which at best is most unsatisfactory. The proposed changes will save the agencies time, effort and expense, and aid considerably in more effective enforcement of the present law.

(c) Amend the Clayton Act to give the Federal Trade Commission authority to seek court action preventing a proposed merger from taking effect, and where it has already taken place to ask for a court order preventing the comingling of the assets and facilities of both firms until a decision is reached on the legality of the merger.

The wisdom in giving the Federal Trade Commission this additional power is obvious. The intent of the law is to prevent injuries to competition that arise out of harmful mergers. Once the acquired company is swallowed up and disappears. it is practically im possible to restore preexisting competitive conditions.

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Pending a determination of their illegality, the Commission should have the power to prevent harmful mergers from taking place, or where they have taken place, to prevent insofar as possible the competitive injury that will result. At present, the Department of Justice has authority similar to that which is recommended here for the Commission. Because of the divided responsibility in preventing harmful mergers between these two agencies, it is desirable that the Commission have as much authority in this field as the Department of Justice loes.

(d) Amend the Internal Revenue Code to provide that the corporate surtax of 22 percent be applied to income in excess of $50,000. This can be done on a graduated scale each year so that the surtax will be applied on income in excess of $30,000 this year, and by 1960 on income in excess of $50,000.

At present, the surtax of 22 percent is imposed on income in excess of $25,000. The normal tax on income of this amount or less is 30 percent. One of the most serious problems of independent business today is raising sufficient capital for expansion purposes. The application of the 52-percent tax rate to income in excess of $25,000 constitutes a serious impediment to the growth of independent enterprise. For the same reason it is conducive to harmful mergers.

(e) Amend the Clayton Act to make cease-and-desist orders entered by the Federal Trade Commission final after a lapse of time, as is provided for Commission orders under the Federal Trade Commission Act.

This is a longstanding weakness in the Clayton Act which the Commission has repeatedly recommended be corrected. Under present law a cease-and-desist order of the Commission under the Clayton Act does not have full force and effect. In many cases the Commission must show a further violation of the law before its order can be enforced.

(1) Amend the Clayton Act to make the meeting of competition an absolute defense to a charge of price discrimination only in cases where the probable effect of the discrimination is not to injure competition substantially or tend to create a monopoly.

While this recommendation does not deal with the merger provision of the act, nevertheless it is needed to prevent harm to competition growing out of mergers already in effect. The concentration of buying power in the hands of a few which mergers produce, is likely to manifest itself in greater pressure either direct or implied-being placed on manufacturers and suppliers to give such large concerns price advantages which they do not deserve by reason of cost savings. At present, the meeting of competition in good faith is a complete defense to a charge of price discrimination, even where its effect is or may be to injure competition substantially or tend to create a monopoly. Under this loophole it is gradually developing that this defense applies even where the discrimination is given to meet an illegal price, thereby allowing one harmful discrimination to justify another. This chain reaction threatens effective enforcement of the Robinson-Patman Act. Where there is a probability of substantial injury to competition resulting from a discrimination, it is more important to protect the competitive market than to allow the meeting of competition by means of harmful discriminations. Eliminating this loophole in the act will help prevent one of the injurious consequences of inergers in the retail food field.

(9) Increase the appropriation of funds for the Antitrust Division of the Department of Justice and Federal Trade Commission to be used in antimerger work.

Never before has this association advocated an increase in Government appropriations for any purpose. It does so now only because it feels the need for more money to prevent harmful mergers outweighs the usual considerations against greater Government spending.

Last year was a banner year for mergers. The increased activity warrants a similar increase in the resources devoted to preventing mergers which may injure the competitive system. That system is worth what it costs to preserve it. It should also be noted that a larger appropriation to prevent harmful mergers more than likely will return dividends by making it unnecessary to bring many costly suits to restore competition where monopolistic practices have resulted. A dollar spent to prevent harmful mergers may save many times that amount later. If a bad merger is permitted, it may become necessary later for the Government to institute expensive antitrust action against the combination in an attempt to recreate competition which the merger destroyed. From this point of view, it is cheaper for the Government and the taxpayers to spend now what is needed in antimerger work, rather than wait until the damage is done and try to correct it.

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