U.S. TAKES A CLOSER LOOK AT MAYBELLINE SALE
Byline: Joanna Ramey
WASHINGTON — The Justice Department’s interest in how branded consumer goods compete in a market where there are few players will likely play a key role in the agency’s stepped-up scrutiny of the L’Oreal and Maybelline cosmetics merger.
As reported, Justice officials have declined to give the merger their antitrust approval after the agency’s routine 15-day review. Instead, the two companies now must undergo a microscopic agency examination of how their marriage might affect competition in the mass market cosmetics industry, a process that could take months.
Justice officials could not be reached for comment due to the government shutdown.
“You’re in an area of presumptively serious antitrust concerns,” said Doug Melamed, a Washington antitrust attorney.
What typically grabs antitrust officials’ attention is the seemingly narrow nature of competition within an industry. Currently, Revlon has 20 percent of the mass cosmetics market, while Procter & Gamble dominates with about 30 percent of sales through its Cover Girl and Max Factor lines. P&G’s control would be rivaled if L’Oreal, with 10 percent, buys Maybelline, with roughly an 18 percent market share, for a total of 28 percent.
The next layer of concern resides in how such increased market concentration among fewer players could increase prices. It’s how Justice officials might measure this likelihood that could be the crux of how the L’Oreal and Maybelline merger will be judged by the agency, antitrust observers say.
The agency’s new antitrust division chief economist, Carl Shapiro, in a recent speech to the American Bar Association, discussed his increased attention to the effects of mergers of branded goods, even if they fill different niches in the market, as is the case for L’Oreal cosmetics, which has higher prices than the mid-market Maybelline.
Shapiro described a technical formula now being used by Justice to measure a merger’s price impact when “a significant number of consumers consider the merging firms’ products to be their first and second choices.” He said that unless competitors reposition their products or there are new entries into the market, there is a strong likelihood the merging brands will increase prices and injure consumers.
“Market share numbers must be interpreted in conjunction with evidence about the proximity of merging brands,” Shapiro said.
According to James Weiss, also a Washington antitrust attorney, Shapiro’s emphasis on the importance of branded competition within retail markets is something to watch.
“Antitrust enforcement is very much influenced by economic analysis,” Weiss said. “Carl Shapiro believes a certain analysis can support cases where high market concentrations among branded products can adversely affect consumers. It certainly is an evolving initiative, which people are watching with interest.”
But, as in all merger cases, each market for branded goods has its own particular characteristics. In the case of the highly competitive cosmetics industry — both mass market and department store lines — industry observers say price increases would be product suicide. Even L’Oreal executives have acknowledged a need to maintain L’Oreal and Maybelline in separate price niches.
“You can’t make Maybelline’s prices any higher than they are now, or else you’ll get defections,” said Allan Mottus, a beauty industry consultant.
“Consumers are totally price oriented. If a L’Oreal lipstick goes to $7.50 you’ll have people say, ‘I can go to a department store and buy a Clinique product for $11.50 and get a whole bag of gifts with purchase.”‘
The leading mass market cosmetics’ shares of the market are also routinely under attack from small, lower-priced new companies, another factor weighing against Justice intervening in the merger, Mottus said.
“Mass market cosmetics has become a much higher competitive level product category than it has been for years,” Mottus said. “Companies are stealing market share from one another.”
“The merger does tighten up the industry a bit, but who could say whether there would be less competition?” asks Douglas Love, a cosmetics industry analyst with Merrill Lynch.
“I don’t think you’ll see an immediate change in the marketplace because of this merger.”
Another argument in favor of the merger is the effect of competition all mass market brands now have from door-to-door sales of vendors like Mary Kay and Avon. Just as consumers weigh the value of buying cosmetics at drugstores and supermarkets versus department stores, door-to-door companies provide another venue for shopping and thus an incentive to keep prices in check, Melamed said.
“Does it make sense for Justice to look just at the mass market as the four leading companies? It’s a question of product substitution by consumers of alternatives when there are higher prices,” Melamed said.
“Justice will be asking L’Oreal and Maybelline questions about their market strategies, surveys and data on sales that might shed light on that.” — Fairchild News Service