FTC Says Razor Thin Market Share Not Enough for Merger Clearance and What It Means for Disruptive DTC Brands

Alerts / December 21, 2020

Last week, the Federal Trade Commission (FTC) filed a complaint in the U.S. District Court for the District of Columbia against Procter & Gamble to enjoin the consumer goods company from acquiring New York-based direct-to-consumer shaving startup Billie. The transaction was announced in January 2020, just over two years after Billie came to market but after it had already seen significant growth in sales “at P&G’s expense,” according to the complaint. The complaint seeks a temporary restraining order and preliminary injunction to stop the deal pending an administrative trial at the FTC.

The FTC’s filing here is another in a line of actions that takes aim at preventing acquisitions of “nascent competitors”; in fact, the FTC’s press release specifically says that “the proposed acquisition would eliminate substantial and growing head-to-head competition between P&G and nascent competitor Billie in U.S. wet shave razor markets.” These actions potentially would shatter the dreams of various disruptive direct-to-consumer brands for which acquisition is the holy grail.

According to the FTC’s press release, “P&G sells women’s and men’s razors under various brands, including Gillette, Venus, and Joy” while “Billie sells a quality, mid-tier women’s system razor targeted at Generation Z and Millennial women.” The FTC also noted that Billie’s marketing effort “attack[s] the practice of pricing women’s razors higher than comparable men’s razors—otherwise known as the ‘pink tax.’” The complaint emphasizes Billie’s “female first” message, which “challenged traditional portrayal of women’s razors.” Further, “Billie targeted P&G from the start, with a vision to [d]ethrone Gillette Venus to become the number one women’s razor brand in the U.S.” According to the FTC, “P&G’s CEO of Grooming viewed the ‘big’ value from this acquisition as the ‘removal of the competitive threat.’”

As we previously wrote, in February, the FTC sued to block another direct-to-consumer shaving company from being acquired by a more established competitor. There, the FTC filed an administrative complaint seeking to prevent the $1.37 billion acquisition by Edgewell Personal Care Company, which owns shaving brand Schick and others, of nascent Harry’s Inc. Ultimately, Edgewell and Harry’s abandoned their merger under pressure from the FTC’s action.

The Edgewell/Harry’s action made clear that the FTC was looking beyond current market share in evaluating block mergers, focusing on future competition and innovation, reasoning that a nascent competitor could constrain a larger competitor’s market power. Harry’s reported market share at the time of entering into an agreement with Edgewell was just 2.5 percent, which would usually fall outside the realm of FTC action. However, the FTC complaint described Harry’s as “a uniquely disruptive competitor in the wet shave market [that] has forced its rivals to lower prices,” which was enough for the FTC to want to prevent this nascent competitor from leaving the market. Notably, before the FTC’s complaint was filed, Harry’s had already expanded from solely direct-to-consumer sales to brick-and-mortar with its deal for shelf space with Target. That deal placed Harry’s in direct competition with established wet shave companies. The FTC’s complaint there was aimed at preventing Edgewell from eliminating this small competitor before it had a chance to gain significant market share.

The FTC is applying the same logic in its recent action against P&G and Billie, even though Billie had not yet expanded to brick-and-mortar retail; the complaint alleges that P&G “seeks to acquire Billie on the eve of Billie’s expansion into brick-and-mortar retail.” “Billie saw an opportunity to challenge P&G’s position as the market leader by finding underserved, price and quality conscious customers,” said Ian Conner, director of the FTC’s Bureau of Competition. “As its sales grew, Billie was likely to expand into brick-and-mortar stores, posing a serious threat to P&G.” The FTC’s press release also called out P&G’s recent positioning of its brand Venus as a potential competitor for gender- and consumer-conscious Billie. “As Billie grew rapidly, P&G introduced its own direct-to-consumer site promoting its women’s system razor brand, Venus. The proposed acquisition also halted Billie’s anticipated expansion into brick-and-mortar retail stores, which would have benefited consumers through intensified competition between Billie and P&G at retail locations,” the FTC said.

Indeed, for several years, there has been an increased focus on “nascent competition” in merger review by the federal antitrust agencies. Nascent or future competition concerns potentially exist where one of the merging entities “has the capabilities that are likely to lead it to develop new products in the future that would capture substantial revenues from the other merging firm” and where “one of the merging firms has a strong incumbency position and the other merging firm threatens to disrupt market conditions with a new technology or business model” (Horizontal Merger Guidelines). Further, the FTC’s recent filings against a tech giant concerning past-approved mergers reinforce its view that elimination of startup competitors – even if they do not have significant market shares at the time of the acquisition – could lead to anticompetitive effects for consumers.

In the case of tech startups and direct-to-consumer companies alike, some have argued that nascent competitors are better left on their own rather than as part of a larger corporation. However, this approach of denying nascent companies’ ability to merge may harm innovation by disincentivizing startups and app developers, particularly those whose primary goal was to be acquired by a larger company.

The FTC’s actions against Harry’s and Billie, largely direct-to-consumer companies, both in the razor market, leave us with a few interesting takeaways in the antitrust, acquisition and advertising spaces:

  • The FTC may look at future (nascent) competition as a constraint on market power and look to potential future market share or innovation constraints as part of its merger review.
  • Market disruptors, especially those challenging large incumbent competitors through marketing and advertising, may be viewed by regulators as strong potential competitors likely to restrain competitor market power.
  • The pink tax – the practice of pricing women’s products higher than comparable men’s products – and nascent competitors’ ability to constrain the pink tax are issues on the FTC’s radar.
  • Direct-to-consumer advertising, marketing and pricing practices could significantly impact how the FTC views a prospective merger.
  • Disruptive brands that successfully challenge the competition through advertising and more competitive pricing may inadvertently weaken their ability to be acquired if regulators take an adverse view regarding that activity. These competing goals will need to be carefully balanced by emerging companies in the future mindful of how regulators might perceive that activity.

Authorship Credit: Ann O’Brien, Linda Goldstein, Marc Schildkraut and Alyse Stach

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