The Federal Trade Commission (FTC) voted unanimously to challenge Edgewell Personal Care Co.’s proposed $1.37 billion acquisition of Harry’s, Inc. The complaint alleges that, for many years the two biggest razor companies operated as a “comfortable duopoly” made increasingly profitable by annual price increases that were “not driven by changes in costs or demand.” But this dynamic changed in recent years thanks to digital, direct-to-consumer upstarts like Harry’s and Dollar Shave Club.
According to the FTC, losing Harry’s as an independent competitor “would remove a critical disruptive rival that has driven down prices and spurred innovation in an industry that was previously dominated by two main suppliers, one of whom is the acquirer.” The FTC concluded the merger would ultimately “inflict significant harm on consumers of razors across the United States.”
Harry’s launched as an Internet-only, direct-to-consumer wet-shave brand, immediately capturing loyal customers and inspiring enthusiastic reviews. In 2016, Harry’s entered brick-and-mortar retail stores, posing an additional threat to Edgewell and P&G. In response, the duopolists immediately reduced prices and developed “previously unavailable value-priced products, generating significant benefits for consumers,” the FTC said. Rather than continue to compete, Edgewell is attempting to “short-circuit competition by buying up its newer rival,” which “promises serious harm to consumers,” according to Daniel Francis, Deputy Director of the FTC’s Bureau of Competition.
The administrative trial is scheduled to begin on June 30, 2020.
Disruption is generally good for competition and consumers. Disruptors distinguish themselves through lower prices and/or innovation. For example, in the eyewear segment, Warby Parker has taken market share from giants like Luxxotica by offering lower prices and a more convenient direct-to-consumer model. Similarly, in the financial services market, Robinhood has acquired market share by offering no-commission trades and a millennial-friendly app. Robinhood’s success has been so pronounced that many of its large rivals have been forced to offer zero-commission trades as well.
But the benefits bestowed by disruptors will be short lived if legacy firms can protect their dominance by acquiring disruptors once they pose a sufficient threat.
The FTC appears to recognize this dynamic. Interestingly, this coincides with the development of enforcement cases against mergers designed to take out nascent competition. Hopefully this is a sign of things to come and not an aberration.
Edited by Tom Hagy for MoginRubin LLP.