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Could a PetSmart/Petco Merger Further Thin the Pack?

Could a PetSmart/Petco Merger Further Thin the Pack?

We are seeing consolidation in retail happen at an increasing pace. A decade ago, it wouldn’t be unusual to see three to five significant competitors in any given merchandise category, ranging from national players to dedicated regional specialists. Now, we are seeing some categories where the real competition is shrinking to two (and perhaps one) significant national players.

There are now two very high profile cases occurring that are testing the “two’s a crowd” theory of modern-day retail. The Staples/Office Depot merger is under serious regulatory scrutiny by the Federal Trade Commission and there are indications that the deal, both here and abroad, could be in jeopardy.

This, of course, follows on the heels of last years’ Office Depot/Office Max merger, as well as the very long history of Staples and Office Depot attempting to merge in the past. The FTC stopped that deal in 1997. This time around, contract sales seem to be the major bone of contention. While the two firms don’t control a huge portion of the retail office supplies market, combined they are major players in the contract office supplies sector. At any rate, the future of these two companies is likely to involve continued store closings and downsizing as competitive pressures take their toll. If the deal doesn’t go through we might see an even greater number of closures.

There have also been public rumors about a merger between PetSmart and Petco. At this time, both of these companies are controlled by private equity firms. Petco has been in private equity hands for some time, while PetSmart recently went private. Petco has also been looking at a potential IPO as well, as the chain’s owners seek liquidity.

We suspect that the eventual FTC ruling on Staples and Office Depot will have a cascading impact on further retail consolidation, including in the pet supplies industry. PetSmart and Petco face the same technical challenge—they are important in the specialty sector of the business, which is a narrower definition of competition, and two of many who compete in the broader pet business.

Obviously, competition in retail has been redefined. In just about every category, Wal-Mart  and Target wield enormous influence and market share. Pet and office supplies would be no exception. Another key factor is, of course, e-commerce. While Amazon controls significant share in many categories, there are also a growing number of dedicated specialists who also compete. In many categories, e-commerce sales are absorbing whatever growth would be available for brick-and-mortar retailers. While it seems shortsighted to view competition narrowly, the FTC might just do so.

If the proposed mergers don’t go through, expect to see continued natural attrition, which will include further store closings and perhaps more creative consolidation attempts. The market is indeed getting more crowded and retail in the future is likely to look much different than it did in the past.

Neil Stern is a senior partner at Chicago-based consulting firm McMillan Doolittle, where he spent the past 25 years specializing in strategic planning and the development of new retail concepts.

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