Archived — Acquisition of Maytag by Whirlpool
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This technical backgrounder is intended to summarize the main findings of the Competition Bureau’s (“the Bureau”) review of the acquisition of Maytag Corporation (“Maytag”) by Whirlpool Corporation (“Whirlpool”).
Readers are advised to exercise caution in interpreting the Competition Bureau’s assessment of this transaction. Enforcement decisions are made on a case-by-case basis and the conclusions discussed in this backgrounder are specific to this merger and are not binding on the Commissioner of Competition (“the Commissioner”). The legal requirements of section 29 of the Competition Act and the Bureau's policies and practices regarding the treatment of confidential information limit the Bureau’s ability to disclose certain information obtained during the course of a merger review.
In the fall of 2005, Whirlpool announced its intention to acquire Maytag. Competition authorities in the U.S., Brazil, Germany and Mexico were also notified. The transaction was classified as ‘complex’ under the Bureau’s service standards.1 As part of its examination of the proposed transaction, the Bureau conducted interviews with industry stakeholders including competitors, major retailers, buying groups and appliance parts distributors. These market contacts were a main focus of the analysis. Extensive information was received from the parties, as well as various competitors in the industry. The Bureau carefully analysed data going back three years as part of its review.
In mid-March 2006 the Bureau completed its review of the transaction and the parties were advised that grounds did not exist to challenge the proposed transaction in Canada before the Competition Tribunal.
Whirlpool is headquartered in Benton Harbor Michigan and is the largest global manufacturer of appliances with plants in North America, Europe, Latin America, Asia and Africa. For the year 2005, it had annual sales of more than $14 billion, 66,000 employees, and nearly 50 manufacturing and technology research centers around the world. The company markets its appliances to consumers in more than 170 countries.
Whirlpool Canada LP (“Whirlpool Canada”) has responsibility for all sales, marketing and distribution for Whirlpool product lines in Canada. Whirlpool Canada appliances are sold under the Whirlpool, KitchenAid, Inglis, Roper and Admiral brand names. Whirlpool does not have any manufacturing plants in Canada and sources the majority of its products from its U.S. parent.
Maytag is a $4.9 billion home and commercial appliance company focused in North America and in targeted international markets.
Maytag Limited (“Maytag Canada”), is responsible for all pricing, marketing, distribution and sales for Canada. Similar to Whirlpool, Maytag has no plants in Canada but is supplied from its plants in the U.S. and Mexico. Maytag Canada sells appliances under the Maytag, Amana, Jenn-Air and Magic Chef brand names.
The Bureau defined the relevant product markets as the five major home appliances; washers and dryers (“laundry”), refrigerators, dishwashers and ranges. Industry participants refer to these products as the T-5. Product features vary somewhat for Canadian appliances compared to those sold in other countries. For example, Canadian consumers generally purchase smaller size refrigerators than the United States and prefer appliances that run on electricity as opposed to gas.
There was a consensus among stakeholders contacted that the primary concern was the laundry segment which is the largest source of revenue for both manufacturers and retailers, as consumers generally purchase washers and dryers as a pair (the “laundry segment”). In addition, the combined market shares in the laundry segment post merger would exceed 35 %. In each of the remaining product categories (i.e. refrigerators, dishwashers and ranges), the market share of the merged entity was below the 35% market share threshold.2
Within the laundry segment, the Bureau had to assess whether or not front-load and top-load washers were in the same or separate product markets. The Bureau concluded that at this point in time, and for the purposes of its analysis of this transaction, top-load and front-load washers constituted separate product markets. While the two types of machines are functionally similar, front load washers are still priced considerably higher than comparable sized capacity top load models. No major concerns were expressed by market participants with respect to dryers as consumers generally choose a dryer to match their selected washer.
However, the Bureau noted that the market is in transition, moving to a single laundry market as prices for front-load washers decline and consumers increasingly take into account the savings afforded by front-load washers in making their purchasing decisions.3 Information gathered by the Bureau indicates that front-loads represent approximately one-third of unit sales of washers and that the rate of substitution had increased over the past three years. While each of the manufacturers had a different view on the pace of the transition from top-loads to front-loads, no one suggested that this market trend would reverse.
Appliance manufacturing is global with plants located in the U.S., Mexico, Europe, Asia and Canada.4 A number of factors led the Bureau to conclude that the relevant geographic market is Canada.
All appliance manufacturers have sales representatives in Canada calling on Canadian retailers. The majority of these manufacturers have distribution centres, regional warehouses and customer support services in Canada. Retailers in Canada tend to purchase their appliances from the Canadian subsidiary and not source directly from the parent company in the U.S., Mexico or offshore. In addition, retailers who operate in both Canada and the U.S. negotiate separately for these two markets with the appliance manufacturers’ respective representatives and there is no evidence of cross-border re-selling.
As noted above, consumer preferences tend to vary somewhat between countries. In addition, there are incentive programs for energy efficient appliances offered in some provinces. Accordingly, Canadian specifications and demand for appliances in Canada differ somewhat from the U.S. Finally, there are some price differentials between the U.S. and Canadian appliance prices once exchange rates are considered.
Some of Canada’s top appliance retailers market their own house brands of appliances in competition with the major name brands. In assessing this proposed merger, the issue arose as to whether to attribute those house-brand appliances manufactured by Whirlpool or Maytag to the merged entity or treat them as an independent brand. This was particularly important in the laundry segment.
In this case, the Bureau took the position that sales of strong house brands should not be attributed to the manufacturer on the basis that the house brand is owned and controlled by the retailer and all pricing and marketing decisions are made solely by the retailer. The retailer is often responsible for its own warehousing and distribution, and provides its own product warranties and servicing for its house brands. Two additional key considerations were the number of remaining appliance manufacturers available to compete for house brand contracts and the ability of retailers to switch from one appliance manufacturer to another. The Bureau was advised that such retailers can and do switch manufacturers as there are no long-term manufacturing contracts in place.
As explained above, market share was determined on a brand and not a manufacturing basis. The market share in the combined top and front load laundry segment for Whirlpool Canada and Maytag Canada would exceed 35%. In the top load washer segment, the merged entity would have a still higher share, whereas in the front load sector it would be less than 35%. Section 92(2) of the Act directs that the Competition Tribunal cannot find that a merger lessens or prevents competition substantially solely on evidence of market shares or concentration.
Barriers & Factors Deterring Entry
A brand name in a consumer product can pose a significant barrier for a new entrant to overcome and both Whirlpool Canada and Maytag Canada have well-established brand names in the T-5 product line.
Barriers to greenfield entry appear to be low to medium in the appliance industry as is evidenced by the numerous new entrants over the past few years, such as LG, Samsung, Haier, Bosch, Fischer Paykel, Miele, etc., whose market shares have increased notably since their entry. The Bureau’s investigation revealed that in particular, offshore appliance manufacturers with established brand names in electronics have successfully attracted consumers to their brands through marketing arrangements with big-box retailers. This has introduced a new dimension to the structure and competitiveness of the industry. An important advantage is the large ‘footprint’ that national big box retailers provide with stores located in all major markets across Canada.
There are no tariffs or other barriers to imports and no evidence of regulatory barriers to restrict the supply of offshore brands. Similarly, switching costs are low and access to distribution centres in Canada has not posed a barrier to offshore appliance manufacturers.
The Bureau’s review found that there is a trend by offshore manufacturers to build plants in the U.S. and Mexico. 5 Since 2000, Samsung and LG have all built refrigerator plants in Mexico and Haier has set up in South Carolina. Bosch-Siemens built new washer and dryer plants in North Carolina in 2003 and Fisher & Paykel (New Zealand) is building a new laundry plant in Ohio with production due to begin in late 2006.
Remaining North American maunfacturers include Electrolux (Frigidaire) and General Electric who both have a long history in the industry. There has also been recent entry and expansion in front load machines by Asian and European manufacturers, notably, LG, Samsung, Haier and Bosch.
The Bureau considered whether the retail ‘buyers’ of appliances have countervailing power to constrain possible price increases post merger. In Canada, seven Canadian retailers represent over 60% of appliance sales in Canada. Many of the remaining independent appliance retailers are member of two major buying groups.
There was a difference of views by stakeholders over this issue. A few retailers expressed concern that their bargaining position would be compromised as Whirlpool Canada and Maytag Canada were viewed as industry leaders in the laundry segment. These retailers expressed doubt that competition from the remaining suppliers would be sufficient to constrain a price increase.
The majority of retailers expressed the view that foreign manufacturers were more than just a threat and have already established themselves as viable competitors. They had the ability to switch a significant volume of their purchases within a short period of time to a competing supplier.
All major retailers acknowledged that they have leverage over manufacturers in that they control floor placements, displays and signage which all contribute to the degree to which consumers are aware of the product.
On balance, the Bureau concluded that major retailers would continue to have relatively strong bargaining positions and post-merger purchasing power.
The Bureau considered whether the merger would change the competitive dynamics among the firms in the market such that coordinated behavior would be likely to occur. The Bureau found that transaction prices between appliance manufacturers and the large retailers are confidential and that rebates and special promotions are common. The fact that these products are highly differentiated and manufacturers encounter differing costs of production, makes successful coordination unlikelyàEfficiencies
The parties claimed that the merger would yield significant annual savings from efficiencies in production, engineering and marketing operations. While the Bureau was conscious there would be some efficiencies, in view of its conclusion that the merger would not prevent or lessen competition substantially in any of the relevant product markets, it was not necessary to analyze these claimed efficiencies.
Although post-merger market shares were significant in the laundry segment, the Bureau’s analysis revealed that effective competition would remain from a combination of foreign competitors. These remaining competitors have the ability to expand their operations and new entry is occurring. Moreover, the growth of big box retailers and their support of offshore brand name manufacturers will continue to provide consumers with competitive choices.
1 Complex mergers involve transactions between direct competitors where there are indications that the transactions may create or enhance market power. The merger between Whirlpool Canada and Maytag Canada involved several analytical challenges such as defining the relevant product market, evaluating the effectiveness of remaining competition and the strength of new competitors.
2 The Commissioner will not generally challenge a merger on the basis of a concern related to unilateral exercise of market power when the post-merger market share of the merged entity would be less than 35 %. Merger Enforcement Guidelines September 2004 at paragraph 4.12.
3 Natural Resources Canada conducted a study of the life cycle cost savings attributed to a front-load (most efficient) washer. Based on energy costs of 10 cents per kWh and a 14 year life expectancy of the washer, the most energy efficient washer (front load) was expected to save the consumer $777 as opposed to a comparable size top-load. In some cases this saving more than offsets the higher initial purchase price of a front-load washer.
4 In Canada there remains only three appliance manufacturing plants.
5 Generally, a new plant takes 12-18 months to construct at a cost of approximately US $70 million.
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