Advisory opinion letter to Mr. Goetsch

ADVISORY OPINIONS AND REQUESTS THEREFOR 1927

prior approval of the Commission under the above-mentioned order . In view of its prior agreement to abide by this determination, Korvettes does not intend to proceed with this transaction without the prior consent of the Commission. We submit that approval of the transaction is in the public interest , since it wi1 permit a highly aggressive price-and-quality-competitive firm now encumbered by an inadequate sales base to offer vigorous , widespread competition to the entrenched store operators in the Washington area. Meanwhile, no competitor in the market wil be lost by virtue of the transaction.

THE NEED FOR EXPEDITED ACTION For the reasons stated below; we urge Commission action on this request at the earliest possible time permitted by its Rules, Thus we ask (1) that this matter be placed on the public record as soon as possible; (2) that the staff make its recommendation duringthe 30-day notice period; and (3) that the Commission take action immediately upon the close of the 30-day period. The agreements with City mentioned in our letter to the Commission of April 11 , 1973, have been reinstated by the parties, subject solely to Commission approval ofthe transaction being obtained no later than May 31 , 1973.2 Submitted with this letter is the affdavit of Louis Me1choir executive vice president of City Stores, (Attachment A) which emphasizes City s critical need for expedited consideration of this request.

That affdavit establishes, first, that City has decided to cease its Lansburgh operation in the Washington area whether or not the Korvettes transactions are consummated. It shows, further that City s decision to cease the Lansburgh' s operation has become a matter of public knowledge. The virtually untenable position in which City has been suffering arises out of substantial losses sustained by its Lansburgh stores. City faces rapidly increasing losses with the public knowledge of Lansburgh' s coming demise. Its personnel organization is melting away, and customers are increasingly unwiling to deal with a store to which they know they wil not be able to turn for servicing or redress. City has ceased ordering new merchandise for these stores , causing their selections to be increasingly unsatisfactory to customers. MeanwhiJe, despite its mounting . The failure ofcertoin conditions precedent had cau ed the e ligreements to terminate on April 13, 197:. However, by virtue of an agreement of the parties a1l matters other than Commission approval by May 31 1973 have been waived.

(, ) ,, :\

1928 FEDERAL TRAIm COMMISSIOl' DECISIONS losses, Lansburgh' s cannot halt operations because, at several locations , its leases require continuous operation of the stores. Thus, if the stores are closed, City may lose its leases. Indeed such closings, and consequent loss of lease rights , will thwart the proposed transactions with Korvettes, which , as hereinafter detailed , are clearly pro-competitive. City cannot even conduct going-out-of-business sales since, under law, such sales must be followed by an actual closing within a limited time period, an event City cannot be sure of while Commission review of the Korvettes transactions is pending.

Thus , the Commission is presented , on the one hand , with a transaction which , Korvettes submits, clearly merits approval as a desirable pro-competitive development in the Washington area department store market. On the other hand , the necessity for Commission review results in the imposition of extreme hardship on one of the parties to the transaction. Clearly, expedited Commission action is not merely justified , but imperative. Korvettes urges the Commission to take every step possible to ensure that its action is taken promptly following the 30 day notice period contemplated by its rules.

DESCRIPTION OF THE TRANSACTION Copies of the operative agreements between the parties are submitted with this letter. (Attachment B) 3 The essential terms of the proposed transaction are as follows: Korvettes will accept assignments of the leases to the Tyson s Corner and Langley Park sites without paying any premium therefor and will acquire title to land and buildings in Springfield Mall. Korvettes will also purchase from City Stores at book value (depreciated to date of closing) certain fixtures located in the three premises. The transaction specifically excludes (1) the " goodwill" of City, (2) the name " Lansburgh' , (3) the inventory or stock of merchandise of either City or Lansburgh' , (4) customer or credit lists or applications therefor , (5) licensees and lease departments (e. the shoe department), (6) any otber tangible or intangible property or property rights of City except as set forth in the Agreements. Nor does the transaction involve any commitment to the Lansburgh' s employees or any assumption of 'Korvet es reqt.eststf:atwo or. e page letten to Arlen from Cit . dated ;.!arci, :10 , 1873 anr: paragl" aph;J 0: a :etter from City to Arlen also dated :\jarch 30, 19,3 h aec(Jrd ,j confid.-nt:,,1 treat",,,r. !. by tiw rl11111,, ior. r"r8\Jar. to it Rulps. Tbs milt rial deals with possible future rel",ions wi\:1 some OJ' all o:1.he lanrJ:Qnb at lhr " s tes involved, Sucl non-published commercial and financial :nformatio!l would COne"lqLbl ' lJr used eith er by I a ndlord s to del a,' or frus,ra:e tLe propo,ed prcI-O l petit I \' e trans actior. 0 I' by rom (Jr such. tile formalion ('onta ed there:n is higr, l,' confidential. S'Jh informl\t:or. fall:; withi" :I protl', 'h'1. of Senior. 6(f of the Fcderal Trade Commi sjo" Act, ::; U. c. * 6(t; ar. :;5 (6)( : the F"E' d(1m of InforTlJation Act , :; 1;, 'i2(6)( ADVISORY OPINIOKS AKD REQ"ESTS THBREFOR 1929 maintenance and service contracts. In addition , all leased departments involved "in the Lansburgh's operation must be removed.

Korvettes is obligated to pay the following consideration: At Langley Park, in addition to assuming the lease, there is to be paid an aggregate of $127, 740 (book value as of February 3 1973) for leasehold improvements and fixtures less the depreciation (12 /2 percent annual rate at all three stores) to Date of Closing, and $1 000 (or actual cost) for those leased departments (e. the shoe department) fixtures which City Store must repurchase from its lessees. The aggregate cost for purchase of leased department fixtures in all three stores is not to exceed $100 000. At Tyson s Corner , in addition to accepting an assignment of the lease , Korvettes is to pay an aggregate of $1 781 908 (book value as of February 3 , 1973) less depreciation to Date of Closing for leasehold improvements and fixtures and $39 000 (or actual cost) for those leased department fixtures which City Stores must repurchase from its lessees. At Springfield, City Stores wil receive $3 730 795. 68 for the land and building (less depreciation to Date of Closing) and $1 600 000 (book value as of February 3 1973) for leasehold improvements and fixtures (less depreciation to Date of Closing), and $60 000 (or actual cost) cash for those leased department fixtures which City Stores must repurchase from its lessees. Pursuant to this agreement , Franconia Associates, tbe developer of Springfield :vall , may realize a profit. If Korvettes is able to operate a Korvettes store at Tyson Corner, it will pay Franconia Associates $700 000 to $800 000; if not, City is obligated to repurchase the Tyson s Corner fixtures from Korvettes for the original purchase price and City in turn is obligated to sell the fixtures to Franconia Associates for S1.00. Additionally, Korvettes bas agreed to indemnify City up to $60 000 annually for a possible lease loss in connection with City Stores ' Rockville store. Finally, in connection with the extension ofthe closing date necessitated by seeking FTC approval , certain provision of the agreements were modified in a manner which provides an additional $130 000 for City if the transaction is approved by the Commission.

A DESCRIPTIO:o OF THB KORVETTES OPERA TIO!' A complete description and recent history of Arlen s business and , in particular, its Korvettes department store division is contained in the reports to shareholders and prospectuses (from 1969 to present) that are submitted with this letter. (Attachment C) A brief summary of this description here follows: ( . :) ,!, ) , ;).

1930 FEDERAL TRAm; COM:VIISSION DECISIONS In addition to operating' Korvettes, Arlen is engaged in the development and construction of a wide variety of income-producing real estate, including shopping centers residential complexes , office buildings and planned communities in 30 states. In its fiscal year ending February 29, 1972 , Arlen had total net sales of $759 699 000 and net earning's of $5 817 000 (after an extraordinary loss of 85 855 000). A majority of the Korvettes department stores are located in major metropolitan areas , including ::ew York , Chicago Philadelphia, Detroit, Baltimore, Washington and St. Louis. The stores sen, for cash or credit, a wide assortment of merchandise including apparel and home furnishings, principally in the medium- priced lines. At the end of fiscal 1972 , Korvettes operated 51 stores.

In the last few years Korvettes, in common with all of the nation s major department store retailers, experienced rising costs and reduced profit margins. For Korvettcs, retailing on a national level has become l110re competitive than ever. In the \Vashington area in particular , Korvettes has experienced an adverse sales and profit trend contrary to the area in gcneral. Thus, Chart 1 , attached hereto ' relating to the sales and earnings of the t\vo Korvettes stores in the Washington area is to be contrasted to the increase in total retail volume in Washington from 1970 to 1972 of 16% (From $5. 95 to $6. 9 billion) rSource: Washington Post researcb departmentJ and a 13. increase in monthly sales figures from October 1971 to October 1972 (from $77. 5 milJion to $88.2 million 5 ). Accordingly, Korvettes sales have not even reflected the pressures and increases attributable to inflation.

In considerable part, this experience is believed to be attributable to the relationship between advertising costs and an inadequate sales base in the vVashington area which has prevented Korvettcs from being a rneaningful competitive force. At thc present time, Korvettes spends a percentag'e of its V\Tashington area sales on advertising which is disproportionate to its chain-wide average and department stores averages

'Kon. el,es rer:\a"l :l1nt Chart) be ,, ()"(i c: cOYJ ident:al tl'e"u"""t b, COlllli :o" . pClr,uant In ;ls HLdc_ . Kc' enes d() )ot rli close ~Jer:ol."'nr_ c" lccol'd 0: il;(ii"i,;\:,,1 "lorc, 'ocCE\l: e it cor. siders ,\\-,,,h don,Wli,1l highl,- cOL: idenli,li hum " CfJlJlpditi,e ol"r-dpoiJll. S' J('h l(lr. )Jubl:s;""d cOlllle'Ti,,1 ""d :in," lc:,,1 ::li ormntiun (' ou:d IH.' u,ed to Kune:te,; d..'u-illel t b,. l'(\llpet: 'i, Sue :, il hl"matio" falis withiYJ ,he protpctiol1 of Sect:ul: I,::l of t;1e Federal Tra( " ("clllli",:on .-\e:, ),5 FS- fi:f) an(: 52':01(-:) uf the cedom of Idol' nH\tlu l Ad, ,'j t'S, c. ,,216:'(11. El'Onn,":(, Inrlil'atr, , or"I:' \\,,"I :Lj!:O:1 ;.ielrn,wlita" Scollom,' for Octo 1,2 :s cOTlpiled by L1('partn "1 c.: 2"1' 0)1,)1 Var. ill". .\1.,,_ ,-o,JO:itf\' \r"";l!l;gUJll ('"", c;1 uf Go' 1n:,,"'I, 1931 ADVISORY OPIKIONS AND REQUESTS THEREFOR generaJIy. ' (See Chart 2 , attached hereto. ') Korvettes management estimates that a retail volume in the range of $50 000 000 is necessary to support the advertising program botb as to type and volume , which is necessary for effective operations. Korvettes , for instance , has not been able to use the more expensive and effective television medium in Washington. could beOther fixed area management and distribution costs used more effectively if more stores were involved. Meaningful expansion of the sales base by means of new locations is not viable by virtue of the absence of development of new regional centers. The proposed construction of a Korvettes store at what was deemed to be a marginal location at Springfield , Virginia has been abandoned. It is Korvettes understanding that the space may be used for otber retail purposes.

A DESCRIPTION OF CITY STORES, INC. , LANSBURGH S DIVISION City is fuJly described in the Melchior affdavit and its Exhibits (Attachment A). In summary, it is a general merchandise retailer which operates, among others , Lansburgh' Department Stores as a division of the company in the greater Washington , D. , area consisting of department stores located in downtown Washington , Shirlington (Va.), RockviJle (Md. Langley Park , Tyson s Corner and Springfield Mal!.8 Lansburgh' s bas been owned by City since 1951. Lansburgh' s was late in expanding from a single downtown site to the suburbs, where nlOst area department store sales are made. Starting in 1968 Lansburgh' s began to experience a sevcre decline in sales and profits. It has lost an aggregate of$l1 million during the fiscal years 1968 and 1972. While Lansburgh' s in the fiscal year ending February 28, 1973 , produced but 8% of City sales , its losses of $3.7 million partiaJIy offset the profit contribution of $5.2 milion made by City s 10 other divisions. At present Lansburgh' s is losing $100 000 a week. This weekly loss is expected to increase due to factors previously noted. By 1972 , City s management realized the Lansburgh' situation was hopeless , and on January 5 1973, City s board of Directors ordered the liquidation of the Lansburgh' s division.

'These diffic'JI "5 arC comp()un,ied by th hig) lineage rates for Washinr;tun advcrtising, ashin!,rton Post ofS1.10per h;e as ('lJllJpared to Bal!i"1orp Sun 8. 59 pe"line. KOJTettes reql,est, that Chart 2 be acconleri confidentifll treatment. pursuant to its Rules. for the reaSOn, set O'Jt in 'J", footr.ote on page 10 hereof. , TLe location of these stores, the two KOJ"Vettes stor s ;lnd the ather \\ l'shingi(\n area ricpartment stores areidentif:ednntheattachedrnf.p(1Ilap.-\ttachJJocnt). This decision and negotiations with other companies antedates the discussions which resulted in the instant transaction. Two facts are thus clear: (1) Lansburgh' s intends to close without regard to whether the Commission approves this transaction and (2) the transaction with Korvettes is the only one available City which provides City with a viable business arrangement. Further, the Melchior affdavit (Paragraphs 4 , 11 and 12) provides solid ground for the beJief that disapproval of the transaction with Korvettes will lead to expansion by companies which are already present and dominant in the area, such as Sears , Roebuck & Co., J. C. Penney, Federated Department Stores , Garfinkel' s and L. S. Good.

DESCRIPTIO" OF THE MARKET Since there is no single readily available source of department store statistics, we set forth below market share data for the Metropolitan Washington market from a variety of sources. In the October 30 1972 issue Sales Management magazine reported (p. 98) that MetropoJitan Washington would generate over $7. billion in retail sales during the year 1973. That same publication estimated that department store sales in Metropolitan Washington amounted to $1.3 billion in 1971. Accordingto Editor & Publisher s Market Guide , 1972 ed. , general merchandise sales for 1972 were $1 297 746 000 and , when added to the furniture and apparel sales , totalled over $2 billion for combined department and " GMAF" store sales.

Based upon assumptions that total department store sales are S1.3 billion and total department store GMAF store sales are billion , upon the number of stores operated by certain retailers in the area, upon sales figures published in the April 16, 1973 issue of \\Tomen s \Vear Daily and upon certain estimates by Korvettes officials , the following chart provides dollar sales volume and market shares of what are believed to be the fourteen leading department store chains in the Washington area.

;\ ... .............. ....., . . _ . ....

1933 ADVISORY OPINIONS AND REQUESTS THEREFOR

Total Total Dept.

Sales In Dept. S o!'e Store G:\L\F Rank Stores ).Iilljor. Percent Percent

Sears Roebuck $165 12. Woodward & Lothrop 153 11. Hecht 140 IO. Mon tgomery \Vard e. Penney 5.4 Zayre....

Garfinkels 38. Lansburgh' 28. 1.4 Mart 1.9 1.25 10. Korvettes 1.5 1.0 11. Kleins 1.2 12. Giant 1.2 13. GE2\ 14. ME1!CO Total Sales of Top Fourteen. 8832. 6:J. 41.65

lVloreover, while the discussion in the following section deals with competitive impact in terms of the department store market, such stores are in competition with many specialized retailers which sell tbe same sorts of goods (apparel , appJiances, home furnishings , automatic accessories , etc.). Of total retail sales in the area, the competing store groups account for the percentages shown in tbe following table.

-1i1be1'af rer ent of Area Catego1" F:stabli,hments' Rdb.il Sales 1971'

Department stores. 15. Furniture , appliances , home furnishings. 829 Apparel 055 529Drug. .

Variety and other general merchandise., . 358 Tires-batteries-accessories .. 411

I "'umber 0: estabJishme'lt, are for 1967 and are derived fram the Cens'-s of Retailing. The urrent nup.1bn i beiieved to be greater.

'Based nr. S(1!es \1rllwrlc1lJenl estimates , October 30. 1972 , p, is. J Estimated fron natio11a1 avera"e Korvettes sells appliances and thus competes not only with Sears, Montgomery Wards , Hechts , etc. , but also with George Dalmo , and many other highly effective retailers. Korvettes drug department competes with Drug Fail' , Dart, and Peoples among others. Its shoe and apparel departments are faced with competition from local and nationally-identified shoe chains and more than a thousand other stores selling diverse soft goods. In the sale of tires, batteries , and other auto accessories Korvcttes competes with Market Tire outlets for Firestone and other tire manufacturers, similar specialized sellers , and about 1 500 gasoline service stations. All told , as revealed in the table, the Washington area specialized stores that sell the same types of mercbandise as are vended by Korvettes account for substantially more in dollar sales than all the department stores combined.

COMPETITIVE IMPACT It is relevant to note again that City s decision to close its declining Lansburgh' s operation in 1973 is irrevocable and that Korvettcs is paying City hook value of certain assets and is not acquiring a going operation. No customer lists , accounts receivable, trade name , goorlwill or similar assets are involved. These are all retained by City. Indeed , by virtue of City less than-vigorous merchandising since March (see 1\1elchio1' affidavit 15-16) there is , if anything, a ncgative public image of the stores now operated at the location at which Korvettes stores would operate if the transaction is approved. In light of these facts, this transaction should not be viewed as a conventional merger between two active competitors where the surviving firm can be anticipated to retain the share of the market equal to , inthe sum of the two firms prior to the merger. Korvettes attempting to project anticipatcd sales for 1973, regards the Lansburgh' s transaction as an internal expansion whereby Korvettes increased market share will depend solely upon the success of its own merchandising and promotional activities without any carry- over benefits from the Lansburgh' operation.

Korvettes vVashington operation has not been as effective a competitor as might be hoped principally because the volume of its vVashington sales cannot support an effective advertising effort and fixed area management and distribution costs are disproportionately high for two stores (see p. 10). By increasing the number of its \Vashington stores from two to five , Korvettes salcs volume will increase to a level whicb will enable it to ADVISORY OPINIONS AXD REQUESTS THF:REFOR 1935 undertake the kind of promotional and merchandising activity needed to compete effectively in Washington. While this transaction wi1l thus enable Korvettes to compete more effectively, Korvettes prospective market share increase is no cause for concern. On the basis of the estimates of the total market and existing shares set forth on page 15 above, Korvettes market share after the transaction will not be adverse to competition. Even if one made the invalid assumption that the do1lar volume generated by all six Lansburgh' s stores in 1972 would flow to Korvettes in 1973 (although only 3 of the sites arc to become Korvettcs stores), the transaction with City would only result in a 3.7% share of the Washington market for Korvettes, based on 1972 figures.

We also note that the 3. 7% market share for Korvettes projected as a result of this transaction does not fa1l within the Department of Justice Guidelines for horizontal mergers which the Department stated that it would ordinarily cha1lenge. Further, this market share figure , even if it were a meaningful measure within the department store market, must be regarded as a ceiling figure because of the competition from other retailers, as discussed at pages 15- supra. oreover given Korvettes limited market penetration and adverse trend in the area, it can fairly be regarded as analogous to a company not yet in the area. This is particularly true when the proposed transaction is reviewed in the light of likely alternative operations at the locations in question. Finally, the Commission should not ig-nore the fact that tbe proposed transaction will result in the acquisition of a site for Korvettes , an aggressive , price-and- quality competitive merchandiser , in the Tyson s Corner Shopping Center, an objective consistent with the Commission s own actions regarding that center (complaint issued on May 8 1972 , FTC Dkt. 8886 , 3 Trade Req. Rep. ';20 003).

Thus , the effects of the transaction can in no way be sug-g-ested to have any adverse implications on the market. No corporate merger activity appears likely to be encouraged. K 0 dominant or significant share of the market appears likely to concentrated. No trend toward concentration has existed or appears likely to be encouraged by the transaction. )/0 meaningful anti-competitive effect upon the suppliers or other firms or companies appears likely to occur as a result of the transaction.

In fact, this transaction has pro-competitive effects which can only be a positive force in the Washington market. The 1936 FEDERAL TRADE CO:vMISSJON DECISJO anti-competitive and restrictive agreements which purport to exclude Korvettes and other promotional department stores from the original shopping centers in the District of Columbia area would receive a sharp setback. A potential1y vital competitive force would be added to the market, quickly and with no apparent loss of any competitor or competition in the area by virtue of the transaction.

Respectfully submitted, WALD, HARKRADER & ROSS

Carleton A. Harkrader

George A. A very

Alexander W. Sierck Of Counsel:

Donald R. Levin
Barry J. Bratt
Parker, Chapin & Flattau
520 Fifth Avenue
J\ew York, J\ew York 10026

1937 ADVISORY OPINIO:-S AKD REQUESTS THEREFOR

Proposed establishment ofa wholly-owned subsidiary which would collect consumer indebtedness without identyfying American

Oil Co. as owner (File 733 7005).
Opinion Letter
May 16 , 1973

Dear Mr. Goetsch:

This is in response to your letter requesting an advisory opinion regarding the establishment by American Oil Company of a who11y-owned subsidiary to engage in the business of collecting consumer indebtedness without identifying American Oil as tbe owner thereof.

In that letter, you requested answers to two specific questions: 1) Would the operation of the co11ection subsidiary violate the Commission s Guides Against Debt Co11ection Deception; and 2) Would tbe operation of the proposal violate the September 13 , 1967, Assurance of Voluntary Compliance entered into by American Oil? The answers to each of these questions are in the affirmative. The Commission s Guides Against Debt Co11ection Deception provide that:

An industry member shall not use any deceptive representation or deceptive means to collect or attempt to collect debts or to obtain information concerning debtors.

The Guides describe misrepresentations that the Commission has prohibited, including:

(6) that debts have been turned over to an attorney or an independent organization engaged in the business of collecting past-due accounts. Your proposal to create a who11y-owned subsidiary to engage in debt collection urithoLd identifyi"ng Alnerican Oil as the o' wner of the subsidio)' is therefore precisely the type of deceptive representation prohibited by the Guides. The Assurance of Voluntary Compliance entered into by American Oil on Scptem bel' 13 , 1967, contains the representation of American Oil that it would discontinue representing to the pu blic that its receivables had been referred for collection to an independent agency or organization unless such receivables were in fact so referred. American Oil' s present proposal differs little in substance from the activity terminated by the 1967 1938 FEDERAL TRADE CO)lMISSIO:- DECTSIO:-S Assurance of Voluntary Compliance. The subsidiary proposed does not appear to the Commission to possess the attributes of independent organization. That lack of independence, coupled with the intention not to identify American Oil as its owner effectively brings the present proposal within the ambit of the 1967 Assurance.

Accordingly, you are bereby advised that your proposal that American Oil Company establish a wholly-owned subsidiary for the purpose of collecting consumer indebtedness without identifying then1selves as the owner of said subsidiary is disapproved.

By direction of the Commission.

Letter of Request