Rundown: FTC sues alcohol distributor, Walgreens' potential PE takeover & Amazon cracks down on paid reviews

0:04Hey, everyone. Welcome back to the Modern Retail Rundown. I'm Gabby Barcoe, here with Editor-in-Chief Kale Guthrie Weissman. Hey, Kale, how are you today? I'm doing well. We're in the final stretch of the last weeks of December. So the new year is almost here. Can you feel it? Yes, I can. But, you know, the news is not stopping. No, we've got a lot of news. It's kind of crazy. Yeah, a lot of people getting under the wire with their news drops this week. But yeah, I mean, speaking of, you know, we're going to start out by talking about this lawsuit that the FTC filed against Southern Glazers Wine and Spirits.

0:43That's the country's largest alcohol distributor for pretty much, you know, anti-competitive pricing that favors the large retailers over the small liquor stores. So that one is interesting. And then after that, we'll talk about Walgreens potentially being taken private. That's another installment of the latest saga there with Walgreens. And then finally, there is a new report that shows that Amazon is basically putting an effort to detect paid reviews by actually going out on social media and trying to find their creators. I thought that one was pretty interesting, so I'm excited to get into it with you.

1:26But let's start first up with the Federal Trade Commission sued Southern Glazers Wine and Spirit this week, alleging that the company displayed illegal price discrimination. So, yeah, I'll get into what the actual lawsuit entails. So Southern Glazers is, like I mentioned, the U.S.'s biggest distributor of wine and spirits. And the FTC lawsuit says that since at least 2018, the distributor has been providing access to the big retail chains to bigger discounts over the that, you know, the smaller shops, independent grocery convenience liquor stores aren't getting. We'll get into why that is. You know, they have their own claims to that.

2:12But it's pretty significant because Southern Glazer is also the 10th largest privately held company in the country. It also generated$26 billion in revenue from all of these retailers last year. So yeah, I don't know. What are your thoughts? I mean, you know, this is obviously a piece of a bigger strategy that the FTC under the Biden administration has had. We'll also talk about how that may all change soon. Yeah, I mean, the biggest thing is that this points to just how convoluted and opaque the alcohol distribution world is in the United States, where it's reliant on these distributors, only a few of them, that then are able to sell these products to retailers.

2:58And so the fact that the FTC is alleging that one of them was giving preferential pricing to only the big guys, that has pretty big ramifications if you're a smaller business trying to sell alcohol. And so I think that's super interesting. I wasn't really expecting this type of lawsuit to happen, so it's really interesting to read. And so just a little bit of backstory about it is that the suit, according to the FTC, the FTC alleges that the company Southern Glazer violated the Robinson-Patman Act, which, quote, forbids certain discriminatory allowances or services due to the company providing, quote, steep discounts without any market justification to a certain set of retailers.

3:40So essentially, it's saying that it gave big players, which supposedly are like Costco, Kroger, Total Wine and More, those players got better discounts than a mom and pop wine shop. So super interesting. Right. So obviously, that trickles down to the actual pricing that the customers get. So, you know, the FTC is saying that these smaller mom and pop stores weren't able to compete in their own neighborhood because they're not getting these discounts on rebates that you get when you're buying at large volume, which is really what those big chains are doing. obviously that's you know logical but ftc chair lena khan who's been in the news a lot lately said when local businesses get squeezed because of unfair pricing practices it favors large chains americans see fewer choices and pay higher prices and communities suffer but yeah basically they're just uh it's just anti-competitive uh laws that they're citing but interestingly enough i saw that You know, the commissioner, Andrew Ferguson, who was just picked by president elect Trump this week to replace Khan, you know, in January, voted against the law.

4:54He said there's not enough evidence to show that this is happening. And yeah, of course, you know, Southern Glazer said that it strongly disputes the allegations because they're both misguided and legally flawed. So, yeah, they're basically just saying that, you know, what they do is they offer bigger discounts to the retail buyers that are buying at larger volumes. And that's why you're seeing this, but that it's not actually breaking any laws. But this has been in the making for over a year. I think October 2023 is when the subpoena started going out. But it is coming in right under the wire, which I thought was interesting, you know, as far as the new incoming administration.

5:36Maybe it's just because it's been on my mind this week, but a lot of people are talking about friendlier, I guess, FTC to M &A and to, you know, I don't know. I guess this FTC has been called anti-monopoly and very pro-antitrust laws. So, yeah, pretty interesting. Yeah, I mean, in many ways, this could be seen as Lena Kahn's last hurrah. The big question is whether she and her administration are going to be able to get it through, or whether it can be undid by the incoming administration. And also, I will say, an interesting factoid that I learned over the last few weeks is that the pressure against this could possibly be bipartisan, because one of the founders of Total Wine and More is actually a Democratic politician who was very pro-Kamala Harris and made a lot of videos in her support.

6:29But I imagine he's not too happy about this lawsuit happening either. It'll be interesting to see just what the backlash is and whether the FTC is able to get it in past the wire or what the next steps will be once January comes. Yeah, they have about a month or so to get it done. But yeah, speaking of mergers, acquisitions, we're going to be talking about Walgreens' possible deal for a private equity firm to take it private. So yeah, do you want to give us a little bit of an overview of what this might actually entail? I mean, obviously, this is just a Wall Street Journal report that's talking about it.

7:11Sure. Yeah. So pretty much the Wall Street Journal has a report out that came out this week that is essentially just saying that Walgreens is in talk with Sycamore Partners, which is a well-known PE firm. Nothing has been confirmed. No one has said anything on the record. But also, if you look at how Walgreens has been faring over the last few years, it's not surprising that the company would be trying to go private. So we can talk a little bit about what's going on with Walgreens. We've talked about this on the show, I think, multiple times. But the company has not been doing well. Its stock price is the lowest it's been in nearly three decades, which is pretty wild.

7:49In the last few months alone, it announced some pretty major cuts. Big plans to close, I believe, around 1 ,200 locations by 2027, 500 of which are closing by the end of this coming year. And I imagine that even if you make those cuts, the company still is looking for some kind of out and Sycamore likely is one of those outs. We don't know about how much the deal would be. We don't know what the terms would be, but it does seem like this is something that they are possibly considering. Yeah. So maybe we can talk about the background of what's led to this dip in performance by Walgreens that's really pushed it against the wall.

8:30I mean, we talked about, of course, sales falling in the last couple of quarters. I think it really started coming off of COVID, right, when a lot of pharmacy chains saw their sales dip after the big vaccine push and the way they benefited from that. And then, you know, of course, things like inflation and just softer demand, everything that all the retail, pretty much every retailer is dealing with right now is what's also impacting Walgreens. But then it also has this healthcare business that it invested a lot in over the past few years that hasn't really, you know, those fruits did not bear at all.

9:08Yeah, it's super interesting, because in many ways, the healthcare business has seen growing sales, but the margins are terrible. And that's because pharmacies have been squeezed over the last few years. So there's a very interesting report in CNBC from a few months ago, just about how all of the pharmacies have been experiencing falling pharmacy reimbursement rates, which essentially is what the pharmacies are paying for the healthcare products they're selling. And the margins for Walgreens specifically, a few quarters ago, meant that its operating margin was negative, even though the company was still trying to boost its healthcare sales.

9:48So the one area that the company has really been trying to invest in healthcare, the business just has not been working out. And of course, it's important to say that Walgreens is not the only one. All pharmacies have been facing some kind of pressure. CVS has had difficulties on the stock market. Its stock is at a two-year low. It reported, I think, a couple of weeks ago, and it had pretty mixed results, which it also attributed to higher medical costs. Rite Aid, lest we forget, it filed for bankruptcy last year. It emerged, I think, this past September. All of them have cited very similar things.

10:24I could go into the nitty gritty where the reason why CVS's healthcare is doing maybe a little bit better than Walgreens is that it owns a bit more of the business, especially on the pharmacy side, so it can set prices a little bit better. Whereas Walgreens works with these companies where if it doesn't make a deal with these pharmacy companies, it just won't have the correct prescriptions and then it won't be able to give them to consumers. So it just has shown that it's been very difficult to figure out a business model that really works for them. And you mentioned falling demand after COVID.

10:58One of the big things, and it seems small, but all these pharmacies are locking up their products. And so retail sales obviously have not been doing well because they can't get people to buy at volume. So it's been a bad retail experience. The healthcare business has been mixed. And as a result, you're seeing a company like Walgreens really have a plummeting market value and now trying to find some way out via the private markets. Yeah. And, you know, PE has been in the news a lot when it comes to retail takeovers in the last couple of years. But Walgreens itself is not new to potential takeovers, right?

11:32I think it has been a target by private equity firms in the past. Yeah, the last major one was in 2019 when KKR made a reported$70 billion bid. It should be noted that Walgreens was a very different company then than it is now. At the time when KKR was reportedly making it big, it had a$50 billion market cap. Right now, Walgreens market cap is a little over$8 billion. So just take that into account. But had that 2019 deal gone through, it would have been one of the largest PE takeovers in history, which is pretty wild. Did not happen. Walgreens stayed a public company. And now it is where it is now.

12:12Yeah. And then I guess we can talk about Sycamore, which is the firm that is potentially trying to take over. So in terms of the business size, Sycamore's last major purchase was Staples in 2017. So that would be an interesting umbrella to be under. So yeah, I bought Staples for about$7 billion. And it was also reportedly trying to acquire Kohl's a couple of years ago in 2022. So yeah, I feel like Sycamore has been on the streak lately and trying to grow its portfolio. So this doesn't really come as a surprise, but it just goes to show just how large these PE firms are becoming. Yeah. And it's super interesting.

12:57I was just doing some research into what a Sycamore bought recently. It was reportedly, nothing has been said since then. I think it was around May when this was reported, considering buying Nordstrom. In 2022, it bought the remainder of the parent company that owns Ann Taylor. So that included Ann Taylor, Loft, Lane Bryant, Lewin Gray. Earlier this year, it acquired Chico's. Just a bunch of interesting, more apparel-based... Clearly, it's going after distressed retailers that it thinks it can streamline in some way, but none have been at the scale that a company like Walgreens is. And this is an interesting point that the Wall Street Journal brought up in their story, that this is probably because a lot of PE firms have been spooked for the last half decade, decade, because we're in a new era now where PE is thinking about taking a lot of companies private.

13:51But this happened again before. And that was what, you know, like think about Toys R Us, that is considered one of the biggest debacles where a PE firm did a leveraged buyout, and then the company essentially went kaput. Although every few years, you hear that Toys R Us is coming back, but nowhere near what it was before. Essentially, PE, for the most part, has been scared to do such a big move because that was such a major disaster. And so it's interesting that potentially they're thinking about it again. Of course, Walgreens is a much smaller company now than it has been in the past. I also imagine, though, getting into health and pharmaceuticals, I mean, that's just a completely different business than seems to be a lot of apparel up till now.

14:31So that'll be interesting to see how they maneuver that, just considering how competitive it is. I mean, yeah. And that goes to what would a company like Sycamore do? And with a company like Walgreens, and this was said in the article, it would probably sell it for parts. And so I don't think Sycamore wants to get into the healthcare business, but it wants to make a return on selling Walgreens healthcare business. Yeah. We can talk about what happens next. Obviously, these are unconfirmed reports, but I'm sure we'll know either way pretty soon. Yeah. And the Wall Street Journal, this was a quote that it said, is that according to their source, the firm would likely sell off pieces of the business or work with partners.

15:09So we'll see if that happens. First, a deal has to happen. Yeah. Look, I said, we'll wait, but pharmacies as a whole are struggling, especially the big trio, the three, like we said, Rite Aid is just now coming up from underwater. So this is coming at a pretty interesting juncture, I guess, for them. But from there, let's take a look at Amazon's effort to investigate paid reviews by actually reaching out to the writers or the creators of these reviews on social media. I thought this was interesting. It's a Bloomberg report that came out this week saying that Amazon is asking online shoppers about their product testimonials that they've posted on TikTok, YouTube, Instagram by literally sending a questionnaire.

15:57Not sure how effective that is. You know, a lot of us ignore those questionnaires, but it's an interesting tactic from Amazon. Yeah. So I guess the questionnaire was sent to a reviewer by Amazon's product review team. It said, we are researching reviews and would like to talk to you about the interaction you had with the seller of this product. And it was then followed by 11 questions, which included, can you describe the work you've done with the seller as an influencer, e.g. posted videos on YouTube, TikTok, Instagram? It seems very proactive, more proactive than Amazon has been in the past.

16:29And I've reported on this before. I've written about this before. This has largely been the elephant in the room where brands, sellers, their Amazon success is made or broken pretty much by reviews. And you're not allowed to have a paid review. but there is an entire cottage industry out there that essentially makes for these paid reviews in one way or another. And it's been, you know, this was even before the advent of influencers, but when social media became the dominant way that people talked about how good a product is, that entered the mix with this situation. And so it's been really interesting to watch.

17:05And I've been kind of waiting for some type of response from Amazon other than the whackable that it usually does, where if you point it out to Amazon and say, hey, this is a problem with this brand, they'll say, oh, we didn't know. Thank you for letting us know. But this seems much more proactive. Yeah. So, you know, Amazon, of course, has these detection tools that it says scan reviews for potential paid reviews. This, you know, their spokesperson told Bloomberg that we have a robust and longstanding policies that prohibit review views and we suspend, ban, take legal action against those who violate these policies.

17:39We consistently monitor and enforce our policies so customers can shop in our store with confidence. You know, she did decline to answer any questions about the actual questionnaires, but it, you know, they basically confirm that this is something that they are actively working on, which is an interesting conundrum for Amazon, like you said, because on the one hand, obviously, these paid reviews are bringing in customers, you know, maybe potentially converting customers, but then they also obviously create this anti-competition, which seems to be a big theme today. Yeah. And the review ecosystem is a wild and gnarly and very difficult to understand ecosystem.

18:20And on Amazon specifically, there are hundreds, if not thousands of vendors that work in this space. Some say they're doing good, where they help companies sort of crack down on fraudulent reviews. Others are essentially probably the intermediaries to seed product so that they can get good reviews, which is essentially a paid review. No doubt this is a very difficult and likely impossible problem for Amazon to fully tamp down on. And Amazon has made announcements over the years about ways to try and figure it out. But this is an interesting new way. I don't know if it's really scalable, but it just shows that this will probably forever be a problem as long as reviews are the major way that a brand or a product is deemed worthy on Amazon.

19:05And that's part of the search results. Yeah. And like I said, speaking of the scalability aspect, not only are you tracking down these users and sending out these questionnaires, but like I said, they can basically just ignore them and you won't get any data back. So it's very voluntary, of course. But maybe this is a good time to also talk about the FTC's involvement. So they also have been trying to help crack down on paid reviews. you know just this past august they announced there's a new rule that they want to put into effect that prohibits brands and e-commerce sellers like amazon sellers from paying for customer reviews and that would give the agency the authority to actually seek civil penalties against the users themselves again how possible is that to actually implement yeah uh on a large scale is is hard to tell but yeah the ftc had notified companies including amazon facebook Google about this new rule and their goals.

20:05But it seems like right now that, you know, companies like Amazon are still taking sort of, you know, taking matters into their own hand to try to crack down on these. Yeah, exactly. And, you know, kudos for trying to find a new way to approach it. We'd love to hear more about how it's working. Yeah. Okay. Well, I think on that note, we can end it there today. You can rate and review us wherever you're listening. You can come back on Thursdays to listen to the Modern Retail Podcast for interviews by Kale with industry executives. Kale, do you have a preview for us for next week's guest? I certainly do.

20:42I am talking with Puma about its approach to emerging technology. It recently did some fun things with Gen.AI. It's done things in the past with VR, AR, Web3. And so we just talked about how Puma's approaching that and how it fits into its overall marketing schema. It was a really fun conversation. Yeah, that sounds really interesting. Cool, okay. And then, yeah, you can follow us on social. We're at Modern Retail to see all our coverage. And you can come back on Saturdays for more Modern Retail Rundown. Thank you.