Welcome to the post-pandemic U.S. economy.
The biggest companies are getting even bigger. Mid-size players are running on fumes. Brick-and-mortar stores are struggling to get financing just to make it to next month. Startups -- the building blocks of a competitive economy -- are disappearing.
It all adds up to a sobering challenge for U.S. antitrust enforcers: The pandemic risks worsening the very problems of rising concentration and declining competition that they were already trying to address before the outbreak.
For almost a year, the Justice Department, Federal Trade Commission, and state attorneys general have been investigating Alphabet Inc.'s Google and Facebook Inc. for possible antitrust infractions. Antitrust officials claimed those inquiries were hardly slowed down by the outbreak as they shifted to working remotely. As the economy reopens, enforcers may find themselves under pressure not to undertake actions that could hurt jobs.
The pandemic is playing to the strengths of the biggest digital players, as seen in their earnings results for the quarter ending in March. Amazon.com Inc. has gone on a hiring spree to keep up with a surge in demand from millions of homebound consumers. In what is normally a slow quarter, sales jumped 26% to a record $75.5 billion, though earnings fell 29% compared with the same period in 2019.
Alphabet's revenue exceeded analysts' expectations. Facebook's shares soared on Thursday after its results eased some investor concerns about advertising weakness, though the real test could come in the months ahead. Investors were braced for one of the biggest annual sales declines in Apple Inc.'s history, but the company reported a surprising 1% revenue increase to $58.3 billion.
At the same time, retailers, restaurants, airlines and hotels are struggling -- and more than 30 million Americans have suddenly become jobless.
Dominant companies were already on the march across industries, from the internet to wireless carriers and from health care to food processing, long before the virus hit. For years, antitrust experts and economists have been warning that markets were becoming less competitive, harming consumers and workers in the process.
Now, antitrust experts fear that as the largest companies increase market shares, decimated firms might disappear or have little choice but to sell out at fire-sale prices to stronger rivals -- and that regulators and lawmakers will be under pressure not to stand in the way as the economy struggles to get up off its knees.
"If you have some shock to the system -- a financial crisis, a war -- one effect is the weakest firms in the market tend to fail," said Daniel Crane, a professor at the University of Michigan who studies antitrust law. "I do worry that the world that recovers from this will be one characterized by firms having failed and pressure to consolidate."
The 2008 financial crisis, in which a wave of bank mergers increased concentration, could offer a template for what's to come. The banks that were "too big to fail" in 2008 got even bigger, with the blessing of policymakers who encouraged the strong to gobble up the weak.
By 2012, five banks -- JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. -- were about twice as large as they had been a decade earlier, relative to the U.S. economy, with $8.5 trillion in assets.
This time, embattled retail, restaurant, entertainment and travel industries could follow suit. Clothing chain J. Crew Group Inc. is preparing a potential bankruptcy filing, Bloomberg has reported. J.C. Penney Co. and Neiman Marcus Group Inc. are in talks with creditors about restructuring debt and might file for bankruptcy. Car-rental giant Hertz Global Holdings Inc. is trying to preserve cash and get leniency from lenders to avoid a bankruptcy.
New York University economist Thomas Philippon, whose book, "The Great Reversal," documented how U.S. markets have become less competitive, said big companies gained access to Federal Reserve lending facilities in the $2 trillion coronavirus stimulus package. Meanwhile, millions of small firms were left with a poorly designed Small Business Administration loan program that's been swamped by demand, including from larger companies with the ability to tap stock and bond markets.
"It will be harder for younger firms to survive, and they are the potential new competitors," Philippon said.
Some are already closing up shop. Service, a travel app, folded after an investment deal and a backup plan to sell to Enterprise Holdings Inc. fell through in quick succession, said Michael Schneider, the chief executive officer. He had to inform his nine employees in Los Angeles that they were out of a job. "It feels like the end of the world," he said.
Supply-chain bottlenecks from one industry's high concentration level already have led to President Donald Trump invoking the Defense Production Act to keep food supplies flowing. On April 29, he ordered meat-processing giant Tyson Foods Inc. and other slaughterhouses to keep their plants open -- despite covid-19 outbreaks that have sickened thousands.
Tyson and its top two rivals -- JBS SA and Cargill Inc. -- control about two-thirds of America's beef production, the bulk of which is done in a few dozen giant plants. Pork and chicken are similarly dominated. Their tight control prompted Senators Tammy Baldwin, a Wisconsin Democrat, and Josh Hawley, a Missouri Republican, on April 29 to seek an antitrust probe of the meatpacking industry.
"This is 100% a symptom of consolidation," said Christopher Leonard, author of "The Meat Racket," which examines the protein industry. "The virus is exposing the profound fragility that comes with this kind of consolidation."
The pandemic could reshape the American economy in myriad ways, as companies begin to teeter and corporate defaults are projected to soar. And the fallout won't be limited to the U.S.
Jean-Paul Agon, the chairman of French cosmetics giant L'Oreal SA, alluded to that possibility on an April 16 earnings call. "It's unfortunate, but it's the Darwinian side of this industry," he said. "We are pretty sure to be able to get out this crisis even stronger. So will there be opportunities for interesting acquisitions? We will see."
Wall Street investment banker Ken Moelis echoed that sentiment. "The people who are going to survive this are obviously the biggest folks in their industry," he said during Moelis & Co.'s April 22 earnings call. "I could see a large M&A wave in industries where you just have to consolidate out the middle, and we end up with very large concentrated industries."
Even as the pandemic grinds deal-making to a halt, famed investors in struggling companies like Howard Marks' Oaktree Capital Group are getting ready to pounce. MasterCard Inc. Chief Executive Officer Ajay Banga told investors on an April 29 conference call that the company is "keeping the powder dry" for acquisitions.
Fear of a consolidation wave has led Rep. David Cicilline, D-R.I., who chairs the House antitrust panel, to call for a moratorium on acquisitions.
"As millions of businesses struggle to stay afloat, private equity firms and dominant corporations are positioned to swoop in for a buying spree," Cicilline said at an April 23 conference.
Two other Democrats, Sen. Elizabeth Warren of Massachusetts and Rep. Alexandria Ocasio-Cortez of New York, are proposing legislation to ban corporate mergers while the pandemic persists. Cicilline said in an April 28 interview with Bloomberg TV that he would try to get the ban included in the next stimulus measure.
The increase in concentration has sparked calls for tougher antitrust enforcement and proposals to overhaul how regulators police mergers and anti-competitive conduct. The issue was debated on the 2020 presidential campaign trail and has become an area of common ground for Democrats and Republicans who have raised concerns about the power wielded by big companies, particularly Google and Facebook.
Yet antitrust officials at the Justice Department and the FTC could face political pressure to pull back on enforcement, said Crane, the University of Michigan professor, who has researched how competition enforcement was ceded to other priorities during wars and financial panics. During World War II, for example, the Franklin Roosevelt administration implemented formal policies that shielded companies from antitrust prosecution.
As the pandemic accelerates Amazon's grip on U.S. online retail sales -- its market share already was about 40% -- it could also permanently shift consumer behavior toward online shopping, further dooming physical stores and alarming antitrust overseers. On Friday, Rep. Jerrold Nadler, D-N.Y., the House Judiciary Committee chairman, called Amazon Chief Executive Officer Jeff Bezos to testify about his company's treatment of third-party merchants on Amazon's website.
Hospitals could be another area of consolidation. To deal with the virus outbreak, they are delaying elective surgery, which is worsening already squeezed finances at many providers. An April 6 report by Boston Consulting Group said the strain on hospitals would accelerate consolidation and the integration of independent physicians into health systems. Bloomberg Intelligence health care analyst Glen Losev expects hospital operators HCA Healthcare Inc. and Tenet Healthcare Corp. to be buyers once the crisis recedes.
"Our health care supply chain because of all the consolidation is already bottled-necked," said Diana Moss, the president of the American Antitrust Institute, which advocates for aggressive merger enforcement. "Allowing more consolidation would mean more bottlenecking and more dominance and lack of flexibility."