City Centre Restaurants plc / Ask Central plc
OFT closed case: Proposed acquisition by City Centre Restaurants plc of Ask Central plc.
Affected market: Restaurants
The OFT’s decision on reference under section 33 given on 19 January 2004
City Centre Restaurants plc (CCR) (see [note 1]) operates a number of restaurant brands throughout the UK, including, Frankie & Benny's, Chiquito, Garfunkels, Caffe Uno and Est Est Est.
Ask Central plc (ASK) operates a number of restaurant chains across the UK, predominately under the ASK and Zizzi brands. ASK's total UK turnover for the year ending 29 December 2002 was £95.8 million.
CCR has proposed a conditional offer of a mixture of shares and cash to acquire ASK for a total consideration of approximately £174m (see [note 2]). The OFT was notified of the transaction on 27 November 2003 and the 40 working day administrative deadline will expire on 30 January 2004.
As a result of this transaction CCR and ASK will cease to be distinct. The UK turnover of ASK exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 is satisfied. A relevant merger situation is likely to be created.
The parties overlap in the ownership and management of restaurants.
The parties considered it difficult to define the boundaries of the relevant market in which they operate. They stated that their clearest competitors are restaurants that offer a similar type of food or those that offer a different type of cuisine but in a similar price range. Additionally, gastro-pubs were considered close competitors, and quick service/fast food restaurants also provide competition, particularly for lunchtime trade in city centre locations.
One third party commented that customers view most informal restaurants as substitutable, regardless of the type of food served - thus Indian, Chinese, burger, chicken and Italian restaurants and gastro pubs are considered to be possible alternatives for each other. Local, independent restaurants were also considered to be important competitive constraints, particularly in small towns.
It is clear that some types of restaurant are closer substitutes on the demand side than others. However, it is considered that on the demand side a hypothetical monopolist of one type of restaurant (eg pizza restaurants) could not impose an across the board price increase without customers switching to an alternative restaurant type. On the supply side, restaurants may be constrained in their switching by having a reputation for a certain type of food or skills in preparing certain types of food.
There may be a case for segmenting the restaurant market in a number of alternative ways including by the price range of the meal, by level of formality, by restaurant experience or by the general location of the brand (eg high street or leisure park (see [note 3]). No conclusion has been reached on whether delineating the market in any of these ways is appropriate since no competition issues arise in any segment.
Both parties operate national restaurant chains, and set prices and format centrally, therefore, on the supply side, certain parameters of competition are set nationally.
The parties estimate the average customer drive time to their restaurants is 20 minutes or around 5 to 10 miles. One third party was unable to comment on the catchment area of its restaurants, but noted that customers are generally attracted from beyond the immediate town. Another third party stated that three-quarters of its customers live or work within 10 miles of the restaurant that they visit, although this is highly dependent on location – distance travelled for urban or business district restaurants is generally around 10 minutes walking with customers travelling over 60 miles to some rural locations.
Therefore, the appropriate geographic frame of reference appears to be wider than the immediate high street and quite possibly wider than the immediate town. No conclusion has been reached on the relevant geographic market since no competition issues arise even at the most narrow possible level.
The parties were unable to provide share of supply figures on a national basis, however, they did not believe that any chain of restaurants had a market share of more than 5 per cent (by number of outlets). Given the high levels of fragmentation in the restaurant sector, shares of supply at the national level are believed to be low and increments minimal. No evidence has been received to the contrary.
At the local level, the parties provided an assessment of competition that they face in top level postcode areas where the merging parties overlap. In all areas the parties face competition from a large number of other restaurants.
Barriers to entry and expansion
The parties state that there may be some licensing and planning application hurdles to overcome when opening a new restaurant and the impact of these varies from location to location, but these are by no means prohibitive as evidenced by the large number of new entrants and restaurant openings. The parties maintain that the market is characterised by frequent entry and exit and expansion and retraction of chains. Sunk costs are low.
CCR's 2002 annual report states that its strategy is to direct investment into the leisure parks and concessions segments which have 'distinct barriers to entry'. Entry barriers may therefore be considered higher in these segments than on the high street. However, the parties do not overlap in the supply of restaurants to leisure parks or concessions.
Individually, customers are unlikely to have buyer power.
There are no vertical issues.
THIRD PARTY VIEWS
Of the competitors we contacted, only two responded. Neither raised concerns and commented on the large and fragmented nature of the informal restaurant market.
The restaurant industry is highly fragmented at the national level, and in any local areas where the parties overlap they face competition from a large number of other restaurants. In addition, barriers to entry appear to be low as evidenced by frequent entry and exit in the restaurant industry.
Therefore, the OFT does not believe that it is or may be the case that the creation of the relevant merger situation may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom for goods or services. Nor does it believe that there is a credible alternative view that the merger might substantially lessen competition.
This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.
- On 14 January 2004 CCR changed its name to The Restaurant Company Plc.
- Based on the closing share price of CCR shares on 8 January 2004 of 76.25 pence.
- Some of CCR’s restaurant brands, namely Frankie & Benny’s and Chiquitos, are generally found in leisure park locations (mainly at cinemas) rather than on the high street. Visiting restaurants in these locations is generally, although not exclusively, complementary to the leisure park experience. The parties do not overlap in the supply of restaurants at leisure parks.