Affected market: Convenience retailing
The OFT's decision on reference under section 22 given on 23 October 2003
The Co-operative Group (Co-op) is involved in food retailing,
funeral services, travel agencies, the motor trade and non-food
department stores. In food retailing it operates: 'Welcome'
convenience stores; smaller 'market town' supermarkets; and some
Balfour Convenience Stores Ltd (Balfour) is involved in convenience retailing and operates a total of 114 stores comprising convenience stores and CTNs. Balfour's UK turnover is £72 million.
Co-op acquired Balfour on 27 June 2003. The statutory deadline for this case is 26 October.
As a result of this transaction Co-op and Balfour have ceased to be distinct. The UK turnover of Balfour exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. A relevant merger situation has been created.
The parties overlap in grocery retailing, more specifically convenience grocery retailing. The Competition Commission's (CC's) supermarkets report in 2000  distinguished between one-stop and secondary (including convenience) grocery shopping and found that a significant amount of secondary shopping was done in supermarkets. Evidence from the CC's recent report on the acquisition of Safeway (the Safeway Report) indicates that many grocery retailers believe that supermarkets represent serious competition for convenience stores in meeting the demand for convenience retailing .
Convenience stores have been defined by Mintel and IDG as stores (of less than 3,000 sq. ft.): (i) with extended opening hours (including Sundays); (ii) offering a range of products; and (iii) serving a local community. This is consistent with the CC's findings in the Safeway Report that the normal industry definition of a convenience store was below 280 square metres (3,000 square feet). For certain customers, these criteria may be met by small convenience outlets or by secondary shopping at supermarkets of any size. Specialist stores such as butchers and bakers may provide some local competition to convenience stores but it is unlikely that they provide a strong competitive constraint. The appropriate frame of reference for considering the competitive constraints in this case would therefore appear to be convenience retailing, including secondary shopping from supermarkets but excluding smaller specialist shops that do not meet the Mintel/IGD criteria.
It might also be the case that supermarket shopping more generally, not just the proportion of shopping in supermarkets that is 'secondary' shopping, should be included in the analysis. For example, Co-op maintains that distinctions between convenience stores and supermarkets are becoming blurred as shopping habits are constantly changing and a store used by some people for secondary purchases will, for others, be the store where they do their main shop.
Catchment areas of stores offering convenience retailing were considered by the OFT in its consideration of the Tesco/T&S  and Co-op/Alldays  mergers. Evidence in the Tesco/T&S case indicated that the catchment area for a convenience store is probably up to one mile from the store and the analysis in that case focused on areas where a Tesco outlet (of any size) was within one mile of a T&S store. No further information was uncovered on catchment areas in the Co-op/Alldays case, or in this case.
There is also a national element to competition between grocery outlets as Co-op, Balfour and other country-wide competitors are national brand names, and pricing, product range and opening hours are generally determined at a national level. For example, Co-op uses different nation-wide price bands for its convenience, market town and superstore shops. Balfour operates three price bands: [ ] .
The combined UK share of supply in national grocery retailing is 4.6 per cent (increment 0.1 per cent). The combined UK share of supply of convenience stores (i.e. by number of stores) is 2.4 per cent (increment 0.2 per cent) and the share of convenience sales is 6.3 per cent (increment 0.3 per cent).
The OFT's analysis of local overlaps (i.e. where there was a Co-op outlet within one mile of a Balfour store) identified 10 areas where there are three or fewer competing fascia offering convenience retailing (i.e either a convenience outlet or supermarket). While a reduction in the number of competing fascias might, in principle, lead to some loss of competition in these areas, the significance of any such reduction is very closely related to the ease of entry to convenience retailing at a local level.
Barriers to entry
Convenience stores have traditionally been a very dynamic sector, with a high proportion of independent ownership and rapid turnover of businesses. Previous analysis has found that while a convenience store can be started with relatively little capital outlay (especially if a going concern is bought) it is becoming increasingly expensive because of an increased demand for fresh and chilled products which require initial investment in plant and have high ongoing costs due to increased wastage. Although this may discourage entry by small independent businesses (which account for around 60 per cent of all convenience retailers), it is not a barrier to larger chains.
Some large grocery retailers told the CC during its investigation on the Safeway acquisition that barriers to entry for convenience retailing were low. However, during this enquiry, some smaller grocery retailers have commented that the convenience sector is becoming increasingly difficult to enter for individual independent retailers, mainly due to the disparity of buying terms between grocery retailers.
Nevertheless, third parties have been able to point to recent examples of new store openings in geographic areas in which there was only one existing convenience store, albeit mainly by larger grocery chains. This indicates that entry does occur in areas with few competing fascias .
Local planning regulations might create barriers to entry. However, once planning permission has been given for any form of commercial property such as a restaurant it is possible to use such a property for retail purposes. In the Tesco/T&S case no evidence was identified which indicated substantial difficulties in gaining planning permission at a local level in the areas of overlap. No evidence to the contrary was uncovered in this case.
THIRD PARTY VIEWS
Third parties were generally not concerned about this specific merger, but some competitors raised concerns about wider UK grocery trading structures.
The analysis in this case has focused on convenience retailing, both by convenience stores and supermarkets. At a national level combined shares of supply for grocery retailing, convenience stores (by number of stores) and conveniences sales are all below 7 per cent with increments below 0.5 per cent. At a local level, the analysis has identified 10 local areas of overlap between Co-op and Balfour where, post-merger, there will be three or fewer competing fascia. However, barriers to entry at a local level currently appear to be low with no evidence identified that the planning regime creates such barriers.
The merger does not appear to result in a substantial lessening of competition within a market or markets in the United Kingdom for goods or services.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- Supermarkets: A report on the supply of groceries from multiple stores in the UK Cm 4842.
- Safeway plc and Asda Group Limited (owned by Wal-Mart Stores Inc); Wm Morrison Supermarkets PLC; J Sainsbury plc; and Tesco plc Cm 5950.
- Proposed acquisition by Tesco Plc of T&S Stores PLC published on the OFT website on 3 January 2003.
- Acquisition by the Co-operative Group of Alldays PLC, not published.
- Text deleted at Co-op's request for reasons of confidentiality.
- It should be noted that third parties do not necessarily view this as a positive sign.