Affected market: Fuel
The OFT's Decision on reference under section 22 given on 6 January
CPL Distribution Limited (CPL) is a national provider of a full range of
solid fuels at both wholesale and retail level. In the financial year
to 31 March 2003, CPL's turnover was £98.6m.
Fergusson Coal (Fergusson) is a distributor of solid fuels to both
domestic and industrial customers in Scotland. In the financial year to
31 March 2002, Fergusson's turnover was £45.3m.
CPL has acquired Fergusson's coal merchant depots in Kirkcowan and
Lugar in Scotland and in Otterburn in northern England. It has also
acquired the goodwill and staff in Fergusson's depot in Forth,
Scotland; and the goodwill in Fergusson's depot in the Lothian area in
Scotland. In turn, Fergusson has acquired CPL's Scottish depots in
Elgin, Dundee and Auchterarder; and parts of CPL's retail businesses in
Inverness and Selkirk in Scotland.
The parties notified the transaction on Monday 10 November 2003 and the
40 working day administrative deadline expires on Wednesday 7 January
2004. The merger was completed on Friday 17 October 2003 and the
statutory deadline expires on 16 February 2004.
As a result of this transaction certain businesses of CPL and Fergusson
have ceased to be distinct. The parties overlap in the supply of solid
fuel and the share of supply test in section 23 of the Enterprise Act
2002 (the Act) is met. The OFT believes that it is or may be the case
that a relevant merger situation has been created for the purposes of
section 22(1)(a) of the Act.
The parties overlap in the supply of solid fuels at both wholesale and
retail level. This transaction only relates to the retail sector and
does not affect the parties' wholesale operations. Accordingly, the
merger does not lead the OFT to believe that there is a significant
prospect that the merger may be expected to result in a substantial
lessening of competition in the wholesale supply of solid fuels.
Therefore, the wholesale supply of solid fuels is not considered
Solid fuel includes house coal, anthracite and smokeless fuels. At
retail level, there appear to be three different groups of coal
merchants that sell solid fuel. Large merchants, such as the parties,
which operate solid fuel depots and generally source their fuel from
wholesalers but sometimes deal direct with coal mines; medium sized
merchants which also operate their own depots and purchase their fuel
from wholesalers; and small merchants, also known as drawing merchants,
which do not have depot facilities but instead tend to obtain their fuel
from large or medium sized merchants as and when required.
Customers of coal merchants include both domestic households, usually
for heating purposes, and commercial customers, such as petrol garages,
supermarkets, DIY outlets and local general stores, all of which
purchase solid fuel for resale.
The parties submit that demand for solid fuel has been declining by
approximately 15 per cent each year and this has resulted in
consolidation between existing suppliers in the sector. Data obtained
from the Department for Business, Enterprise and Regulatory Reform
confirms that there has generally been a downward trend in the
consumption of coal for domestic use.
The parties argue that customers do switch from solid fuels to
alternative energy sources such as oil, electricity, liquefied petroleum
gas and natural gas. This, they claim, constrains suppliers of solid
fuels from increasing their prices and therefore the relevant product
market should include all of these different fuel types.
However, the parties are unable to provide any data to substantiate
their argument. The OFT's investigation appears to show that most
customers consider different types of solid fuel (house coal, anthracite
and smokeless fuels) to be fully substitutable and suppliers of one type
of solid fuel are likely to start supplying another type of solid fuel
in the event of a small but significant increase in its price.
Although, there is some evidence of customers switching to alternative
fuels, this principally appears to be due to convenience as opposed to a
5-10 per cent increase in the price of solid fuel.
Overall, the OFT takes a cautious view that the appropriate frame of
reference in this case appears to be the supply of all types of solid
The parties submit that they typically supply customers within a (see
[note 1]) mile radius of their depots in Kirkcowan, Lugar,
Auchterarder, Dundee, Forth and Selkirk. In terms of the supply of
solid fuel in Inverness, the parties state that fuel is delivered up to
(see [note 1]) miles from the depot. The OFT's own
investigation found that coal merchants on average tend to supply up to
50 miles from their depots and that the distance travelled is greater in
more rural areas, such as the Inverness region. It appears that such
variations are largely due to the distance that a supplier needs to
travel to obtain sufficient customer density to make its business
Notwithstanding these local delivery patterns, the parties, however,
argue that the geographic scope of reference should be at least as wide
as northern and southern Scotland due to the potential competitive
constraint exerted by neighbouring areas of supply on each other.
However, the OFT's investigation did not find sufficient evidence of
the possibility of customers obtaining their fuel from neighbouring
areas to suggest that competition occurs over a broader geographic
Given the above, for the purposes of the competition assessment, a
cautious view is taken that the most appropriate frame of reference
appears to be the supply of solid fuel over a 50 mile radius from the
parties' depots extending to an 80 mile radius in the Inverness region.
Taking the geographic scope of reference mentioned above, the share of
supply data shows that the parties' shares of supply in respect of
their depots in Kirkcowan, Lugar, Auchterarder, Dundee, Inverness, Forth
and Selkirk vary but in no case exceed 25 per cent (see [note
2]) and the largest increment is 5.8 per cent. In each case,
the parties appear to be constrained by a large number of other coal
merchants operating in the relevant area (ranging from twenty to over
sixty in number).
The parties' shares of supply and the large number of existing
competitors present in this sector suggest that, prima facie, no
competition concerns appear to arise from this transaction.
Barriers to entry and expansion
The parties have not provided any data on the costs of supplying solid
fuel. However, they submit that to begin supplying solid fuel, a new
entrant would require access to solid fuel. This is readily available
from a wholesale supplier; direct from domestic coal mines; or via
imports. They would also need a means of delivering the fuel and medium
and large coal merchants would also have to acquire a depot for storage
purposes. The need to achieve the critical mass of customers required
to sustain costs and the numerous examples, cited by the parties, of
recent consolidation between existing suppliers might suggest that new
entry in this sector is unlikely. However, there do not appear to be
any significant barriers to entry or expansion in this sector.
Small coal merchants which tend to purchase their solid fuel from larger
coal merchants, such as the parties, may have a degree of negotiating
strength due to their ability to readily switch suppliers. It appears
unlikely that the transaction will materially affect this.
This merger appears to raise no vertical concerns.
THIRD PARTY VIEWS
The overwhelming majority of customers and competitors contacted by the
OFT did not express any concerns about this merger. Only one customer
was concerned that the merger might lead to a reduction in their choice
of suppliers and a potential price increase.
Post merger, the parties will continue to face competition from a large
number of other coal merchants in each of the areas of overlap. There
do not appear to be any significant barriers to entry or expansion in
this sector and the overwhelming majority of customers and competitors
have no competition concerns as a result of this merger.
The OFT does not therefore believe that there is a significant prospect
that the merger would substantially lessen 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 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.
- Information excised at the parties’ request.
- The parties’ share of supply only exceeds 25 per cent in the supply of solid fuel over a 50 mile radius from their Inverness depot (at 30-40 per cent) (exact figure replaced by a range at the parties’ request). As mentioned above, however, the appropriate geographic frame of reference for the supply of solid fuel in the Inverness region is considered to be up to 80 miles from the parties’ depot. Over an 80 mile radius, the parties’ share of supply in the Inverness region is only 10-20 per cent (exact figure replaced by a range at the parties’ request).