Affected market: Department store retailing
The OFT’s decision on reference under section 33 given on 8 August 2005. Full text of decision published 12 August 2005.
Please note square brackets indicate information replaced by a range at the request of the parties for reasons of commercial confidentiality.
House of Fraser plc (House of Fraser) is a UK retailer of designer brands operating 51 department stores in the UK and Ireland.
James Beattie plc (Beatties) owns and operates 12 department stores in the UK; its retail operation is based in central England. In the year ended 31 January 2005, Beatties' UK turnover was around £97 million.
House of Fraser intends to acquire Beatties by way of a recommended cash offer for the entire issued and to be issued share capital of Beatties. The transaction was notified to the OFT by way of Merger Notice on 5 July 2005. The statutory deadline (as extended) expires on 16 August 2005.
As a result of this transaction House of Fraser and Beatties will cease to be distinct. The UK turnover of Beatties exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.
Both parties own and operate department stores in the UK; as such, they both supply womenswear, menswear, childrenswear, homeware, fashion accessories and beauty products/perfumery/toiletries. Both parties also provide concession space to other companies. The parties also overlap in the provision of in-store cafes and restaurants, but since this area of activity is insignificant in the context of the sector it is not considered further.
The parties have identified product markets in relation to womenswear, menswear, childrenswear, homeware, fashion accessories and beauty products/perfumery/ toiletries. They submit that these products are retailed by a wide variety of specialist and general stores. For example, Marks & Spencer and Bhs in relation to clothing, Habitat and Ikea in relation to homeware, and Boots, Superdrug and supermarkets in relation to beauty products/perfumery/toiletries.
In our view, it is possible that within each of these categories, department stores compete more closely with each other than they do with specialised retailers because department stores offer the convenience of a 'one-stop-shop' as well as certain services such as, for example, bridal registries and personal shopping advice, which are not usually provided by specialist retailers. For completeness, we have also considered the impact of the merger within this narrower frame of reference. Since the merger does not raise competition concerns whatever frame of reference is used, it has not been necessary to conclude on this point.
In addition to their direct retail sales, the parties also supply retail locations to their concessions. The competitive effect of the acquisition on this activity has also been considered.
In our view, there are both national and local aspects of competition in retail mergers. We have therefore examined the effect of the transaction on a national as well as local level. The only locality where the parties both have retail stores is Birmingham.
As stated above, the parties overlap in the retail supply of womenswear, menswear, childrenswear, homeware, fashion accessories and beauty products/perfumery/toiletries. In respect of each product category, the parties' combined national share of supply is low ([1-10] per cent or less) and the increment is minimal (less than [1-10] per cent) (see [note 1]). The only locality where the activities of the parties overlap is Birmingham. In each product category, combined shares of supply are below [1-10] per cent with increments below [1-10] per cent (see [note 1]). These local and national shares of supply do not raise competition concerns.
It is possible that department stores compete more closely with each other than with specialist stores. Therefore shares of supply for the various product categories in the retail market as a whole may underestimate the competitive constraint the two parties place upon each other. However, post-merger several other department stores with significant shares of supply at both a national and local level will provide a competitive constraint on the merging parties; therefore no competition concerns arise (see [note 2]).
The parties also overlap in the supply of retail space to concessions. However, the merger does not raise any competition concerns in this area due to the availability of alternative concession space in other local and national department stores, as well as the availability of specialist (i.e. non-department store) locations.
Barriers to entry and expansion
According to third parties, barriers to entry in respect of the product categories of overlap are relatively low for small and medium sized shops, and it is possible for these to expand quickly since the capital investment for leased premises is low. For department stores, the possibilities of entry and expansion are more limited, due to the low availability of suitable sites; entry is also more capital intensive due to the additional cost of outfitting a department store.
Buyers of retail goods are individual customers who do not have countervailing buyer power. Some brands may have some buyer power in relation to the provision of space for concessions, but since the merger raises no concerns in this respect, it is not necessary to conclude on this matter.
Some third parties raised the point that the merger could potentially give rise to anti-competitive effects if rival department stores were unable to attract major concessions, or could do so only at higher costs than the merging parties. However, since the transaction does not give rise to any significant increase in market power vis-a -vis concessions, this concern was not justified.
THIRD PARTY VIEWS
Third parties did not raise any concerns in respect of competition on a national or local level. As noted above, some concerns were raised in relation to the increased power of the merged entity vis-a -vis concessions; these were not substantiated by our analysis.
The parties overlap in the supply via department stores of womenswear, menswear, childrenswear, homeware, fashion accessories and beauty products/perfumery/toiletries. They also overlap in the provision of concession space. The small increments resulting from the transaction, the low combined shares of supply at both a national and local level, the existence of a number of significant competitors (particularly other department stores), and the lack of third party complaints indicate that this merger does not give rise to competition concerns.
Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.
- Source: the parties.
- For example, Debenhams, John Lewis and Marks & Spencer have significant national operations; Selfridges, Harvey Nichols and Debenhams all operate in Birmingham city centre.