Affected market: Grocery retailing
The OFT's decision on reference under section 33 given on 25 June 2004
J Sainsbury plc (Sainsbury's) is a large national grocery retailer operating both one-stop grocery stores and smaller grocery stores.
Wm Morrison Supermarkets plc (Morrison) is a large grocery retailer, operating both one-stop grocery stores and smaller grocery stores.
On 8 March 2004, Morrison acquired Safeway plc by way of a scheme of arrangement. Under the terms of the undertakings given by Morrison on 8 December 2003 to the Secretary of State for Trade and Industry (the Undertakings), Morrison must divest a number of grocery stores (to address local competition concerns identified by the Competition Commission (CC) in its report on the proposed acquisition of Safeway (the CC Report)) ([see note 1]). Sainsbury's proposes to acquire 14 stores from Morrison (the acquired stores), which must be divested by Morrison under the terms of the Undertakings.
The turnover attributable to the acquired stores for the respective last financial years is £330.5 million ([see note 2]). The extended statutory deadline is 30 June 2004.
Before announcing its decision under the Enterprise Act 2002 (the Act), the OFT had to be satisfied that the transaction met the terms of the Undertakings. The OFT concluded that the terms had been met on 15 June 2004.
As a result of this transaction Sainsbury's and the acquired stores will cease to be distinct. The UK turnover attributable to the acquired stores exceeds £70 million, so the turnover test in section 23(1)(b) of the Act is satisfied. A relevant merger situation will be created.
The CC concluded in the CC Report that one-stop shopping in grocery stores of 1,400 square metres and above (large stores) constituted a relevant frame of reference for the purposes of their inquiries. Typically in a local area, only large stores cater for one-stop shopping. Generally, they are not effectively constrained by smaller grocery stores for this type of shopping because such stores do not stock a sufficiently wide product range to fulfil customers' needs for a weekly grocery shop.
All but one of the acquired stores fall within the definition of one-stop grocery store as used in the CC Report. The other store (Tadcaster) is less than 1,400 square metres. However, the CC considered that an acquisition of this store by Sainsbury's would not raise competition concerns ([see note 3]). In light of this, the rest of this analysis focuses on the 13 one-stop stores.
The product frame of reference for this case is one-stop grocery shopping as defined by the CC.
The CC Report concluded that the geographic frame of reference was essentially local because of the limited distance that most customers were willing to travel for their regular shopping trip. However, the CC did recognise that there were national aspects to competition which should also be considered, as many important decisions (such as pricing and advertising) ([see note 4]) were taken at national level and implemented locally. In light of this, we analysed competition both nationally and locally (using the CC's isochrone methodology for the latter).
Sainsburys' share of supply in national one-stop grocery retailing would increase from 20.3 per cent to 20.6 per cent as a result of the merger. Given this very modest increment, no national concerns arise as a result of the transaction.
In order to assess local issues, the parties provided isochrone analysis using the Safeway methodology as used in the CC Report. This analysis indicated that the merger does not raise any local competition concerns. No third party concerns were received about local competition issues arising from this merger.
Barriers to entry and expansion
The CC Report sets out that barriers to entry and expansion are high for large stores, due to significant economies of scale and planning constraints. We have not received any evidence which would warrant departing from this conclusion.
Supermarket customers are usually individuals, so buyer power is not an issue in this case.
Sainsbury's share of national grocery purchases from suppliers would increase from 14.7 per cent to 14.9 per cent as a result of this merger. Again, given the very modest increment, no vertical concerns arise as a result of this merger.
THIRD PARTY VIEWS
No third parties expressed any concerns to us about the merger.
This merger raises no horizontal competition concerns at either a national or local level, and no vertical 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.
- For the former Safeway stores, the year ended 31 March 2003; for the former Morrison store, the year ended 31 January 2004.
- Appendix 5.7, Table 3 of the CC report.
- Para. 2.51 of the CC report.