J Sainsbury / Wm Morrison Supermarkets (2005)

OFT closed case: Proposed acquisition of former Safeway stores by J Sainsbury plc from Wm Morrison Supermarkets plc.

Affected market: Grocery retailing

No. ME/1930/05

The OFT's decision on reference under section 33 given on 3 October 2005. Full text of decision published 7 October 2005.

PARTIES

J Sainsbury plc (Sainbury's) is a large national grocery retailer operating both one-stop grocery stores and smaller grocery stores.

WM Morrison Supermarkets plc (Morrisons) is a large national grocery retailer, operating primarily one-stop grocery stores.

TRANSACTION

Sainsbury 's proposes to acquire nine stores (the Acquired Stores) from Morrisons. The parties notified the transaction on 19 August 2005. The statutory deadline is 3 October 2005.

On 8 March 2004, Morrisons acquired Safeway plc. As part of this transaction Morrisons gave undertakings to the Competition Commission (CC) to divest 52 stores (the Divestment Stores) to address local competition concerns. Whilst the nine stores being considered here are former Safeway stores, they do not include any Divestment Stores identified by the CC for divestment.

JURISDICTION

As a result of this transaction Sainsbury 's and the Acquired Stores will cease to be distinct. The UK turnover attributable to the former Safeway stores 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.

RELEVANT MARKET

Product market

In its report on the proposed acquisition of Safeway (the Safeway Report, see [note 1]), the CC concluded that one-stop shopping in grocery stores of 1,400 square metres and above constituted the relevant frame of reference for the purposes of their enquiries. Typically in a local area only large stores cater for one-stop shopping and are thus not generally constrained by smaller grocery stores for this type of shopping as such stores do not stock a sufficiently wide product range to fulfil customers ' needs for a weekly grocery shop. Each of the Acquired Stores falls within the definition of a one-stop grocery store as used in the Safeway Report. The product frame of reference for this case is therefore one-stop grocery shopping as defined by the CC.

Geographic market

The Safeway 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 as many important decisions (such as pricing and advertising) were taken at a national level and implemented locally and should therefore also be considered. In light of this we analysed competition both nationally and locally (using the CC 's isochrone methodology for the latter, see [note 2]).

HORIZONTAL ISSUES

National Competition

As a result of the acquisition, Sainsbury 's share of supply in national one-stop grocery retailing would increase from 19.4 per cent to 19.5 per cent (see [note 3]). Given this very small increment no national concerns are considered to arise as a result of this merger.

Local Competition

In order to assist the OFT in its assessment of local issues the parties provided isochrone analysis using the methodology used in the Safeway Report. No local areas were identified as  'problem areas ' on this basis.

The majority of the Acquired Stores do not give rise to an overlap with any Sainsbury stores at the local level. Where an overlap does exist, there are four or more fascia remaining post-merger. In its Safeway Report the CC identified that competition concerns are most likely to arise in more concentrated areas with three or fewer competing fascia in an isochrone. The concentration levels in this acquisition are therefore below the threshold at which the CC considered problems would arise.

The majority of competitors and suppliers indicated that they did not have concerns relating to changes in local conditions. However one respondent did raise concerns that the reduction in the number of one-stop grocery stores in Bitterne might have a negative impact on mid-range stores within a 5 minute drive time of the target store. Both the Acquired Store and the Sainsbury 's store identified in Bitterne are one-stop grocery stores and were therefore included in the one-stop grocery store analysis outlined in the Safeway Report. This analysis showed that the merger passed the isochrone test since it did not lead to a reduction in the number of fascia. The CC did not indicate in its report that it was necessary to go beyond the one-stop analysis to consider the effects on a mid-range store. Based on the evidence available at this time the OFT sees no reason to depart from this methodology in the present case.

Barriers to entry and expansion

The Safeway Report identified high barriers to entry in one-stop grocery retailing. Economies of scale in particular the ability of large incumbent supermarkets to command favourable buying terms, as well as planning restrictions have restricted entry such that there has been no new entry in the last ten years. We have not received any evidence which would warrant departing from this conclusion.

Buyer power

As customers are usually individual, there is no countervailing buyer power.

VERTICAL ISSUES

Sainsbury 's share of national grocery purchases from suppliers would increase from 10.5 per cent to 10.6 per cent (see [note 4]).  Given this small increment the merger is not considered to materially strengthen Sainsbury 's buyer power. Therefore no vertical concerns arise as a result of the merger.

THIRD PARTY VIEWS

Of the competitors and suppliers contacted, the vast majority did not have concerns. However some third parties did express general concerns about the increasing levels of concentration in the supermarket sector.

ASSESSMENT

This merger raises no horizontal competition concerns at either national or local level. Furthermore no vertical competition issues are raised. 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.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

NOTES

  1. Safeway plc and Asda Group Limited (owned by Wal-Mart Stores Inc); Wm Morrison Supermarkets plc; J Sainsbury plc and Tesco plc: A report on the mergers in contemplation, August 2003, Cm5950 paragraph 5.11.
  2. See Safeway Report, Chapter Five.
  3. Based on TNS total till roll data for the 52 weeks ending July 2005.
  4. Based on TNS data for the 52 weeks ending July 2005.
Published 2 October 2005