OFT closed case: Anticipated acquisition by Littlewoods Shop Direct Group Limited of the agency mail order business of Redcats (Brands) Limited
Affected market: Catalogue home shopping
The OFT’s decision on reference under section 33(1) given on 17 March 2008. Full text of the decision published on 20 March 2008.
Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.
Littlewoods Shop Direct Group Limited (Littlewoods) offers home shopping services via mail order catalogues and the Internet for items including clothing, electrical goods, furniture and homewares. It also provides a home delivery service to support its home shopping services, a range of credit services (including unsecured personal loans and a credit card) [See note 1] and direct mailing and data management services for third parties. It operates in a number of countries.
Redcats (Brands) Limited (Redcats) is a wholly-owned subsidiary of the French company Pinault-Printemp-Redoute SA. It offers home shopping services via mail order catalogues and the Internet for items such as clothing, household electrical goods, sporting goods, bedding and home furniture. Its brands in the UK are Empire Stores, La Redoute, Daxon and Verbaudet [See note 2]. The UK turnover of the business being transferred to Littlewoods was around £[130-140] million in 2007.
On 26 January this year the parties entered into two separate agreements for the acquisition by Littlewoods of (i) the Empire Store book debts; and (ii) the customer database, obsolete stock, call centre numbers and all intellectual property of the Empire Stores brand. Although these transactions have not yet been completed, the combined consideration for the two transactions is expected to be around £[ ].
The first transaction (of the book debts) is not conditional on receiving clearance by the Office of Fair Trading (OFT), while the second transaction is. However, the second transaction is also conditional upon the completion of the books debts purchase and in their Merger Notice the parties notified both transactions together. The OFT has considered the two transactions on the basis of a single merger situation.
As a result of this transaction Littlewoods and Redcats will cease to be distinct. The OFT considers that the transfer of customer records, call centre numbers and intellectual property rights (including domain names and logos) constitute an enterprise within the meaning of section 129 of the Enterprise Act 2002 (the Act) [See note 3]. The UK turnover of Redcats exceeds £70 million, so the turnover test in section 23(1)(b) of 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.
The 20 day statutory deadline (without extension) for the OFT to reach a decision in this case is 17 March.
The parties overlap in agency mail order (AMO) catalogue shopping services.
AMO is a form of catalogue shopping whereby agents place orders for goods on behalf of other people and receive a commission from the AMO company in return. The agents will be responsible for sending in the order, collecting the payments, distributing the products to the customers (after receiving them from the AMO company) and returning unwanted products. Goods are paid for in instalments.
The parties submitted that today the key characteristic of AMO is allowing customers to spread their payments over 20 or 52 weeks since the method of selling via agents is in decline. For example, Littlewoods submitted that only around five per cent of its agents have more than two customers who live outside of their own household. In 2004 the Competition Commission (CC) did not consider that the provision of credit which allowed customers to spread their payments meant that AMO was a distinct product market [See note 4].
By characteristic, the closest service to AMO is direct mail order (DMO) catalogue shopping services. AMO involves an agent and the price incorporates the price of the good, delivery and return, and the cost of paying in instalments, whereas the DMO price is only the price of the good. Delivery and credit terms are priced separately. The parties submitted that as a consequence DMO prices are generally around 15 per cent cheaper than AMO prices. Further, there is a much wider range of providers and products in DMO catalogues than there are for AMO. However, for Littlewoods, the range of products in its AMO and DMO catalogues is identical and the price gap between AMO and DMO has hardly changed since 2003.
The parties submitted that there is little practical difference between AMO and DMO apart from the method of payment and therefore they should be considered to be in the same product market.
Furthermore, the parties also submitted that Internet shopping should be included in the relevant market since mail order suppliers are investing in their online capabilities and around two-thirds of Littlewoods' AMO customers have access to the Internet. Some 40 per cent of mail order sales in the UK are ordered online [See note 5] and one third party said Internet pricing is an important reference when setting its own prices. The evidence available to the OFT supports the inclusion of catalogue-based Internet shopping in the product market, but the OFT, adopting a cautious approach, has not been persuaded by the evidence that general Internet shopping should be included in the product market.
Third party respondents considered that the product market is wider than just AMO, saying that if AMO customers faced a 10 per cent price increase some would switch to other shopping channels such as DMO, Internet shopping or bricks and mortar retailers. One third party also said that as it is now easier for people to receive credit (for example, via a store card) they are less reliant on AMO shopping than they once were. Another third party competitor said that in setting its prices it took account of prices on the high street, in DMO catalogues and on the Internet.
The parties also submitted that other forms of home shopping, including door-to-door selling, direct response selling and catalogue stores, should be included in the product market.
Door-to-door selling also involves the selling from catalogues but the parties submitted that the product range is often narrower than AMO. Direct response selling is another form of home shopping whereby customers react to an advertisement by returning a coupon, writing or telephoning in order to place their order with the provider. A further form of home shopping is via ‘catalogue stores’ - stores in which customers can obtain a catalogue (which are usually also available by mail) and the customer can place their order from home by telephone or online.
In 2004 the CC concluded that the market was wide in which AMO companies were constrained by competition from other forms of home shopping and high street retailing [See note 6].
In 2005 the OFT also considered that high street stores constrained catalogue retailers and examined catalogue retailing on the basis of product categories [See note 7]. In this case it is not necessary to conclude on whether the product market should be narrowed by product category since mail order account for a small share of overall sales for all retail product categories (the highest being around 12 per cent for womenswear) [See note 8].
The parties to the current case submitted that the CC's 2004 finding is still the appropriate product market definition.
The evidence from the CC investigation and third party comments in this case indicate that the product market is wider than just AMO and includes at least DMO, other home shopping channels and catalogue-based mail order shopping via the Internet. However, it is not necessary for the OFT to conclude on the exact product market in this case, and in particular whether high street retailing should be included, since the competition assessment does not depend on it. Nevertheless, the merger has been cautiously examined on the basis of catalogue home shopping with and without high street retailing but including catalogue-based Internet shopping.
The parties submitted that the market is national. The CC and OFT reports referenced in paragraphs 17 and 18 above concluded that the relevant geographic frame of reference was national.
In this investigation the OFT has not received any evidence for it to depart from this finding. The nature of many home shopping distribution channels lend themselves to a national market. The parties submitted that prices are determined on a national basis.
This merger has been examined on a national basis.
Excluding high street retailing and Internet shopping which is not via a catalogue, the parties' UK share of supply after the merger will be around 20 per cent (increment around four per cent) [See note 9]. Catalogue mail order shopping rivals include Next Directory (around 10 per cent), N Brown (around seven per cent) and Otto UK (around five per cent), plus a fragmented tail of other suppliers [See note 10].
The parties submitted that non-food high street retailing in the UK is worth around £145-150 billion. By including high street retailing within the relevant market, the parties will account for around one per cent of non-food retailing shopping in the UK [See note 11. No competition concerns arise as a result of the merger on this basis.
Third parties have told the OFT that consumers tend to use a variety of shopping channels at the same time and switching between them is easy and relatively costless. One third party said that the growth of Internet shopping has better enabled consumers to compare price and product offerings across a range of suppliers. Evidence supplied by the parties show that AMO shopping has been in decline in recent years while expenditure through other home shopping channels has increased, giving further support to the proposition that consumers can and do switch.
Barriers to entry and expansion
The parties submitted that barriers to entry and expansion are low, and provided some examples of recent entry and/or expansion. These include Otto UK’s mail order catalogue business, Oli, the Internet mail order site Adili.com, N Brown’s two websites and catalogues (Marisota and Jacamo), ILVA's furniture catalogue, Ideal Shopping Direct's website and Woolworth's ‘Big Red Book’.
However, when the product characteristics of these are taken into account, it seems that some - ILVA's furniture catalogue, for example - do not have the same characteristics as the parties’ catalogues since they do not contain a wide range of products or brands. The CC in March/GUS said that one of the chief elements of an AMO catalogue is the wide range of clothing, household and electrical goods contained in them [See note 12].
The CC, in 2004, found little entry had occurred in AMO but entry was common in the DMO sector. The parties agree that this is still the case - there has not been entry into AMO for around 35 years - but the narrowest basis for assessing this merger includes other home shopping channels. On this basis, the evidence indicates that entry barriers are low. However, in this case the OFT has not found it necessary to conclude on barriers to entry.
THIRD PARTY VIEWS
Third parties who responded to the OFT’s questionnaire did not raise competition concerns about the proposed merger. They viewed AMO shopping as being a part of a wider retail market. One third party competitor commented that the merger would allow Littlewoods to achieve greater efficiencies and to lower prices.
The parties overlap in the provision of AMO catalogue shopping services. However, the evidence before the OFT indicates that AMO services also compete with, at least, DMO services, other home shopping channels and mail order shopping via the Internet. Furthermore, in 2004 the CC considered that retailers using these channels were also constrained by high street retailers.
In this case, even ignoring any constraints imposed by high street retailers, competition concerns do not arise as a result of the merger. The parties will not hold a particularly large share of supply after the merger (and in any case, the increment is small), customer switching is easy and after the merger Littlewoods will continue to face constraints from suppliers across a variety of home shopping channels.
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.
- Its personal loans are offered through Home Shopping Personal Finance Limited, a 50:50 joint venture with HBOS plc, and it issues credit cards through Solutions Personal Finance Limited, a 50:50 joint venture with Barclaycard.
- Only Empire Stores is involved in agency mail order operations.
- OFT guidance says ‘An enterprise may comprise any number of components, most commonly including the assets and records needed to carry on the business The transfer of customer records is likely to be important in assessing whether an enterprise has been transferred’. Mergers: Substantive Assessment Guidance, OFT516, May 2003, paragraph 2.8.
- Competition Commission, March UK Ltd and the home shopping and home delivery business of GUS plc: a report on the merger situation, Cm 6102, January 2004, paragraph 2.88.
- Verdict Research Limited, UK Mail Order Retailers 2008, January 2008, page 27.
- CC, 2004, paragraph 2.96.
- OFT decision of 20 June 2005, Anticipated acquisition by GUS plc of part of the Index Business of Littlewoods Ltd. In that case the product categories were housewares, furniture, electrical, toys, jewellery and gifts, sports and leisure, and DIY products.
- Verdict Research Limited, 2008, table 4, page 33.
- Verdict Research Limited, 2008, table 5, page 34.
- Verdict Research Limited, 2008, table 5, page 34.
- Based on the parties’ estimate of non-food retailing in the UK and data published by Verdict Research Limited, 2008.
- CC, 2004, paragraph 2.25.