Affected market: Kitchen interiors
The OFT's decision on reference under section 22(1) given on 25 February 2004.
Nobia Holdings UK (Nobia) owns Magnet Ltd which manufactures and supplies kitchen, bathroom and bedroom interiors primarily through its UK network of over 200 retail stores. Magnet's subsidiary CP Hart sells Poggenpohl and Pronorm (Nobia brands) bathroom and kitchen products.
Gower Group Ltd (Gower) manufactures and supplies kitchen interiors and sells a small amount of bedrooms and bathrooms. For the year ended 31 March 2003, Gower had a reported turnover of £70.4m.
Nobia acquired Gower on 1 December 2003. The transaction was notified on 5 January 2004. The administrative deadline is 1 March 2004 and the statutory deadline is 31 March 2004.
As a result of this transaction Nobia and Gower have ceased to be distinct. The UK turnover of Gower exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. A relevant merger situation has been created.
The parties overlap in the manufacture and supply of kitchen units. These activities comprise the manufacture and supply of cabinet frames, doors and panels, in assembled and flat-pack forms, together with associated accessories.
Most manufacturers supply entire kitchen units and parts of units, in rigid and flat-pack forms. The parties consider that the distinction between flat-pack and rigid plays a minor role in the customers' buying decision. In addition, it was submitted that considerable supply-side substitution existed between rigid and flat-pack forms.
Products are sold through a variety of supply channels including: highly vertically-integrated retailers, such as MFI and Magnet; DIY multiples; independent retailers; housebuilders; builders' merchants; and direct to consumers. In general, consumers have a choice of supply channel and there would appear to be scope for manufacturers to switch supply between the channels.
The market for kitchen units would appear to be, at its narrowest, UK wide. However, imports account for around 10 per cent of total UK kitchen unit sales, indicating that the geographic market may potentially be wider than that of the UK. Third parties indicated that imports formed an important and growing part of the sector.
On this basis, the appropriate frame of reference to examine this transaction is considered to be the manufacture and supply of rigid and flat-packed kitchen units in the UK.
The kitchen interiors business in the UK is fragmented. Following the merger, the parties will be the number two manufacturer of rigid and flat-packed kitchen units in the UK, with a combined share of supply of approximately 15 per cent (increment 7 per cent). The post-merger HHI is less than 1000, indicating a fragmented supply base.
Given that Gower specialises in the manufacture of flat pack kitchen units, shares of supply were also examined on this basis, providing a combined share of supply of approximately 16 per cent (increment 1 per cent). On this narrow basis, the post-merger HHI was around 1350, with an increment of approximately 30.
Barriers to entry and expansion
Although there appears to have been no significant entry in the UK in recent years, there is no evidence to suggest that there are significant barriers to entry in this business. Costs of entry appear to be modest in relation to the size of business at stake. Third parties also considered barriers to entry to be low.
Many of the purchasers of the parties' products are themselves large companies (e.g. DIY multiples and housebuilders), with contracts often being awarded through a competitive tender process. These companies in particular are therefore likely to have considerable buyer power. The number of alternative suppliers suggests that smaller customers also currently have a large measure of choice.
This merger does not appear to raise any vertical concerns.
THIRD PARTY VIEWS
Third parties were unconcerned, indicating that barriers to entry were low and competition from imports is active and growing.
The manufacture and supply of rigid and flat-packed kitchen units in the UK is fragmented. Post-merger the combined share of supply will be 15 per cent (increment 7 per cent). Barriers to entry are low and imports appear to provide a competitive constraint on UK manufacturers.
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 UK.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.