Affected market: Grocery retail
The OFT’s decision on reference under section 33(1) given on 14 July 2009. Full text of decision published 23 July 2009.
Tesco plc (Tesco) is a public company whose shares are listed on the London Stock Exchange. Operating both within and outside the UK, it is a multiple retailer of groceries [see note 1] and a range of other products and services.
Capper & Co (Capper), one of the UK franchisees of the international SPAR grocery store brand, is also a multiple grocery retailer in the UK.
3. The anticipated transaction involves the acquisition by Tesco from Capper of a grocery store (the Acquisition Store) currently trading under the SPAR fascia and located in Wroughton, near Swindon. [see note 2] The UK turnover of the Acquisition Store is approximately £1.9 million per annum.
4. Tesco notified the transaction to the OFT by way of a Merger Notice dated 17 June 2009. The unextended statutory deadline for the OFT’s decision on reference is therefore 15 July 2009.
5. As a result of this transaction Tesco and the Acquisition Store will cease to be distinct. The parties overlap in the supply of grocery retailing and together will account for over 25 per cent of all grocery retailing in the UK. The share of supply test in section 23 of the Enterprise Act 2002 (the Act) is consequently met. 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.
6. The groceries industry has been examined extensively in recent years by both the OFT and the Competition Commission (CC) [see note 3]
7. The proposition that market definition is merely a starting point for competitive analysis is, in the OFT’s view, especially relevant in the grocery retail sector which is characterised by very substantial differentiation in retailer offering. Such differentiation is based on factors such as price, store location, the number of products on offer, the range of choice within product categories, in-store facilities, ambience, staff service levels, home delivery services and branding. We therefore consider that each retailer in every particular location faces an array of competitive constraints which do not lend themselves to be framed by exact product and/or service and geographic market delimitations across all locations. In the absence of any more readily available transparency with regard to market definition, the OFT has developed a framework for its first phase competition analysis in accordance with procedures and methodologies developed from its own and from the CC’s previous competition assessments.
8. In previous cases, both the OFT and the CC have drawn distinctions between three broad categories of grocery retail offering:
- One-stop stores: those with a net sales area of 1,400 square metres or above. Such large stores constitute their own distinct frame of reference.
- Mid-size stores: those with a net sales area of less than 1,400 square metres but above 280 square metres; competitive constraint being posed on this category of grocery retail format by other mid-size stores (excluding those operated by the Limited Assortment Discounters [see note 4] and specialist grocery retailers [see note 5] and by one-stop stores.
- Convenience stores: those with a net sales area of less than 280 square metre; competitive constraint being posed on this category of grocery offering by all other non-specialist grocery stores, regardless of their size.
9. Accordingly, the Acquisition Store in this case, comprising a net area of 3,921 square feet (about 360 square metres), is a mid-size store - albeit one at the very low end of the mid-size range.
10. Previous CC and OFT reports into supermarkets have found that there are both national and local aspects to competition in that segment. [see note 6] The CC report stated that, although certain aspects of the retail offering are operated predominantly on a national basis, this is no indication of itself that the market as a whole is national in geographic scope.
11. For the purposes of competition analysis, the CC concluded that regard should be had at the local level as to whether any grocery store is located in a rural area or in an urban area, comprising populations of less than 10,000 or greater than 10,000 respectively.
12. Furthermore, areas are delimited at the local level by the time taken to drive to the relevant grocery store by car. Effectively the methodology draws around each of the relevant stores an isochrone of the following dimensions:
- For one-stop stores: 10 minutes’ drive time in urban areas and 15 minutes’ drive time in rural areas.
- For mid-size stores: five minutes drive time in urban areas and 10 minutes’ drive time in rural areas; however any mid-size store faces competitive constraint from all one-stop stores located within 10 minutes’ drive time from it (or within 15 minutes’ drive time if it is located in a rural area).
- For convenience stores: five minutes drive time in all areas; however any convenience store faces competitive constraint from all one-stop stores located within 10 minutes’ drive time from it (or 15 minutes’ drive time if it is located in a rural area) and all mid-size stores located within five minutes’ drive time from it (or within 10 minutes’ drive if it is located in a rural area).
13. Consistent with the CC’s Groceries report and with the OFT’s decision in CGL/Somerfield, the OFT has, for the purposes of the present case, adopted the approach to local geographic delimitation set out in paragraphs 11 and 12 above.
14. The focus of the OFT’s assessment at the local level is therefore based on the Acquisition Store being a mid-size store in a rural area.
15. TNS data provided by Tesco indicates that its share of the supply of groceries in the UK amounts to some 27.3 per cent, with UK sales of £23.2 billion in a market whose total value was around £85 billion for the year to 25 January 2009. [see note 7]
16. At the national level, the Acquisition Store’s share of supply, based on its annual turnover at less than £2 million, amounts to a figure very substantially below 0.1 per cent.
17. Consequently, the OFT does not consider that Tesco’s purchase of the Acquisition Store will result in a substantial lessening of competition at the national level.
18. Within a 10-minute drive time from the Acquisition Store there are five alternative fascia, comprising two Sainsbury’s stores (both one-stop), two Tesco stores (one mid-size and one one-stop), one Asda (one-stop) one Coop (one-stop) and one Marks & Spencer (mid-range).
19. Further, by following the methodology described in CGL/Somerfield, and examining the results of all the re-centring tests on all the relevant stores, the OFT’s analysis of the filter test information provided by Tesco indicates that the acquisition will not result in any areas where there would be fewer than three competing fascia in addition to the Acquisition Store.
20. On this basis, the OFT considers that Tesco’s proposed purchase of the Acquisition Store does not create a realistic prospect of a substantial lessening of competition at the local level.
21. No vertical issues are attributable to this acquisition.
THIRD PARTY VIEWS
22. The OFT received one concern from a Somerfield employee who pointed to the potential inability of neighbouring independent stores in the Wroughton area to compete against a Tesco store. Without further evidence as to the likelihood of Tesco foreclosing the grocery market to other retailers - or as to the likelihood of its engagement in predatory behaviour - the OFT considers that it is not possible to attribute a significant lessening of competition to the substance of this third party comment.
23. By the anticipated transaction, Tesco will acquire one single mid-size grocery store in the village of Wroughton, near Swindon.
24. Tesco and the Acquisition Store overlap in grocery retail.
25. Given that the transaction represents an increment of substantially less than 0.1 per cent to Tesco's total UK share of supply, the OFT does not consider that the transaction raises any concern for a substantial lessening of competition at the national level.
26. The OFT’s analysis of the information provided by Tesco at the local level indicates that the acquisition will not result in a substantial lessening of competition in any local area.
27. This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.
The CC’s Groceries Market Investigation (published 30 April 2008) defines groceries as including food, pet food, drinks, cleaning products, toiletries and household goods.
The large (population around 7000) village of Wroughton is part of the Borough of Swindon and is located some four miles southeast of Swindon town centre.
For OFT examples, see Completed acquisition by Tesco Stores Limited of Brian Ford Discount Store Limited, OFT decision of 22 December 2008 (Tesco/Brian Ford); Anticipated acquisition by Co-operative Group Limited of Somerfield Limited, OFT decision 20 October 2008 (CGL/Somerfield), and Anticipated merger between Co-operative Group Limited and United Co-operatives Limited, OFT decision of 23 July 2007 (CGL/United). For CC examples, see The supply of groceries in the UK market investigation (April 2008) (Groceries report); and Tesco plc and the Co-operative Group (CWS) Limited: a report on the acquisition of the Co-operative Group (CWS) Limited’s store at Uxbridge Road, Slough by Tesco plc (November 2007) (Tesco/CWS); Somerfield plc and Wm Morrison Supermarkets plc: A report on the acquisition by Somerfield plc of 115 stores from Wm Morrison Supermarkets plc (September 2005) (Somerfield/Morrison); and 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 (September 2003) (Safeway report).
For example, Aldi, Netto and Lidl.
For example, butchers, fishmongers and greengrocers.
For example, CGL/United (paragraphs 103 and 104); Tesco/Adminstore (paragraph 11); Safeway report (paragraph 2.65).
TNS Total Grocery data for 52 weeks to 25 January 2009