Affected market: Grocery retailing
Please note that square brackets indicate figures which have been deleted or replaced with a range at the request of the parties for reasons of commercial confidentiality.
The OFT's decision on reference under section 33 given on 18 October 2004.
Tesco plc (Tesco) 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, which also operates a wide variety of 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 52 grocery stores (the divestment 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]). Tesco proposes to acquire 10 one-stop stores (the acquired stores), all of which are divestment stores, from Morrison. The acquired stores are in the following areas:
- Carnforth (near Leicester)
- Dinnington (Sheffield)
- Garforth (Leeds)
- Ingleby Barwick (Cleveland, near Middlesborough)
- Newton le Willows (near Warrington)
- Redcar (near Middlesborough)
- Sheffield Infirmary
- St Helens (near Liverpool)
- Sheldon, Birmingham
The parties submitted a merger notice on 20 September 2004 and the unextended statutory deadline is 18 October 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 October 2004.
As a result of this transaction Tesco and the acquired stores will cease to be distinct. The UK turnover attributable to the acquired stores exceeds £70 million (see [note 2]) so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. A relevant merger situation will therefore 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, and thus are not generally constrained effectively by smaller grocery stores for customers of 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 one-stop grocery store, as used in the CC Report. The product frame of reference for this case is therefore one-stop grocery shopping as defined by the CC.
The CC 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 3]) were taken at national level and implemented locally. We therefore analysed competition both nationally and locally (using the CC's isochrone methodology for the latter).
As a result of the merger, Tesco's share of national one-stop shopping
would increase from [25-35] per cent to [25-35] per cent based on
TNS till roll data and from [25-30] per cent to [25-30] per cent
based on IGD (see [note 4]) data. No national concerns arise as
a result of this merger on the basis of such a small increment.
In order to assess local issues the parties provided isochrone analysis using the methodology set out in the CC report. No local areas were identified as 'problem areas' on this basis. Moreover, the acquired stores were listed in the CC report as mandatory divestments, due to a loss of local competition when initially acquired by Morrison. Appendix 5.6 of CC report shows that all of the 10 acquired stores could be acquired by Tesco without a loss of local competition.
None of the competitors or suppliers contacted identified any issues relating to changes in local conditions, nor did they consider the transaction raised any local competition concerns. Some other unsolicited responses to the Invitation to Comment (ITC) did, however, raise specific concerns about the following areas:
- Newton le Willows
- St Helens
These concerns were based on the fact of one or more Tesco stores being within a certain radius (in miles) rather than drivetime of the target acquired store and included Tesco stores below 1,400 sq m, which the CC found were not effective competitors in one-stop shopping. With respect to all of these stores, there was no overlap between the acquired stores and Tesco one-stop stores in the primary isochrone, thus for those customers in the primary isochrone, the transaction will increase the choice of fascia. Furthermore, upon recentring the isochrone around other effective competitors and centres of population (as defined by the Office of the Deputy Prime Minister (ODPM)), no reduction in the number of competing fascia to three or less was identified. No evidence was provided which would warrant a departure from the CC's methodology.
In summary, the isochrone analysis provided by the parties points to the conclusion that this merger does not raise local competition concerns, as analysed in the CC Report, as in no local area will the number of competing fascias be reduced to three or less. No local concerns therefore arise as a result of this merger.
Barriers to entry and expansion
The CC Report sets out that barriers to entry and expansion are high for large stores. We have not received any evidence which would warrant departing from this conclusion.
As customers are usually individuals, countervailing buyer power is not an issue in relation to this acquisition.
Tesco submitted that this transaction will have a negligible impact on Tesco's purchasing power. Using TNS national grocery sales as a proxy for its share of groceries purchased from suppliers, Tesco's share of grocery purchasing in the UK, was [20-25] per cent (see note 5). One third party raised a concern about the increase in Tesco's buyer power as a result of the transaction. Based on TNS data, the national share of one-stop grocery sales attributable to the acquired stores is estimated to be [less than 1] per cent and the turnover of the acquired stores represents [less than 1] per cent of Tesco's total UK turnover. Given the very modest increment, no vertical concerns arise as a result of this merger.
THIRD PARTY VIEWS
Of the competitors and suppliers contacted, the vast majority did not have concerns. One supplier raised a concern with respect the increase in Tesco's buyer power. There were also a number of unsolicited responses to the ITC. As noted earlier, specific concerns were raised in relation to the stores located in Carnforth, Garforth, Newton le Willows, Sheldon, Dinnington and St Helens and these are addressed above.
This merger raises no horizontal competition concerns at either national or local level. Furthermore, no vertical competition concerns 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.
This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.
- Cm 5950.
- Tesco estimated that the turnover associated with the acquired stores for the last financial year was £[ ] million.
- Para. 2.51.
- Institute of Grocery Distribution
- For the 52 weeks ending April 2004.