No. ME/1117/02
A report under section 125(4) Fair Trading Act 1973 on the advice of the Director General of Fair Trading, given on 19 March 2002, to the Secretary of State for Trade and Industry under section 76 of the Act
The merger satisfies the share of supply test of the FTA in respect of the supply of on-train food services in the UK.
Compass Group plc (Compass) is a UK company whose principal activities are in the foodservices sector, including: contract foodservices to business, education and healthcare sectors; concession foodservice in the operation of branded transport, leisure and sport food services at airports, railway stations and other locations; and vending services. Gourmet Nova, Restorama AG, and Rail Gourmet Holding AG are subsidiaries of the Swiss company Sairlines AG. Gourmet Nova and Restorama AG supplied catering services and staff to Swissair. Rail Gourmet Holding AG (Rail Gourmet) supplies travel-related food services, primarily on board trains, in the Netherlands, Norway, Belgium, Denmark, Finland, Spain and the UK.
The transaction was originally notified to the EC on 14 January 2002. On 6 February 2002, on my advice, you requested that one aspect of the transaction (the supply of on-train food services in the UK) be referred back to the UK competent authorities under Article 9 of the EC Merger Regulation. Having formally cleared the remainder of the proposed transaction, the EC granted the UK's request on 26 February 2002.
The parties overlap in the provision of on-train food services in the UK. In its decisions in Granada/Compass (COMP/M.1972) and Compass/Selecta (COMP/M.2373), the EC took the view that contract foodservice and concession foodservice constitute separate relevant product markets. In its decision in Compass/Restorama/Rail Gourmet/Gourmet Nova (COMP/M.2639), the Commission concluded that there was a distinct relevant product market for the provision of on-train food services in the UK.
The customers for UK on-train food service consist of various train operating companies (TOCs) as well as the Eurostar consortium. TOCs operate train services throughout the UK. A distinction can be made between short train journeys, which only require an on-train trolley service, and longer inter-city journeys, where meals, buffet and trolley (MBT) services are required. There is also a distinction between the logistics services of purchasing and delivering food to trains, and providing on-train trolley or MBT services.
Although the basic requirements of providing trolley or MBT services appear to be broadly similar, the more complex logistics required to provide MBT services represent a significant difference. Trolley services to trains can be provided through a single loading at the point of origin of the train service. For longer journeys requiring MBT services, intermediate loadings at stations along the route are required to maintain stock throughout the journey. In this circumstance, TOC staff on board trains contact the food service provider mid-journey to order appropriate extra supplies, and the food service provider should deliver the order to the train at the next delivery point. This requires suppliers of MBT services to maintain a network of facilities at stations and control the provision of stock.
I have also considered whether station food service outlets might be substitutable for on-train food service. For train passengers, there may be some ability to substitute purchase of food at stations for that on trains, although once on board a train this ability to substitute is lost. There are price differentials between train and station food service. TOCs, however, view the provision of both of these services as important in attracting customers. On the supply side the main difference between the supply of on-train food services and station concession food services is the more complicated logistics of the national network required to service the on-train segment. Holding concessions at stations does not appear to be necessary for entering the on-train food service business since station facilities for each segment are not shared. However, as explained below, there remain competition questions about the relationship between on-train food service and station concession food service in the context of this merger.
A distinction can be drawn between on-train food provision for shorter journeys requiring a trolley service, and longer (inter-city) journeys requiring an MBT service. MBT services account for 80% of the turnover in the on-train food service sector. A distinction might also be made between supply of logistical services and catering services on-board trains, but this can be left open, as it does not affect the competition analysis.
In its decisions on Granada/Compass and Compass/Selecta, the EC concluded that the scope of the geographic market for food services provision was national and, in Compass/Restorama/Rail Gourmet/Gourmet Nova, that the market for on-train food services was national. The on-train caterer needs to establish an infrastructure in the relevant country, including an administrative base and a network capable of re-stocking trains at the beginning and end of their journey and, in some cases, at stations en route. Contracts are open to international tender but a relatively low proportion of 'national' contracts across Europe are awarded to foreign companies. The relevant geographic market for the trolley service and MBT markets is therefore probably national.
In on-train food service overall, the combined entity's share of supply would be [figures excised at request of parties] out of total sales of approximately £102 million in 2000. On-train food service (in both trolley service and MBT) is characterised by periodic bids for a few large contracts. Loss of a single contract would have a major impact on a provider's share of supply. This would indicate that the absolute level of market shares is not as significant for competition as the number of credible bidders for such tenders.
Within trolley services there appear to be several potential suppliers: Rail Gourmet, Xpress Catering, CCG (part of Compass), Trax Snax, Puccinos, and Euroserve. The remaining potential bidders would appear to represent a sufficient competition constraint on Compass's post-merger behaviour. First, contracts (of which there are around ten) are awarded through a tender process, and it appears that the past tenders have resulted in significant competition. Second, it also appears to be comparatively easy for smaller competitors to enter this market operating one contract and subsequently attempting to expand their business. Finally, it appears that for the simpler trolley services, self-provision is an option for certain TOCs, particularly if only a single facility at the start of a train journey is required. Several TOCs have adopted this option.
Participation in the MBT services market appears to be more complex. Rail Gourmet holds [number excised at request of parties] out of the existing eight UK contracts, including the [number excised at request of parties] most lucrative contracts [details excised at request of parties]. Of the three other contracts, two appear to be dissimilar to the standard MBT service required. The Anglia Railways service requires only a single facility at the point of origin of the train, so the requirements are closer to those of a trolley service than MBT. Anglia Railways has opted to run its train catering service in-house. [Passage excised at request of the parties].
Rail Gourmet holds a strong position in MBT services. [Sentence excised at request of the parties]. It appears that Compass is currently competing directly with Rail Gourmet in a limited way. About [figure excised at request of the parties] of the Compass supply relates to the Eurostar contract which is already shared with Rail Gourmet; the remainder of the Compass share relates to its Scotrail contract. Nevertheless, Compass appears to be a credible bidder. [Sentence excised at request of parties]. It has a well-established logistics network in the UK, has strong contacts with TOCs (through the station concession business, of which it runs [figure excised at request of parties] nationally), and has a good reputation with TOCs. Several of the TOCs viewed Compass as a potential bidder for MBT contracts, although views were not uniform.
Sodexho entered the market in 2000, having been awarded the FGW contract. [Passage excised on grounds of commercial confidentiality]. Third parties also expressed the view that [name excised] would not be able to enter the market competitively or profitably on the basis of one contract. There is a possibility of competition in the MBT market from 'in-house' supply. This option appears to be limited to those TOCs with a relatively simple service, only requiring food loading at the point of origin of a journey.
The parties believe barriers to entry into MBT services to be low. The service is not, they argue, technically difficult to provide and there is a range of current contract caterers who have the basic skills required. Railtrack owns the facilities required at stations and leases them to the TOCs, who subsequently sublease them to their chosen service provider. Accordingly, it may be relatively straightforward for a caterer to take over a route from a competitor.
Within trolley services, there have been several new entrants and it appears that entry and exit are easy. In contrast, there have been relatively few bidders for MBT contracts when they have come up for tender, and only one company other than Rail Gourmet, namely Sodexho, has secured such a contract in recent years.
There are several possible reasons for the apparently limited number of perceived credible bidders: first, the set-up costs may be relatively high in comparison to the value of the contracts. Certain third parties have noted that winning only one contract may be insufficient to sustain entry. [Sentence excised on grounds of commercial confidentiality] In other words, there may be significant economies of scale and/or scope - for example there may be some synergies from holding several of these contracts when supply facilities at stations are used to service more than one contract. Second, Rail Gourmet may be perceived to hold cost or informational advantages which deter potential competitors tendering for contracts. In this respect, it is noted that several of Rail Gourmet's current and largest contracts were renegotiated with the relevant TOC without going out to tender. This may be because the relevant TOCs did not feel that there was a realistic alternative to using Rail Gourmet.
On the other hand, it is possible that the threat of new entry may be sufficient to constrain the parties' post-merger behaviour. The parties have presented evidence showing that for those contracts that were renegotiated, Rail Gourmet's margins fell, on average, from [figures excised at request of the parties]. This would support the argument that sufficient competition currently exists, but does not resolve whether the removal of the threat of entry by Compass substantially reduces the restraints on Rail Gourmet.
Two bidding contests have taken place for UK MBT services since privatisation. [Sentences excluded at request of the parties]. The only substantial contract which has been tendered was FGW, and this contract was won by Sodexho. The fact that the only significant contest for contracts was won by a competitor could indicate that sufficient competition currently exists. [Sentence excised on grounds of commercial confidentiality].
Potential buyer power could be exercised by the TOCs through the tendering process. TOCs appear to exercise a great deal of control over the particulars of contracts, selecting what goods are to be sold on trains, often which suppliers they should come from, in what quantities, and at what price each good should be sold on board trains. The extent of buyer power will vary by the size of contract offered by the TOC and any particular TOC's buyer power will not automatically afford protection to other TOCs. Moreover, the reduction in potential bidders for MBT service contracts may substantially reduce TOCs' buyer power.
An issue raised by several third parties is that post-merger the majority of food transactions connected to the rail network will be through Compass subsidiaries. For passengers the closest substitute for on-train food provision is on-station food provision. Compass controls a large proportion of food concessions at stations [figure excised at the request of the parties] and Rail Gourmet has a large proportion of the on-train food provision. There was some concern from one third party that Compass might seek to discourage purchase of food on trains as it would earn higher margins from branded on-station concessions. A mitigating factor is that TOCs set the prices for food served on trains, as well as usually being involved in negotiations with food suppliers. Generally, the on-train food service provider buys products from food suppliers, specified by the TOC at TOC-negotiated prices, but then charges the TOC a negotiated percentage mark-up to cover the costs of delivery plus a margin. Accordingly, the delivered price to the TOC will be influenced by the food service provider, and the strong position of Compass on food service provision at stations might have some effect on its incentives in this regard.
Given the timescale available to consider this matter, it has not been possible to consider undertakings in lieu of a reference.
The views of both TOCs and competitors were mixed. The majority of concerns reflected both a reduction in choice of supplier and an increase in market power in on-station and on-train food provision. Nearly all TOCs also held the view that the merger was likely to result in an improved service from Rail Gourmet, and for some this outweighed the reduction in competition.
The acquisition qualifies on the share of supply test in respect of the share of on-train food services in the UK, where the merger creates a combined UK share of [figures excised at request of the parties]. Within on-train food services, it is possible to distinguish between trolley services and MBT services. Competition for trolley services does not appear to be materially affected by this acquisition.
In the MBT market, this acquisition raises a dilemma. On one hand, no obvious major barriers to entry appear to exist and, in the absence of such barriers, potential new bidders for MBT contracts should act as a constraint. On the other hand, customers either viewed Compass as one of the few potential rivals to Rail Gourmet for UK contracts or believed that there were few, if any, credible bidders apart from Rail Gourmet. This would suggest that significant barriers to entry might exist, such as the investment required to build up a national supply network. The loss of Compass as an independent bidder might therefore lessen competition. It is also of some relevance that Compass accounts for most food concessions at stations, since station food is the nearest substitute to on-train food. On balance and taking into consideration evidence from both the parties and customers of the parties, I believe that there are sufficient reasons to justify further investigation by the CC.
I therefore conclude and recommend that you should refer this merger to the CC.
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