Anticipated merger between Co-operative Group (CWS) Limited and United Co-operatives Limited

Affected market: Pharmacies, travel agency, funeral services, food retail

No. ME/3004/07

PARTIES
 
Co-operative Group (CWS) Limited (CGL) is the UK's largest co-operative society with approximately 3.9 million members. It is active in diverse sectors including banking, insurance, property investment, travel, pharmacy, funeral services and grocery retail services. CGL's UK turnover for the year ending 13 January 2007 was £7,334 million.
 
United Co-operatives Limited (United) is a regional co-operative society, based primarily in the north of England and the Midlands. It is active in diverse sectors including motor dealerships, property investment, travel, pharmacy, funeral services and grocery retail. United's UK turnover for the year ending 27 January 2007 was £2,207 million.

TRANSACTION

Subsequently to the OFT decision on 23 July 2007 (the Decision), on 29 July 2007, the parties amalgamated their respective societies by a transfer of engagements between the two co-operative societies under section 51(1) of the Industrial and Provident Societies Acts.

JURISDICTION
 
The OFT found in its Decision that it is or may be the case that arrangements were in progress or contemplation which, if carried into effect, will result in the creation of a relevant merger situation for the purposes of section 33(1) of the Enterprise Act 2002 (the Act).

BACKGROUND

The Decision concluded that, on the evidence available, it is or may be the case that the merger may be expected to result in a substantial lessening of competition in the supply of pharmacy, funeral and grocery retail services in certain overlap areas across the UK. On this basis, the OFT decided that the merger would be referred to the Competition Commission (CC) unless the parties gave suitable undertakings pursuant to section 73 of the Act to address the competition concerns identified in the Decision.

CGL offered undertakings, on behalf of the merged entity, to divest a package of stores for each of the pharmacy, funeral and grocery retail sectors as set out in the proposed Undertakings (pdf 121 kb). The OFT considered that this option was capable of clearly addressing the competition concerns identified in each of the three sectors.

CONSULTATION

On 30 August 2007, the OFT published the proposed Undertakings inviting interested third parties to give their views on them to the OFT by 20 September 2007. A number of responses to the consultation were received and the main issues raised are summarised below.

A number of third parties were concerned with the proposed divestment of the United Co-operatives grocery store in Dodworth. They stated that they did not believe that the merger would result in a substantial lessening of competition in the Dodworth area as they considered there to be little competition between the parties in the area. As part of its investigation for the Decision, the OFT examined customer survey data in relation to consumer preferences in Dodworth. This data showed that for a (not immaterial) proportion of consumers in the Dodworth area, the CGL and United stores represented each other's closest competitor. On this basis, the OFT concluded in its Decision that the merger may be expected to give rise to a substantial lessening of competition in the Dodworth area. In particular, the OFT was concerned that consumers to the West of Dodworth were likely to have a limited choice of grocery retailers, and this loss of choice may lead to an increase in prices and/or a decrease in quality range or service. The OFT considers that, with the possible exception of the potential entry by Tesco (discussed below), there has been no change in circumstances in the Dodworth area since the OFT investigation which would suggest to a departure from the conclusions set out in the OFT's Decision.

Several third parties noted that Tesco was planning to open a new store in Pennistone (which is to the west of Dodworth) and that this would be sufficient to restore competition and thus remove the need for CGL to divest its store in Dodworth. The OFT has confirmed that planning permission has been granted by Barnsley Council to a developer for a grocery store development in the area. However, the plans for developing the site do not appear to have progressed significantly past the planning stage (for example, construction agreements do not appear to have been entered into). On this basis, the OFT cannot currently be certain that new entry by Tesco is sufficiently timely and/or likely. For this reason the OFT believes that there is still a need for CGL to divest the store at Dodworth although the OFT is not prevented from revisiting this issue should circumstances change.

One third party customer was concerned whether the quality of goods, staff and service would be guaranteed if the United store in Dodworth were sold to another company. However, the proposed Undertakings provide that the OFT must give its approval to the proposed purchaser of any of the divested grocery stores. In doing so, the OFT must be satisfied that, amongst other things, the proposed purchaser has the financial resources, expertise and incentive to maintain and operate the store in question as a viable and active business in competition with the merged entity and other competitors. The OFT therefore takes the view that its procedure addresses this concern to the extent that it is possible.

Finally, one third party was concerned about the ability to sell a grocery retail store in Haltwhistle. However, the proposed Undertakings provide for CGL to divest either the United store on Aesica Road, Haltwhistle or the CGL store on Main Street, Haltwhistle, thus broadening the possibility for successful divestment. In the event that CGL does not find a buyer for either of these stores, the OFT has the option under the proposed Undertakings to direct CGL to sell the store at no minimum price and/or appoint a trustee to oversee and secure a sale of one of the Divestment stores.

In accepting the proposed Undertakings, the OFT has given due consideration to all the representations received during the consultation process. For the reasons outlined above, the OFT considers that it is not necessary to amend or further consult on the proposed Undertakings.

DECISION

The Decision concluded that the merger would be referred to the CC if the parties failed to give suitable undertakings pursuant to section 73 of the Act to address the competition concerns identified in the Decision. The OFT has decided to accept the proposed Undertakings (pdf 121 kb) offered by CGL in lieu of reference to the CC, as they address all of the competition concerns identified in the Decision.

This merger will therefore not be referred to the CC and the proposed Undertakings which have been signed by CGL will come into effect from this date.

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