Anticipated acquisition by Co-operative Group Limited of Somerfield Limited

Affected market: Grocery retailing

No. ME/3777/08

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessement and decision.

The OFT's decision on reference under section 33 given on 20 October 2008. Full text of decision published 17 November 2008.

Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.

PARTIES

Co-operative Group Limited (CGL) is the UK's largest co-operative with a diverse range of activities including the operation of banks, funeral services, farming, pharmacies and food retailing. This case involves CGL's food retailing business.

At the time of making its submission to the OFT, CGL had 2,228 food retail stores comprising 1,717 convenience stores, 452 mid size stores and 59 one-stop stores.

Somerfield Limited (Somerfield) is a food retailer with (at the time of making its submission to the OFT) 877 outlets comprising 221 convenience stores, 616 mid size stores and 40 one-stop stores.

TRANSACTION

In July 2008 the parties entered into a sale and purchase agreement under which CGL will acquire the entire share capital of Somerfield's holding company, Violet Holdings Limited. Completion of the transaction is conditional on receiving OFT clearance.

JURISDICTION

As a result of this transaction CGL and Somerfield will cease to be distinct. The proposed merger does not have a Community dimension under the EC Merger Regulation  since both parties achieve more than two thirds of their Community turnover in the UK.

The UK turnover of Somerfield exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied.

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.

THIRD PARTY VIEWS

During the course of its investigation the OFT solicited views from a large number of food retailers comprising large supermarket chains, symbol groups, LADs, frozen food specialists, convenience store operators and regional retailers. In addition, the OFT sought views from retailer trade bodies and suppliers.

Additionally, a considerable number of individual shoppers wrote to the OFT highlighting the possible adverse affect of the proposed merger on their local areas.

No third party told the OFT that the proposed merger raised competition concerns at the national level. At the local level, all third parties considered that competition concerns would arise.

Some third parties provided details of how they believed local concerns should be remedied, and on this comments diverged. Some third parties did not consider that retailers like the LADs or Marks & Spencer would offer effective competition to the merged entity and large grocery retailers, and therefore should be excluded from purchasing required divestments on competition grounds. Others disagreed and thought the LADs and/or Marks & Spencer should be included.

ASSESSMENT

The market definition used in this case follows that used in recent CC work and comprises three product markets (which included other large grocery retailers, regional grocers and symbol groups, but excluded LADs, frozen food retailers and specialist retailers). The geographic dimension to competition is both national and local, with the scope of the local area being different according to whether it is in an urban or rural location.

The OFT has not found any realistic prospect of competition concerns arising at the national level (whether through unilateral effects - including the merger's likely effect on grocery suppliers - or coordinated effects).

At the local level, the OFT applied a two stage filtering approach which is described in detail at annex A of the OFT's decision. The filtering results were adjusted in a small number of cases to take account of low barriers to entry in the convenience market and a format change of one CGL store. However, in the main the OFT's findings on unilateral effects grounds at the local level are a result of the two stage filtering work.

The OFT analysis (corroborated by third parties) indicates that barriers to entry are high in the one-stop and mid size markets.

The OFT considers that as a result of the proposed merger, there is a realistic prospect of a substantial lessening of competition arising in 94 local areas as a result of local unilateral effects.

During the course of this investigation, the OFT has examined in some depth the competitive interaction between CGL and the regional co-operatives. This issue occurs as a result of CGL acquiring a (fully independent) Somerfield store that overlaps in the relevant local area with a regional co-operative (that is not (fully) independent of CGL). Evidence before the OFT indicates that competition may be substantially lessened in these local areas as a result of the proposed merger because of similarities in pricing, promotions, product range and quality between CGL and the regional co-operatives through their membership of the buying group, CRTG. Given that, to date, this scenario has not occurred before, the UK competition authorities have not had cause to consider the implications on local competition (and therefore the welfare of local shoppers) of it. The OFT's analysis has found that the merger creates the realistic prospect of a substantial lessening of competition arising in 32 local areas as a result of this interaction. [see endnote 1] The OFT considered, but rejected as not compelling, the parties' arguments that efficiencies derived by the merger would enhance rivalry in some or all of these areas sufficiently to negate the prima facie competition concern.

The OFT has found that there is a realistic prospect of a substantial lessening of competition as a result of the proposed merger in 126 local areas [see endnote 2], comprising 94 areas in which unilateral effects concerns arise and 32 areas in which competition issues concerning CGL's relationship with other CRTG members arise [see endnote 1].

The OFT considered but dismissed the prospect of a substantial lessening of competition arising as a result of the proposed merger with respect to ownership of controlled land sites.

Consequently, the OFT believes 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.

DECISION

The OFT's duty to refer the anticipated acquisition by CGL of Somerfield to the Competition Commission pursuant to section 33 of the Act is suspended because the OFT is considering whether to accept undertakings in lieu of reference from CGL pursuant to section 73 of the Act.

ENDNOTES

1. The OFT's calculations at the time of announcement of the suspension of the duty to refer indicated that there were 32 local areas in which there is an overlap between Somerfield and a regional co-operative store and where the test for reference is met. Further checking of the application of the OFT's methodology following announcement of the decision to suspend the duty to refer in fact revealed that the correct number of local areas was 39 including six areas which were not surveyed (not three areas as reported in paragraph 116). This does not affect the OFT's ability to accept undertakings in lieu of a reference since the parties offered to divest stores in all of these areas.

2. OFT's calculations at the time of announcement of the suspension of the duty to refer indicated that there were 126 local areas in which the test for reference was met. Further checking of the application of the OFT's methodology for overlaps between a Somerfield a regional co-operative following announcement of the decision to suspend the duty to refer in fact revealed that the correct total number of local areas was 133 (^ see endnote 1). This does not affect the OFT's ability to accept undertakings in lieu of a reference since the parties offered to divest stores in all of these areas.

Back to top