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OFT considers grocery store divestments in Co-op/Somerfield merger

120/08    20 October 2008

The OFT is considering a remedies offer by Co-operative Group Limited (the Co-op) in relation to its proposed acquisition of Somerfield Limited (Somerfield). The Co-op has offered to dispose of stores to resolve competition concerns raised by the merger in 126 local grocery markets across the UK.

After detailed analysis, the OFT has found that the merger would not give rise to competition concerns at a national level. With a market share of around eight per cent, the merged firm will be a stronger fifth player to compete against the existing 'big four' national supermarkets – Asda, J Sainsbury, Wm Morrison and Tesco – and would not increase any risk of coordination between large grocery retailers.

The OFT's local analysis has drawn upon the valuable know-how developed by the Competition Commission in previous grocery sector work, and relies upon evidence directly obtained from local consumers about their shopping preferences. Following this framework, the parties commissioned surveys of 40,000 UK consumers in areas where the Co-op and Somerfield are present. The extensive evidence base available meant the OFT could safely conclude that the merger raised local competition concerns in 126 markets across the UK, while not raising concerns in any other local markets.

The majority of problematic local areas affected by the merger arise because the Co-op and Somerfield compete closely against one another in the local area concerned. A minority of problem areas arise because the Co-op will replace a Somerfield supermarket with its own store in an area where one of the few other locally competing stores is a regional co-operative (and therefore linked to the Co-op through membership of the same buying group).

The Co-op has offered a comprehensive divestment package to meet each of the OFT's local competition concerns. While the OFT is satisfied that the majority of grocery stores included in this divestment package will be of interest to several eligible buyers, this would not necessarily be true for all stores. To manage the risk that there are no eligible buyers for some stores, the parties therefore agreed to find suitable buyers up-front for the OFT to approve, before it agrees to a finalised remedies package.

The OFT is confident that the ultimate divestment of all the stores will remedy all local concerns without risking the creation of any new competition concerns at the national level, as the divestment package represents a very small proportion of total grocery stores in the UK, and will be distributed among multiple buyers.

John Fingleton, OFT Chief Executive said:

'Once finalised, the divestment package will directly safeguard the welfare of many thousands if not millions of UK consumers by restoring grocery store competition in the 126 local areas affected, while allowing an otherwise likely pro-competitive merger to go ahead.'

If the OFT accepts undertakings in this case, it will be the largest divesture package accepted in UK merger control, based on what is probably the largest consumer survey ever conducted in a merger case.

NOTES
 
1. Confidentiality - for reasons of confidentiality, the OFT will not currently disclose which stores Co-op has proposed to divest or which specific stores are subject to the up-front buyer requirement. Details on how the OFT identified the local areas to be divested, and which should be subject to an up-front buyer requirement, will follow in the full text of the decision and in public consultation on the undertakings in lieu.

2. The reference test - the OFT has a duty to make a reference to the Competition Commission if it 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, and the creation of that situation may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

3. Undertakings in lieu of reference - under section 73 of the Enterprise Act 2002 the OFT may, instead of making a reference to the Competition Commission, and for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned, or any adverse effect which has or may have resulted from it or may be expected to result from it, accept from such of the parties concerned as it considers appropriate undertakings to take such action as it considers appropriate. The OFT is required to consult publicly before accepting any such undertakings.

4. Up-front buyer requirement - the OFT considered in this case that a necessary requirement to suspend the duty to refer and consider undertakings is that, in relation to a small number of areas, the divestiture should be to suitable buyers approved upfront by the OFT before the OFT accepts the undertakings in lieu. This means that the OFT will consult publicly on the suitability of the proposed buyers in these areas, as well as all other aspects of the draft undertakings, during the public consultation period.

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