Affected market: Grocery retailing
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The OFT's decision on reference under section 22 given on 23 March 2005. Full text of decision published 8 April 2005
Somerfield plc (Somerfield) is the fifth largest grocery retailer in the UK, with a total pre-acquisition portfolio of 1219 stores. The company operates nationally across the UK and achieved sales of £4.52 billion in the financial year ending 24 April 2004.
Wm Morrison Supermarkets plc (Morrisons) is the fourth largest grocery retailer in the UK, following its acquisition of Safeway in 2004. Its annual turnover for the year ending 1 February 2004 was £4.94 billion.
On 25 October 2004, Somerfield acquired 114 smaller Safeway stores (the acquired stores) from Morrisons by way of a sale and purchase agreement. The total consideration was £260.2 million and the annual turnover of the acquired stores is approximately £750 million.
Somerfield notified the transaction on 8 December 2004. The extended statutory deadline is 24 March 2005.
As a result of this transaction Somerfield and the acquired stores have ceased to be distinct. The UK turnover of the acquired stores 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 a relevant merger situation has been created.
The transaction gives rise to an overlap in grocery retailing, primarily through mid-range stores.
Certain aspects of competition at the national level have been considered. However, the increment to Somerfield's share of supply is small and there remain a number of substantially larger players. The OFT considers that the transaction does not give rise to any competition concerns at the national level, including in terms of upstream buyer power.
The starting point for the OFT's analysis of the effect on competition at a local level was the CC's methodology in the Safeway Report.
In relation to one-stop stores, the analysis identified one area where the acquisition has resulted in three or fewer competing fascia post-acquisition, and therefore, horizontal competition concerns arise.
In relation to convenience stores, the analysis identified one area where the acquisition has resulted in no competing fascia post-acquisition and therefore, competition concerns may arise. However, there is evidence to suggest that barriers to entry in convenience retailing are sufficiently low that the potential for new entry would be sufficient to mitigate these competition concerns.
The OFT has considered whether it might be possible or appropriate to develop the CC's position in relation to the assessment of competition between mid-range stores at the local level. We proposed a methodology for analysing the scale of competition between stores in this category but there was no consensus amongst third parties (or Somerfield) about the appropriateness of this approach. In light of this, we adopted the CC's methodology for analysing stores smaller than one-stop size, which identified 22 potential 'problem' stores. We examined Somerfield's own analysis that suggested a much smaller number of potential 'problem' stores by modifying certain of the factors in the CC's methodology, such as the effective competitor set. Again, in the absence of consensus about the appropriateness of such modifications, we did not rely on this analysis.
Consequently, the OFT believes that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom being the one area where there is a 'problem' one-stop store and the 22 areas where there are 'problem' stores in the mid-range.
UNDERTAKINGS IN LIEU
Somerfield has indicated a willingness to divest the limited number of overlap stores which it considers to give rise to local competition concerns. However, this would not address all of the potential local competition concerns identified by the OFT.
This merger will therefore be referred to the Competition Commission under section 22(1) of the Act.