Bidvest / Brake Bros

No. Bidvest

A report under section 125(4) Fair Trading Act 1973 on the advice of the Director General of Fair Trading, given on 20 June 2002, to the Secretary of State for Trade and Industry under section 76 of the Act

ASSESSMENT

Jurisdiction

The merger satisfies the assets test of the FTA.

The parties

Bidvest PLC (Bidvest) is a foodservice products distributor. In the UK it owns 3663 First for Service which provides wholesale delivery and contract logistics services to the foodservice industry. Brake Bros plc (Brake Bros) also provides these services, including supply of its own manufactured food, to the foodservice industry.

Relevant markets

The parties overlap in the wholesale delivery and contract distribution of food to the foodservice sector in the UK. Food service outlets have a number of delivery options that they can access, ranging from the provision of smaller, locally-based services such as cash-and-carry outlets to larger national services such as contract delivery (where customers purchase products directly from food manufacturers and then contract for delivery from manufacturer to their premises). Between these two extremes, delivery options include: (a) direct supply by manufacturers; (b) home delivery by supermarkets; (c) wholesale delivery services operating on a local, regional or multi-regional basis; (d) consortia of regional suppliers giving multi-regional or near national coverage; and (e) national wholesale delivery services.

Different customer groups may use different service options: indeed, some customers may make use of a number of these alternative means of supply. For example, smaller foodservice outlets might use cash and carry outlets, wholesale delivery and, perhaps also, supermarket delivery services. National foodservice companies might use a national wholesaler or a pure logistics company.

The food products delivered also fall into different temperature ranges, namely frozen, chilled, ambient or fresh. Although there are differences in price and quality among the various temperature ranges, there does appear to be some scope for substitution between frozen and chilled products (e.g. for chips). However, switching from frozen/chilled to fresh delivery seems less likely because of the increased food preparation that would be required. There may therefore be a case for arguing that delivery for different temperature ranges constitute separate relevant markets. No definitive view need be taken on this issue here.

However, the wide range of delivery options available to customers (in terms of type and temperature of delivery) make it very difficult to estimate what customers' responses might be to any hypothetical change in price. Bidvest and Brake Bros overlap principally in the supply of national wholesale delivery services. In the circumstances, this category of delivery service would appear to be the most appropriate frame of reference in which to consider the competitive effects of the proposed merger.

Neither party is active in Northern Ireland and the major companies active there differ from those on the mainland. The most relevant geographic market is therefore likely to be Great Britain.

Horizontal issues

The parties are the two largest companies in food delivery/wholesaling in the UK. Indeed, third parties have suggested that the parties are the only real national providers and are the only providers covering all temperature regimes. As such, they are each other's closest competitors.

Bidvest has estimated that for all UK wholesale foodservice delivery services (covering all temperatures and contract distribution), the combined Bidvest/Brake Bros entity would have a combined share of supply of 44 per cent (an increment of 24per cent) with the next closest supplier having a share of only 4per cent. Further, information supplied by Bidvest about multi-regional contracts bid for by Bidvest and Brake Bros suggest that the parties' share of national wholesale delivered business could be around [details excised]. Estimates provided by a customer and a competitor support this and suggest that the increment could be around [details excised].

Bidvest has argued that these apparently high shares of supply do not reflect the strength of the competitive constraints that they face. In particular, Bidvest has suggested that all national customers for wholesale delivery services have ready alternatives in the shape of contract distribution or using consortia of regional wholesalers to achieve national coverage. (Bidvest also provided examples of companies that have switched from wholesale to contract delivery.)

However, several third parties - notably customers - said that this was not the case. They said that using a group of regional wholesalers would inevitably raise costs since food outlets would require more deliveries than if they were using a single national centralised distribution system. (This is because no regional wholesaler supplies across the full range of temperatures.) Moreover, several large national companies drew a distinction between single-user and multi-user distribution systems. (In a multi-user system, customers requiring frequent delivery of small volumes of goods share deliveries with other customers to reduce costs.) Customers using single-user distribution might be able to switch to contract distribution. Companies using such a multi-user service believed that the nature of their requirements meant that contract delivery was not a viable option for them. However, Bidvest and other logistics companies argued that these customers just needed to be more disciplined about the way in which they operated (e.g. more central control and more restrictive product range) in order to be able to use contract distribution.

As regards the existence of other competitive constraints, Bidvest has argued that barriers to entry are low, so there is a real threat of new entry or expansion by existing players, particularly regional wholesalers. While the acquisition of warehouse space and lorries does not appear to be a significant barrier, third parties were however dubious that new entry would occur. Bidvest also argued that it was constrained by buyer power. For example, a national foodservice customer could award a large contract to a smaller competitor in order to 'sponsor' its expansion into national wholesale services. However, the extent of customers' concerns suggests that buyer power might be limited.

Other issues

Some suppliers of food products to the parties have expressed concern about the hold the parties could have post-merger over supply to the foodservice sector. Bidvest has said that large food manufacturers are in direct contact with customers and they could not prevent this. It has also said that it and Brake Bros try to stock the widest range of brands possible to provide good customer service. Were they not to do so, customers would likely switch away in order to obtain the specific product that they require.

Third party views

The OFT has received a large number of representations, mainly from customers but also from suppliers. The number of these representations, many unsolicited, and the strength, nature and quality of customers' comments received are a striking feature of this case.

CONCLUSION

The wide range of food delivery services, the combinations of services, the different types of customers, and the variability of substitution across temperature regimes means that it is difficult confidently to define the relevant product market in this case. We have therefore focused on the principal overlap between the parties' activities, which is in national wholesale foodservice delivery, and used that as the frame of reference for our competitive analysis of this merger.

The parties have a strong position in foodservice delivery, particularly to national customers. The parties' post-merger share of national wholesale foodservice delivered business has been estimated at around [details excised] with an increment of around [details excised]. Nevertheless, alternatives appear to be available to national customers either through the use of a combination of regional suppliers or logistics companies that can effect nation-wide contract distribution. Together with the potential for entry or expansion and the likelihood that major customers can exercise some degree of buyer power, the available alternatives might adequately constrain the parties' post-merger behaviour. It is certainly possible, therefore, to construct a prima facie argument for clearance of this merger.

However, we have received a significant number of cogent representations from customers, including some large national customers, which go to core points of the parties' submissions and the argument for clearance. Specifically, they have raised concerns about the ability of national foodservice customers to switch to regional suppliers or logistics companies. In view of the number, source and quality of these comments, I would advise against accepting the argument that can be made for clearance without this merger being investigated more fully.

I therefore conclude and recommend that you should refer this merger to the CC.

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