SAFEWAY MERGER INQUIRIES: ISSUES STATEMENT

The Competition Commission has sent an issues letter to the main parties in the Safeway merger inquiries. These inquiries concern the mergers in contemplation between each of Wal-Mart Stores Inc (Wal-Mart), the owner of Asda Group Ltd (Asda); J Sainsbury plc (Sainsbury); Wm Morrison Supermarkets plc (Morrison); and Tesco plc (Tesco) (together the "parties"); and Safeway plc (Safeway).

The Commission has identified a number of issues that it wishes to consider, arising from the information received to date from the parties and other sources, including representations made at the open meeting on 30 April 2003. Analysis of these issues - and any others which may be identified as the inquiry proceeds - will help the Commission reach conclusions on the question of whether any of the four potential mergers might be expected to operate against the public interest.

An issues letter is always sent to main parties before the Commission has reached any conclusions and is designed to highlight those matters which have been identified by the investigating group for further consideration, and to ensure that nothing significant has been missed. The purpose of making the statement of issues public is to inform all interested parties and give them an opportunity to raise any further points with the Commission. The Commission would be grateful for any written views which interested parties may wish to present, to reach the Commission by no later than 14 May.

The issues the Commission has identified are set out below.

ISSUES

A. THE MARKETS INVOLVED

1. In the CC monopoly report on supermarkets published in October 2000 (CM 4842) (the 2000 report), the CC concluded that the relevant economic market was that for one-stop grocery¹ shopping carried out in stores of 1,400 square metres or above. The CC further concluded that shopping patterns were essentially local, most consumers travelling no more than 10 minutes to the supermarket in urban areas and no more than 15 minutes in non-urban areas. Bearing in mind that the 2000 report was a report on the monopoly situation as regards the supply of groceries from multiple stores and the possibility that different considerations might arise in the current merger inquiries, consideration needs to be given to the extent to which that definition of the economic market is still appropriate and, in addition, to what extent there may have been developments in the market since 2000. We therefore consider that the following issues arise in the case of each of the mergers in contemplation:

(a) Whether the product market or markets should be defined, for the purposes of the competition analysis, as "groceries" or whether it (or they) should include other product categories now frequently sold in large multiple retail outlets and, if so, what other categories; or whether it (or they) should be defined in some other way;

(b) Whether the market or markets should be defined, for the purposes of the competition analysis, as including only those stores where one-stop grocery shopping typically takes place and whether this includes only stores whose sales area is above 1,400 square metres or other sized stores as well and, if so, which other stores; and whether there is a relevant market that includes "convenience stores", that is, stores under around 600 square metres in size;

(c) Whether the geographical market should be defined, for the purposes of the competition analysis, as national, regional or local and, if any of these, how its scope should be characterised; or whether the geographical market should be defined as manifesting characteristics of all or more than one of these.

(d) Whether Internet home shopping to any extent, if at all, affects the geographical market definition;

(e) Whether, in considering market definition, chains of substitution extending across localities or regions should be taken into account; if so, how such chains of substitution operate and what effect they have on market definition.

B. COMPETITION ISSUES

Local level

2. In its 2000 monopoly report, the CC concluded that isochrone analysis based on one-stop shopping in stores of 1,400 square metres or above, with drive times of no more than 10 minutes in urban or 15 minutes in rural areas, was an appropriate framework in which to consider local competition between stores. Bearing in mind the possibility that different considerations might be relevant in the context of these merger inquiries, and in the light of possible developments since the 2000 report, the following issues arise in the case of each of the mergers in contemplation:

(a) Whether isochrone analysis based on stores is a practical and appropriate approach to identifying the sources of local competition between stores; and, if so, what methodology should be adopted for such an analysis and what are the correct criteria for consideration;

(b) Whether isochrone analysis based on a consumer-centric or some other population-based approach is a practical and appropriate way to determine local competition between stores; and, if so, what methodology should be adopted for such an analysis and what are the correct criteria for consideration;

(c) Whether there are any other practical and appropriate ways of assessing local competition between stores;

(d) Whether it would be appropriate to use measures such as the number of fascias in a locality, the Herfindahl Hirschmann Index or market share data to examine the degree and adequacy of local competition and, if so, which of these measures; and what change in any such measure should be regarded as indicating a reduction in local competition;

(e) Whether there are any other measures that might be used to indicate a change in the degree of competition at the local level;

(f) Whether any of the mergers in contemplation might be expected to bring about such a degree of concentration at the local level as to result in any of the coordinated effects set out in the CC's guidelines for merger references²;

(g) Whether any of the mergers in contemplation might be expected to result in prices for groceries or other product categories being higher, or choice being less (whether in the one-stop shopping or any other grocery market) than would otherwise have been the case, as a result of the actions of one of the parties, or one of the parties in association with the actions of one or more other multiple grocery retailers;

(h) Whether any of the mergers in contemplation might be expected to result in prices being higher than they would otherwise be in petrol retailing, as a result either of the actions of one of the parties, or one of the parties in association with the actions of one or more other market participants;

(i) Whether any of the mergers in contemplation might be expected to have any adverse effect on the ability of a new multiple grocery retailer to enter the local market, or the ability of an existing grocery retailer to grow in the local market.

3. Whether any of the mergers in contemplation might be expected to bring about benefits for consumers or others at the local level that would not have been realised in the absence of the merger, and if so, what form these might be expected to take; for example:

(a) consumers having a better chance of being able to shop at their preferred supermarket;

(b) prices of products or services being lower;

(c) efficiencies (for example in distribution, IT, advertising or promotion) being increased and passed on to consumers in the shape of lower prices for products or services, higher quality products or services, a greater choice of products or services or a better quality of service.

National level

4. The CC will wish to explore the precise nature of competition in the relevant economic market or markets at the national level, in order to establish the dimensions of such competition and the mechanisms by which it operates. In this context, the CC will wish to examine the effect that each of the mergers in contemplation might be expected to have on competition at the national level, including the effects on multiple grocery retailers without national coverage and on other (smaller) grocery retailers. In particular, the following issues arise in the case of each of the mergers in contemplation:

(a) Whether it would be appropriate to use measures such as the number of fascias nationally, the Herfindahl Hirschmann Index or market share data to examine the degree and adequacy of competition at the national level and, if so, which measure or measures; and what change in any such measure should be regarded as indicating a reduction of competition at the national level;

(b) Whether there are any other measures that might be used to indicate a reduction in competition at the national level;

(c) Whether any of the mergers in contemplation might be expected to result in such a degree of concentration at the national level as to result in any of the coordinated effects set out in the CC's guidelines for merger references²;

(d) Whether any of the mergers in contemplation might be expected to result in prices for groceries or other product categories being higher, or choice being less (whether in the one-stop shopping or any other grocery market) than would otherwise have been the case, as a result of the actions of one of the parties, or one of the parties in association with the actions of one or more other multiple grocery retailers;

(e) Whether any of the mergers in contemplation might be expected to result in prices being higher than they otherwise would be in the petrol retailing market, as a result of the actions of one of the parties or one of the parties in association with the actions of one or more other market participants;

(f) Whether any of the mergers might be expected to have an adverse effect on the ability of a new multiple grocery retailer to enter the national market, or the ability of a smaller grocery retailer to grow nationally;

(g) Whether any of the mergers in contemplation might be expected to have particular effects in Northern Ireland or Scotland, with respect to the price, quality or choice of products or services on offer, the service levels associated with such products or services or in any other respect.

5. Whether any of the mergers in contemplation might be expected to bring about benefits for consumers or others at the national level that would not have been realised in the absence of the merger, and if so, what form any such benefits might take; for example:

(a) Whether the acquisition of Safeway by any one of the parties might be expected to bring about increased competition, and if so, in what ways this might manifest itself (for example, in price levels, the quality of goods or services or the diversity of the grocery offer);

(b) Whether any of the mergers in contemplation might be expected to bring about efficiencies that would not have been realised in the absence of the merger, and what form these might take (for example, in distribution, head office, IT or logistics) and whether such efficiencies might be expected to benefit consumers by being passed on in lower prices for products or services, higher quality products or services, a greater choice of products or services or a better quality of service.

6. Whether, if Safeway were not to be acquired by one of the parties or by another bidder, it might be expected to offer effective competition to the parties and to other multiple grocery retailers, and what role it might be expected to play in the market for multiple grocery retailing in the future.

C. BUYER POWER AND SUPPLIER ISSUES

7. The following issues are for consideration:

(a) Whether any of the mergers in contemplation might be expected to result in an increase in the merged entity's buyer power in relation to its suppliers and if so, how this might be brought about - for example, by virtue of suppliers having one fewer multiple grocery retail outlet for their products; and how any such increased buyer power might be expected to manifest itself - for example, in increased costs for suppliers (including as the result of situations where products they supply are sold by one or more of the parties at below cost on a persistent basis), a reduction in the quality or diversity of products or services supplied by them, or in the levels of innovation they can attain in relation to those products or services;

(b) Whether any increase in buyer power by the merged entity might be expected to have adverse effects on consumers, by bringing about a reduction in the number of suppliers, increases in product prices, or a reduction in the quality, diversity or levels of innovation in relation to those products;

(c) Whether any increase in buyer power by the merged entity might be expected to have adverse effects on smaller multiple grocery retailers or convenience stores, because suppliers to the merged entity might be expected to seek to recoup any loss of margin through raised prices to those other grocery retailers;

(d) Whether any of the mergers in contemplation might be expected to have any impact (positive or negative) on the effectiveness of the Code of Practice³ governing relations between some supermarkets and their suppliers in protecting suppliers;

(e) Whether any of the mergers in contemplation might be expected to have any impact on the size, efficiency or diversity of the grocery supply chain in the UK or any part of the UK;

(f) Whether any increase in buyer power might be expected to reduce competition at the local or national levels.

Notes to Editors:

The references concerning the four potential mergers were made under the Fair Trading Act 1973 on 19 March 2003 (see DTI Press Notice P/2003/173).

Further information is provided on the Commission's website at http://www.competition-commission.org.uk/inquiries/ref.htm

Footnotes:

Groceries include food, drinks (alcoholic and non-alcoholic), cleaning products, toiletries and household goods, but exclude petrol, clothing, DIY products and financial services.