The Littlewoods Organisation Plc and Freemans Plc (a subsidiary of Sears Plc): A report on the proposed merger

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Summary

On 21 April 1997 the Secretary of State for Trade and Industry referred to this Commission for investigation and report the proposed acquisition of Freemans PLC (Freemans), a subsidiary of Sears plc (Sears), by The Littlewoods Organisation PLC (TLO). The full terms of reference are given in Appendix 1.1. TLO's subsidiary, Littlewoods Home Shopping Group Ltd (LHSG), and Freemans operate catalogue mail order businesses in the home shopping sector of non-food retailing, of which agency mail order accounted for some 60 per cent in value terms in 1995.

Agency mail order is a traditional form of home shopping and has a number of dis-tinguishing characteristics. These include: the offer of a wide range of clothing, household and electrical goods through a large (typically 1,000-page `big book') colour catalogue, issued free twice-yearly; the use of agents to place orders for themselves and their customers in return for a 10 per cent commission on all goods sold; `bundled' prices, covering credit, delivery and the return of unwanted items, as well as the goods themselves; and a facility to pay the catalogue price either in a single payment or by instalments, described in the catalogue as `interest-free', typically spread over 20 or (less commonly) 38 weeks. Catalogue prices are on average 15 to 20 per cent above those in the high street.

There are five firms operating in the agency mail order sector in the UK: the UK home shopping business of The Great Universal Stores PLC (GUS), the largest, with a share of agency mail order of nearly 41 per cent in 1996; LHSG, with an agency mail order share of 28 per cent in that year (in this report we use the term `Littlewoods' to refer to TLO, LHSG and more specifically to LHSG's agency mail order business); Freemans, with a little over 13 per cent; Grattan plc (Grattan), with 10 per cent; and Empire Stores Group plc (Empire), with around 8 per cent. Total agency mail order sales amounted to some £3.3 billion in 1996. All five agency mail order companies, or the groups to which they belong, also operate direct mail order businesses, a form of catalogue retailing which does not use agents.

Littlewoods and Freemans argued that agency mail order had lost much of its traditional character over recent decades. Most of their agents were now no longer `traditional' agents purchasing both for themselves and for customers from whom they then collected instalments on behalf of the company. Today, most agents used the catalogue as `personal shoppers', to buy goods for themselves and their immediate family only. Agency mail order was, they argued, now part not simply of a wider home shopping market but of the whole non-food retail market, competing in particular with the high street, which acted as a direct constraint on agency catalogue pricing. Moreover, while agency mail order was valued because it offered instalment payment terms, there were now many alternative sources of credit available and agency mail order users were in no sense dependent on the agency credit offer.

We estimate that across agency mail order as a whole, there were around 2.5 million traditional agents in 1996, that is, agents having customers outside their own household, and around 6 million agents' customers. Together, we estimate that they account for about 70 per cent of all sales or around £2.3 billion. We also estimate that such agents represent one-third or so of all agents, the remaining two-thirds being `personal shoppers', that is, agents who buy only for themselves and their own household. Most agents are women. The lower-income socio-economic groups make up around two-thirds of all agents and, we believe, a still higher proportion of their customers. These lower-income groups account for around 70 per cent of all agency mail order sales.

For the purposes of determining the market, we examined the extent to which (a) other forms of home shopping, particularly direct mail order, and (b) the high street could be regarded as adequate substitutes for agency mail order; and (c) alternative forms of credit were adequate substitutes for the agency mail order offer.

We found that agency and direct mail order differ markedly from each other: in par-ticular, direct mail order does not use agents to sell goods; prices are not bundled and are broadly comparable with high street prices; interest-free credit is not normally included as part of the catalogue price; the range of goods in many catalogues is far narrower; and many direct mail catalogues are more up-market than those of agency mail order.

In assessing the importance of the credit aspects of agency mail order, we found that access to alternative sources of credit, particularly credit cards, was now widespread. However, agency mail order users in the lower-income socio-economic groups, who are the predominant users of this form of home shopping, are less likely to have access to alternative sources of credit, especially credit and store cards, than the more affluent groups, and are less likely to use the credit available on those cards for purchasing the sorts of goods available through agency mail order. A number of users of agency mail order also seem reluctant to use other forms of credit. We found a lack of transparency in the agency mail order credit offer, and a generally poor understanding on the part of agency mail order users of the nature of the credit terms offered.

With regard to the role of the high street, we found that agency mail order users are prepared to pay a significant premium above high street prices for the credit offered and the convenience of being able to choose items in their own home, and that high street prices exercise no more than a broad upper constraint on what the agency mail order companies can charge.

We conclude (a) that agency mail order has distinctive features which distinguish it from other forms of home shopping, including direct mail order; (b) that on the credit issue, on balance the agency mail order credit offer is sufficiently distinct as to be a factor in identi-fying the market, without being definitive on the matter; and (c) that the high street represents some general constraint on the pricing of the agency mail order companies but is not a tight constraint on them. Overall, we conclude that agency mail order is for these reasons still a distinct market.

We considered the possible public interest benefits and detriments of the proposed merger. We found that the agency mail order market is broadly static and already highly con-cen-trated. The proposed merger would raise concentration further, resulting in the merged company and the current market leader, GUS, having over 80 per cent of agency sales between them. We would expect this increase in concentration to reduce the level of existing compe-tition significant-ly. Although the two smallest companies, Grattan and Empire, are owned by large interna-tional companies, we do not expect these companies, with only 18 per cent of the agency mail order market, to provide sufficient protection for customers. Given the substantial investment required to set up an agency mail order company, new entry into the agency mail order market is highly unlikely.

We accept that there may be some benefits, including cost savings to be derived from the merger which, if passed on by the merged company, might benefit customers, but in our view these do not outweigh the detriments we have identified.

We therefore conclude that the merger may be expected to operate against the public interest in that, as a result of an increase in the degree of concentration in the agency mail order market, less competition might be expected than would otherwise be the case, which in turn might be expected to lead to a detrimental effect on choice, prices or efficiency in the agency mail order market. We do not consider that behavioural remedies would be adequate to remedy the adverse effects we have identified. Accordingly, we recommend that the merger should be prohibited.

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