SUMMARY OF THE LITTLEWOODS ORGANISATION
PLC AND FREEMANS PLC (A SUBSIDIARY OF SEARS PLC): A REPORT ON THE PROPOSED
MERGER
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 distinguishing 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 particular, 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
identifying 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 concentrated. 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 competition significantly. Although the two smallest companies,
Grattan and Empire, are owned by large international 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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