20 October 2008 - The OFT is considering a remedies offer by Co-operative Group Limited (the Co-op) in relation to its proposed acquisition of Somerfield Limited (Somerfield). The Co-op has offered to dispose of stores to resolve competition concerns raised by the merger in 126 local grocery markets across the UK.
After detailed analysis, the OFT has found that the merger would not give rise to competition concerns at a national level. With a market share of around eight per cent, the merged firm will be a stronger fifth player to compete against the existing 'big four' national supermarkets – Asda, J Sainsbury, Wm Morrison and Tesco – and would not increase any risk of coordination between large grocery retailers.
The OFT's local analysis has drawn upon the valuable know-how developed by the Competition Commission in previous grocery sector work, and relies upon evidence directly obtained from local consumers about their shopping preferences. Following this framework, the parties commissioned surveys of 40,000 UK consumers in areas where the Co-op and Somerfield are present. The extensive evidence base available meant the OFT could safely conclude that the merger raised local competition concerns in 126 markets across the UK, while not raising concerns in any other local markets.
The majority of problematic local areas affected by the merger arise because the Co-op and Somerfield compete closely against one another in the local area concerned. A minority of problem areas arise because the Co-op will replace a Somerfield supermarket with its own store in an area where one of the few other locally competing stores is a regional co-operative (and therefore linked to the Co-op through membership of the same buying group).
The Co-op has offered a comprehensive divestment package to meet each of the OFT's local competition concerns. While the OFT is satisfied that the majority of grocery stores included in this divestment package will be of interest to several eligible buyers, this would not necessarily be true for all stores. To manage the risk that there are no eligible buyers for some stores, the parties therefore agreed to find suitable buyers up-front for the OFT to approve, before it agrees to a finalised remedies package.
The OFT is confident that the ultimate divestment of all the stores will remedy all local concerns without risking the creation of any new competition concerns at the national level, as the divestment package represents a very small proportion of total grocery stores in the UK, and will be distributed among multiple buyers.
John Fingleton, OFT Chief Executive said:
'Once finalised, the divestment package will directly safeguard the welfare of many thousands if not millions of UK consumers by restoring grocery store competition in the 126 local areas affected, while allowing an otherwise likely pro-competitive merger to go ahead.'
If the OFT accepts undertakings in this case, it will be the largest divesture package accepted in UK merger control, based on what is probably the largest consumer survey ever conducted in a merger case.