Shoppers would be "worse off" - CMA prohibits JD Sports/ Footasylum merger at Phase II
This article is part of the May/June 2020 edition of our competition law newsletter, focusing on some recent key developments.
On 6 May 2020, the CMA prohibited the merger of JD Sports and Footasylum, after finding that shoppers of sports-inspired clothing and footwear would be "worse off" as a result of the merger. The CMA has concluded that in order to remedy competition concerns, JD Sports must sell Footasylum in its entirety, but it will allow an extended timeframe to do so in light of the current COVID-19 pandemic.
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JD Sports acquired Footasylum in April 2019. The CMA launched a Phase I investigation into the merger in July 2019 and the case was referred to Phase II in October. The CMA published its Phase II decision (CMA summary of decision here) prohibiting the merger between JD Sports and Footasylum on 6 May 2020. The CMA found that the merger gives rise to a substantial lessening of competition in the UK market for sports-inspired footwear and apparel. In particular, the CMA is concerned that the merger will mean customers (predominantly male and aged 16-24) will miss out on beneficial discounts and a high quality range of products, as well as experience a lower standard of customer service.
The CMA identified both in-store and online sales channels as part of a single, combined market, after considering that many shoppers exercise these two options "interchangeably". However, the CMA placed limited weight on market shares in this case given the differentiated nature of the products/services offered by the merging parties. Instead the CMA focussed on a range of other evidence that pointed to the merging parties being "close competitors", including:
- analysis of over 2,500 internal documents showing that the merging parties regularly monitor each other more closely than other competitors;
- surveys indicated that the parties' customers considered them to be strong alternatives to each other;
- the 'gross upward pricing pressure index' (GUPPI), based on the survey results, was high for both parties and particularly for Footasylum. GUPPI provides a measure of a firm's post-merger incentive to raise prices;
- analysis of the impact of store openings and closures indicated that Footasylum is a competitive constraint on JD Sports; and
- the aggregate competitive constraint imposed by other competing retailers was deemed to be moderate at best.
The CMA also considered the effects of the COVID-19 pandemic on the merger, but ultimately concluded that the uncertainty in the retail sector caused by the virus will not, in the medium to long term, increase constraints on either party so as to address the fundamental competition concerns. Although we have seen the CMA provisionally accept the "failing firm" argument due to the pandemic in its Amazon-Deliveroo merger investigation, this case makes clear that COVID-19 will not necessarily result in more lenient merger assessments even in heavily impacted industries.
The CMA therefore considers it a proportionate and necessary next step for JD Sports to sell Footasylum, in order to preserve competition in the market, with an extended divestment period due to COVID-19 uncertainty. JD Sports has expressed its "fundamental disagreement" with the decision and plans to appeal, having recently been granted an extension of time by the CAT to file its notice of appeal against the CMA.
This case provides another example of the CMA blocking mergers at Phase II, including the Sainsbury's/Asda merger, demonstrating a marked increase in prohibition decision compared to the last five years. It will be interesting to see if this increasingly interventionist approach continues, particularly in the context of a rising case load post-Brexit.
With thanks to Harriet Martin of Ashurst for her contribution.
Contents
- Power cables saga continues: ECJ annuls parts of NKT decision
- New Competition Tool and ex ante regulation of digital platforms - EU to widen its regulatory net
- EU Commission proposals to regulate foreign subsidies
- French public consultation on Fintechs
- First French fine for obstructing raid confirmed
- Round 3 to FCO: Landmark German Facebook data collection ban reinstated
- German banking industry attempts to stifle FinTech rivals thwarted
- Competition Tribunal adopts four-step approach to penalties
- First Italian approval decisions under temporary COVID-19 cooperation rules
- Legitimacy of ex-post remedies in Sky Italia and R2 (MP) merger reconfirmed
- Fines for Singapore Zoo and Bird Park building and maintenance bid rigging
- Spanish cartel diverging damages claims developments
- Shoppers would be "worse off" - CMA prohibits JD Sports/ Footasylum merger at Phase II
- Court of Appeal judgment on costs in Pfizer/Flynn excessive pricing case
- Continued rise of UK consumer law: Fake online reviews and COVID-19 pricing and cancelations
- CMA accepts unusual behavioural undertakings in relation to Bauer Media radio acquisitions
- UK Supreme Court: Interchange fees restricted competition
- Online RPM strikes again - further fines for online restrictions
- UK merger control expanded: public health intervention and technology mergers
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