The CMA has expanded and updated its commentary on retail sector mergers. New content reflects developments in its assessment techniques and experience from recent cases, including mergers between grocery stores, mobile phone shops, pubs, betting shops, pharmacies, DIY stores and other retailers. This is a detailed, technical document, but offers valuable insights into understanding the CMA's approach to mergers in retail sectors.
The commentary opens with a discussion of how the CMA assesses competition between bricks and mortar stores. Retail market competition can take place at the local level and/or through overarching policies set at national level, with interaction between the two. New content includes how the CMA reviews the impact of the merger on potential competition, by considering how the merger will impact on the parties' pre-merger plans to open new stores.
Next, the commentary explains how "catchment areas" are set. This essentially involves understanding the maximum distance from a particular store which a customer would typically travel to find an alternative store to identify the geographic scope of competition and the areas where the parties overlap. Catchments might be based on straight-line distance, drive times or postcodes, and might also be adjusted to reflect the characteristics of the market concerned.
"Filtering" is then considered. The CMA sets filtering criteria in order to focus the investigation on those areas where local competition is most likely to be negatively affected. The focus might be on local areas where, post-merger, only three different brands will remain in the catchment area, or where the merged business will account for 35% or more of outlets. Filters are particularly important in cases which involve a very large number of local overlaps.
Next, a new section discusses how the CMA assesses the interaction between bricks-and-mortar and online retail. It seeks to understand how traditional retail competition and online competition interact with and constrain each other. The CMA emphasises that the parties' internal documents are a valuable source of information on how they perceive this interaction.
The final two sections of the updated commentary concern econometrics. The first deals with the use of diversion ratios and price pressure indices. These are measures which evaluate the strength of rivalry between any two particular competitors. Where the merging businesses are each other's closest rivals, the merger is more likely to generate competition concerns. The final section considers other econometric techniques which have been used to evaluate the nature and extent of competition. Such modelling tools are used in particular during Phase 2 merger investigations.
If you would like to view any other articles in the Competition newsletter May 2017 please click on the links below:
