Publication
Mission impossible? Teresa Ribera’s mission letter and the future of EU merger review
Executive Vice President Vestager’s momentous tenure as Commissioner responsible for EU competition policy is nearing its end.
Global | Publication | January 2017
On 27 July 2016, the French Competition Authority (the “FCA”) approved the acquisition of Darty by Fnac and has for the first time in France and Europe considered the market for the retail distribution of certain domestic electronic products to include both online and in-store sales. Due to the FCA’s decision, the tie-up - equating to approximately 1 billion with the aim to create a new entity consisting of about 400 stores - received approval subject to the divestiture of merely 6 of them.
The electronic products at stake were the so-called “brown” and “grey” products. Brown products included items such as TV’s, cameras and audio sets, for instance MP3, DVD and Blu-ray players etc. Grey products referred to communication and multimedia merchandise such as tablets, laptops, smartphones, etc. The FCA confirmed and clarified its position on video game related products (i.e., software, consoles and video game accessories), considering that they constitute a separate market.
The most interesting issue of the decision concerns the segmentation by distribution channels, which the FCA had already analyzed in previous decisions. In its 2011 decision, the FCA estimated that in-store and online retail channels were not substitutable due to four main differences:
Yet, in its 2012 e-commerce market enquiry, the FCA envisaged a convergence of the two channels in the near future, given the increase of households with internet access along with the rise of online purchases. It is therefore only four years later that the competition watchdog has acknowledged this evolution and decided that, with respect to the retail of brown and grey products, the differences between the two channels narrowed enough – although the substitutability is not perfect – to consider that they constitute one single market.
Another interesting feature of this decision is the use of market surveys to analyze distribution channels. The parties ordered a survey but the FCA deemed it useful to perform an additional one, based on a wider population sample (over 20,000 for the FCA instead of about 1,500 for the parties). Given the time constraint of a merger control case, this shows the FCA’s desire to fit its market definition to real consumer habits. The FCA’s findings are the following:
Taking into account online sales could have impacted the geographic definition of the market, making it national rather than local and Fnac’s position in that respect was that competition conditions between in-store and online retail are similar on the French territory. However, the FCA considered that a local analysis was also required, given that more than 7 out of 10 French consumers still prefer in-store purchases. In addition, it also noted that one specific characteristic of the retail market is the retailers’ ability to locally adjust their pricing strategy. Consequently, the analysis of the takeover’s effects was conducted both nationally and locally. The parties could therefore not avoid the traditional and burdensome “shop catchment areas” analysis.
Another change brought by this decision is the market share estimate method. Traditionally, market shares were based on a comparison of the retail floorspace dedicated to sell the products concerned in each competitor’s store. However, the FCA noted – that in relation to the specific market for the retail of brown and grey products – such method is no longer viable. It leads to underestimating the parties’ market power because Fnac and Darty generate higher turnover than their competitors on equivalent surface areas. Above all, as a result of the inclusion of both in-store and online retail channels to the market definition, using the floorspace method to calculate market shares is not suitable.
One of the difficulties the FCA faced was the lack of public data necessary to reconstruct online sale shares for each catchment area. The FCA concluded that online sales pressure is homogeneous on the French territory as a result of the general coverage of internet and 3G in France, which facilitates consumers access to online sales from anywhere. Moreover, it appears that the FCA was unable to obtain relevant data in relation to the geographical distribution of online sales, from the main pure players. Amazon, for example, declared that they do not monitor geographical distribution as such data is irrelevant to their business activity. This seems quite surprising given that consumers have the products delivered to the address they indicated and also the widespread use of “big data” in marketing, logistics and business strategies.
The FCA estimated the local market shares, with online sales included, by taking into account the local in-store market shares (when relevant), the national market shares of the parties on the online channel and the national penetration rate of online sales. In the analysis of each catchment area, the competitive pressure exerted by competitors was reported using a weighted score system, in particular, based on the diversity of choice within the catchment area and the geographical proximity of the competitors.
Concerning the competition effects of the transaction, the FCA assessed the potential unilateral and conglomerate effects. The FCA concludes that competition issues exist in Paris and in the south-western region of Paris where the post-merger alternatives will not be sufficient. In the end, Fnac had to commit to divest, within a period of eleven months from September 2016, 5 Darty stores and 1 Fnac store to obtain merger approval. The stores must be sold to one or more retailer(s) already well-established in the same economic sector of activity, with the ability to exert competitive pressure. This process will be subject to the control of an independent trustee.
The Fnac/Darty merger creates a giant in the retail distribution of certain electronic domestic products. Yet, the decision only provides for a brief assessment of the potential efficiency gains, probably due to the lack of sufficient verifiable and quantifiable evidence. It would have been interesting to have further developments concerning the synergies that will likely result from the transaction, for example in terms of logistics or after-sales services, which are key in the concerned markets.
By looking at the physical and online distribution channels as one, the FCA has shown its ability to innovate and adapt to emerging consumption habits and marketing strategies. This precedent changes the market analysis, immediately reducing the in-store market shares of retailers. It also brings a diverse range of new issues, such as the geographic definition of the market, the difficulty to reconstruct data, the intensity of the competitive pressure of the online sales, and the market shares calculation methodology. Yet, an in-depth competition assessment of the concrete impact of online sales on each catchment area would have been welcome and useful to fully measure the implications of a single market definition. As the percentage of online sales is predicted to keep increasing, a more detailed analysis will probably be developed for future decisions.
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