COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no.: 21/LM/Mar05
In the large merger between:
Edgars Consolidated Stores (Pty) Ltd
and
Rapid Dawn 123 (Pty) Ltd
Reasons
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Introduction
1. On 13 June 2005 the Tribunal approved the merger between Edgars
Consolidated Stores (Pty) Ltd and Rapid Dawn 132 (Pty) Ltd. The reasons
are set out below.
2. SACTWU, the South African Clothing and Textile Workers Union,
represented by Mr Ebrahim Patel and Mr Etienne Vlok, participated in the
hearing and made representations on the effect of the merger on public
interest.
The transaction
3. Edgars Consolidated Stores Ltd (“Edcon”) is acquiring 100% of the issued
shares in Rapid Dawn 132 (Pty) Ltd (“Rapid Dawn”) and Topics (Pty) Ltd
(“Topics”), which is a wholly owned subsidiary of Rapid Dawn.
4. Edcon is listed on the JSE and is not controlled by any single shareholder.
Its major shareholders are:
• South African Breweries 21.64%
• United Retail Ltd (SA) 10.00%
• Public Investment Commissioners 8.68%
• Liberty Life Association of Africa (SA) 7.61%
• Allan Gray 5.20%
5. Rapid Dawn is a holding company and does not operate any business. 1
Its purpose is to hold the shares in Topics. 2
Rationale of the transaction
6. According to the majority shareholders in Rapid Dawn, Topics had prior to
and after its acquisition in 2002 from Wooltru experienced substantial
operating losses. Since Rapid Dawn could not turn this process around
the majority shareholders decided to dispose of Topics to a company with
the necessary skills and infrastructure to ensure the future of Topics.
Accordingly, Rapid Dawn initiated a process to dispose of Topics by
canvassing various potential buyers. There were several interested
parties. However, Edcon was the only purchaser that was prepared to
acquire the whole of Topics on terms acceptable to the majority
shareholders.
7. From Edcon’s perspective the acquisition of Topics is part of its strategy
of making selected acquisitions of reasonably priced businesses that can
deliver synergistic benefits.
Effect on Competition
8. Edcon is a national retailer operating predominantly in the clothing,
footwear and accessories market, including cellular phone products. 3 It
also has a presence in certain of South Africa’s neighbouring countries. Its
business is divided into a departmental store and a discount division. It
owns the following wellknown brands:
• Edgars, which forms part of the Department store division, targets middle
to uppermiddle income families. There are 168 stores.
• ABC sells mainly shoes. It is located within Edgars stores and at a few
selected ABC branded stores.
• Jet with 283 stores and Jet Mart with 17 stores, are massmarket
departmental stores. They are part of Edcon’s discount division that
focuses on the middle and lowermiddle income markets.
focuses on the middle and lowermiddle income markets.
1 Five shareholders hold shares in Rapid Dawn. No single shareholder directly or indirectly controls Rapid
Dawn. The identities of the shareholders are claimed confidential.
2 Topics (Pty) Ltd trades as Topics and Topic.
3 Edcon also owns CNA, which sells books, magazines, toys, DVD’s, Videos etc, and Boardmans, which
sells furniture, home furnishings and kitchenware. Since Topics does not trade in such products these
brands do not form part of this investigation.
2
• Legit, part of Edcon’s discount division, sells fashionable ladieswear.
• Red Square sells cosmetics.
• Prato sells shoes.
9. Edcon also controls three manufacturing subsidiaries, Celrose Clothing
(Pty) Ltd, Reactor Clothing (Pty) Ltd and Studio Clothing (Pty) Ltd that
manufactures clothing for Edcon but also produces for other major retail
groups.
10. Topics retails ladieswear and footwear and cellular products, trading from
120 stores throughout the country. Topics does not own a manufacturing
subsidiary but has a division, Ivano, that makes patterns, procures fabric,
makes samples and manages outsourced production on behalf of its
buyers.
11. The only areas of overlap between the businesses of Topics and Edcon
are the retail market in respect of ladieswear, ladies footwear and cellular
products. Both parties have national pricing and competitive strategies
and compete on a national basis with other large retail apparel chains. We
agree with the Commission and the parties that the geographic markets in
all three product markets are national.
12. The combined postmerger market share in the cellular product market
will be 5.1%. Since this is a highly competitive market with many players,
we agree with the Commission that it is unlikely that this transaction will
substantially prevent or lessen competition in this market.
13. In the ladieswear and ladies footwear markets Edcon and Topics compete
with Mr Price, (with the Mr. Price and Milady brands) Woolworths,
Foschini (with brands such as Foschini and Exact!), Pepkor (with brands
such as Pep, Ackermans, Hang Ten and Dunns), Stuttafords, Queenspark
and Truworths (with brands such as Truworths and Identity).
14. Most of these national chains provide credit facilities to customers (Mr.
Price is a significant exception) and a large part of their income is derived
from their debtors’ books. According to the parties most consumers have
from their debtors’ books. According to the parties most consumers have
accounts with two or more competitors while also buying from cash
stores, making it difficult to distinguish between a market for cash retailers
and credit retailers.
15. The Competition Commission calculated the market shares for ladieswear
using RLC data, 4 which the parties provided as well as 2004 annual
4 The Retail Liaison Committee (RLC) data is a compilation of monthly retail sales information reported to
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reports of competitors. The market shares are as follows:
Competitor Total
turnover
‘000
Turnover
Ladieswear
‘000
Estimated
Market share
%
Number of
stores
Edcon 10 530 000 2 302 888 24.48 504
Topics 347 705 251 576 2.67 120
Woolworths 4 800 000 3 231 784 34.36 255
Mr Price 2 980 535 677 320 7.20 537
Pepkor 512 828 5.45 1234
Miladys 559 077 559 077 6.37 160
Foschini 1 830 800 1 830 800 19.46 334
The post merger market share is 27.15%.
16. The Competition Commission also calculated the market shares of
competitors in ladies footwear on the same basis as for ladieswear. The
market shares are as follows:
Competitor Turnover ladies
footwear
Estimated market share
%
Edcon 603 743 000 31.10
Topics 55 524 000 2.90
Woolworths 436 333 950 22.50
Foschini 213 318 820 11.00
Pepkor 368 459 780 19.00
Shoe City 40 724 502 2.10
Speciality Stores 31 028 192 1.60
Other 170 655 056 8.80
Total 1 939 262 000 100
The market share of the merged entity amounts to 33%.
17. It was pointed out during the hearing that in analysing the market shares
of competitors in the ladieswear and ladies footwear markets the
Commission had omitted the market shares of Truworths, a national
player with 240 stores, which also offers credit to its customers. 5 Other
the RLC by its members. Members include the Pep Group, Edcon, the Foschini Group, the Mr Price Group,
Woolworths, Truworths, Topics and Queenspark.
5 There was some confusion on whether Truworths was part of the Wooltru group and whether
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national chains that are also not included in the market analysis are
Queenspark, trading from 30 stores, and Stuttafords, with 21 stores, also
offering credit to their customers. 6
18. At the hearing, questions were also raised about the basis on which these
figures were calculated. According to SACTWU the figures used in the
Commission’s recommendation were the same as those used in 2003
during the Pepkor Ltd and Fashaf (Pty) Ltd merger, which was based on
RLC figures. 7 The Commission explained that it could not get hold of the
RLC and used the figures supplied by Edcon and the annual reports of
competitors to calculate market shares. The Commission and the parties
were also not sure whether Woolworths’ market share included that of
Truworths. The market share figures are clearly incomplete and
unreliable. Given the importance of these markets and the pattern of
acquisitions the Commission is urged to undertake a statistically reliable
analysis of levels of concentration.
19. However, what is evident from the information supplied is that there
remain several large competitors in these markets. Topics is a relatively
small competitor in both markets and Edcon’s market shares will increase
by only 2.67% and 2.90% respectively in the ladieswear and ladies
footwear markets. It is thus highly unlikely that the transaction would have
a negative effect on competition in the relevant markets.
20. It needs to be noted however that there seems to be an increase in the
number of acquisitions in which relatively small players, that claim to be
financially constrained, are being bought by larger competitors. The result
of this is a slow but steady increase in concentration. Cognizance should
be taken of this creeping level of marginal acquisitions and the effect this
might have on competition in the retail sector.
might have on competition in the retail sector.
Vertical integration
21. As mentioned above Edcon is vertically integrated with three upstream
clothing manufacturers, which not only supply Edcon but also supply other
retail groups that compete with Edcon. Edcon informed the Commission
that it sources its merchandise from approximately 19 local manufacturers
and Topics from 7 local manufacturers.
Woolworths’ 2004 turnover figures included those of Truwoths. However, Wooltru had unbundled
Truworths in 2002.
6 Edcon argues that it also regards these independent players as competitors.
7 See Tribunal Case no: 02/LM/Jan03.
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22. According to the Commission and the parties there are many other local
suppliers from whom retailers can source merchandise. In addition local
suppliers also compete with imports, mainly from China, that, according to
the parties, are able to supply the local market with clothing at highly
competitive prices. Under these circumstances foreclosure is not a
realistic threat and we agree with the Commission that no vertical
integration issues arise from this transaction.
23. We now turn to SACTWU’s concerns and reservations expressed in its
submission on the public interest. The Union raised both competition and
public interest concerns. However its representative conceded that its
concerns were mainly with the public interest implications of the
transaction and we shall deal with all of its arguments under this heading.
Public interest issues
24. Section 12A(3) states that:
When determining whether a merger can or cannot be justified on public
interest grounds, the Competition Commission or the Competition Tribunal
must consider the effects that the merger will have on –
a) a particular industrial sector or region;
b) employment;
c) the ability of small businesses, or firms controlled or owned by historically
disadvantaged persons, to become competitive; and
d) the ability of national industries to compete in international markets.
25. According to SACTWU the transaction will impact on every aspect of the
public interest and will also raise a number of competition concerns. More
specifically its concerns related to the following:
1) The fact that this merger further concentrates economic power in
markets already characterised by high levels of concentration. It
argued that the distributive consequences of this growing concentration
are manifest in significantly increased profit rates for Edcon.
are manifest in significantly increased profit rates for Edcon.
2) It argued that this increase in concentration may have a significant
negative impact on the South African manufacturing supply base
through the power that accrues to retailers relative to manufacturers. It
also leads to an increase in imports because greater size makes
sourcing from abroad easier for local retailers since the cost of setting
up an import operation is defrayed across a wider procurement base.
3) It argued that the effect of such practices is to decrease the size of the
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local manufacturing sector, both through retrenchment and factory
closures and hence the result will be a smaller supply base contrary to
competition policy which, avers the union, seeks to increase the number
of participants in any given market.
4) Topics has an existing supply base of smaller companies,
geographically concentrated in one region and this merger may have
particularly serious implications for that supply base and hence for the
region concerned.
5) It is concerned about Edcon’s growth through acquisition. Recently it
has bought several of its smaller competitors and grown its share of the
retail market in which there is already a high level of concentration. This
has serious implications for Edcon’s suppliers. The bigger the
company’s market share, the more power it accumulates and the easier
for it to dictate price to suppliers. Any change in Edcon’s sourcing
decisions would then have an impact on a substantial part of the local
industry.
6) SACTWU is also concerned about the jobs that will be lost as a result of
this merger.
26. SACTWU expressed concerns about Edcon’s procurement policy. It
compared Edcon to WalMart in the United States claiming that Edcon,
like WalMart, was focused on increasing its imports, thereby impacting
negatively on employment in the domestic clothing and footwear industry.
In short SACTWU fears that as a result of this transaction the upstream
supplier market will shrink while a large and growing Edcon, instead of
entering into partnerships to assist in innovation, design and training in
building a strong local supplier market would rather choose to import more
from China. Edcon’s approach to procurement, claims SACTWU, will lead
to an increase in unemployment in the manufacturing sector, especially in
the Western Cape.
27. However Edcon had indicated to the Commission that it had purchased
the Western Cape.
27. However Edcon had indicated to the Commission that it had purchased
45% of its ladieswear from local suppliers while Topics purchased only
39%. Edcon procures 19.2% of its ladies footwear from local suppliers
while Topics procures 25%. Edcon bought less footwear locally because
of the branded Active footwear that it sold which is produced
internationally. Moreover, Edcon said that it intended to continue doing
business with all the Topics suppliers including those that it did not
already purchase from. It also argued that the transaction would have a
positive effect on local manufacturing because Edcon imported less
ladieswear than Topics. Edcon believes that it will double the volume of
units sold through Topics and that a significant proportion of this increase
will be procured from local manufacturers.
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28. With regard to employment Edcon averred that on a worst case scenario
75 employees could be retrenched. Employees will be offered alternative
positions within Edcon but it was assumed that only 33% would accept its
offer to relocate to Johannesburg. Therefore, 50 employees could be
retrenched as a result of the transaction.
29. It is clear, however, that SACTWU’s concerns with the employment
effects of this merger lie less with the relatively small number of jobs lost
in direct consequence of the transaction than with the larger question of
Edcon’s alleged support for imported merchandise. If this is indeed so
then SACTWU has chosen a bad example on which to mount its case. As
pointed out, Edcon procures a larger proportion of its merchandise locally
than does Topics. This is perhaps why SACTWU refrained from
recommending that the Tribunal impose a condition to ameliorate the job
loss that it believed to be consequential upon Edcon’s growing presence
in the clothing and footwear retail trade combined with its alleged
preference for imported merchandise. An obvious condition would be one
that sought to cap Edcon’s purchases of imports, at least in the target
firm, although, as we have already pointed out, this was not always
proportionally lower than Edcon’s own purchases of local merhandise.
However, the Tribunal would approach the imposition of such a condition
with considerable circumspection and this for two reasons.
30. Firstly a condition of that sort goes to the very heart of antitrust’s concern
with the welfare of consumers. If Edcon favours international over
domestic suppliers it is presumably because the company believes that it
can procure higher quality and/or lower priced merchandise on the
international market. As long as the retail market is competitive – and our
international market. As long as the retail market is competitive – and our
view is that, residual anxieties surrounding what appears to be a creeping
pattern of acquisitions aside, the clothing retail segment remains
competitive – then a significant part of the benefits of these lower prices
and superior quality commodities must be passed on to consumers,
including working people. While we agree with SACTWU that this is cold
comfort to those whose inability to find employment condemns them to
very low levels of consumption, there is considerable evidence to suggest
that the past 20 years have witnessed a significant growth in the
purchasing power of previously disadvantaged consumers. Nor is this
phenomenon only discernible in the form of the super rich – of greater
significance is the rise of a mass middle and lowermiddle class of
consumers. This is clearly the outcome of a great many factors but there
is no gainsaying the role played by lower interest rates and product prices
over the period.
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31. Secondly, a condition such as this could not be imposed on a single
company in the clothing retail sector. Were we to impose a ceiling on
Edcon’s international purchases, this would advantage Edcon’s
competitors who would be free to import without restraint. Expressed
otherwise this issue is not merger specific. SACTWU’s concerns about
cheaper imports cannot be cured by the imposition of a merger condition
on a single firm. It is a sector wide, phenomenon and must be addressed
at that aggregated level with the appropriate instruments.
Conclusion
32. We find that the merger raises no competition concerns and that the
public interest concerns raised by the union are not merger specific.
____________ 4 July 2005
D Lewis Date
Concurring: N Manoim, Y Carrim
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