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Ellerine Holdings Ltd and Relyant Retail Ltd (56/LM/Aug04) [2005] ZACT 46; [2005] 2 CPLR 465 (CT) (5 July 2005)

78 Reportability
Competition Law
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Brief Summary

Competition Law — Merger Approval — Horizontal merger between Ellerine Holdings Ltd and Relyant Retail Ltd — Both parties active in the retail market for furniture and home appliances — Merger aimed at enhancing market position, particularly in the middle-income segment — Competition Tribunal approves merger, finding no substantial lessening of competition in relevant markets despite historical concerns regarding similar transactions — Approval based on the necessity for Ellerines to strengthen its position in the competitive landscape.

Comprehensive Summary

Summary of Judgment


Introduction


These proceedings concerned an application to the Competition Tribunal for approval of a large horizontal merger in the South African retail furniture and home appliances sector. The proposed transaction involved Ellerine Holdings Ltd as the acquiring firm and Relyant Retail Ltd as the target firm, both of which operated national retail chains selling furniture and appliances across different income-based market segments.


The matter was heard over three days, on 7, 8 and 9 March 2005, during which evidence was led from senior executives of the merging parties and from industry participants, including representatives associated with retail competitors and upstream supply. The Tribunal delivered written reasons dated 5 July 2005.


The dispute primarily concerned the merger’s likely effect on competition in retail furniture markets, with particular attention to market definition (product and geographic), concentration and barriers to entry, and the risk of coordinated conduct. In addition, the Tribunal considered vertical effects linked to the upstream furniture supplier Steinhoff, given its significance as a manufacturer and supplier to major furniture retailers and its relationship to the merging parties.


Material Facts


Ellerine Holdings Ltd was a public company listed on the JSE Securities Exchange, with widely held shares and no single controlling shareholder. It traded through multiple branded retail chains aimed at different income segments. The Tribunal accepted that Ellerines’ strongest positioning lay at the lower end (through brands such as Ellerines and Town Talk) and the upper end (through Wetherleys and Osiers), but that it faced a competitive weakness in the middle segment of the market. Although Ellerines operated the FurnCity chain directed at the middle segment, the Tribunal accepted the evidence that FurnCity had not effectively differentiated itself from Ellerines’ lower-market identity.


Relyant Retail Ltd was also a public JSE-listed company. Its largest shareholder was Poco International (40.54%), alongside a consortium of banks holding substantial blocks of shares. Relyant operated multiple retail brands spanning lower and middle segments, with an additional distinction between divisions effectively corresponding to credit-based versus cash-based retailing. The Tribunal accepted that Relyant was better represented than Ellerines in the middle market, with Beares described as a flagship brand in that segment, and also accepted that Relyant had developed an advanced credit control system (Triad hubs) relative to Ellerines.


The transaction was a share-based acquisition in which Relyant shareholders would receive 10 Ellerines shares for every 225 Relyant shares, resulting in Ellerines acquiring control of Relyant. A material post-merger feature was that Poco International would become the largest shareholder in the merged entity, and would appoint two non-executive directors, with Mr P.J.B. Pohlmann serving as non-executive chair.


The Tribunal treated as material background that the furniture retail sector had experienced prior consolidation reviewed by the competition authorities, including a previously prohibited merger in the sector and several later-approved transactions. It accepted evidence that market dynamics had changed, including stronger growth in the middle-income consumer segment and the competitive significance of capturing customers “throughout their lifecycle” across the LSM spectrum, particularly LSM 4–7.


On the competitive conditions of Relyant, the Tribunal treated as important that Relyant did not claim to be a failing firm and that its CEO explicitly denied imminent failure. However, the Tribunal accepted evidence that Relyant’s recovery remained vulnerable, particularly in the event of an economic downturn, and that internal constraints (including IT investment needs and problematic chains) had not been fully resolved.


A further material factual component was the vertical relationship with Steinhoff. The Tribunal accepted that Steinhoff was Relyant’s largest single supplier, that Relyant was Steinhoff’s second largest customer, and that the parties had different procurement patterns, with Ellerines represented as maintaining a policy of limiting dependence on any single supplier and supporting independent manufacturers, while Relyant sourced a significantly larger share from Steinhoff.


Legal Issues


The central legal questions were whether the merger was likely to substantially prevent or lessen competition, and, if so, whether it should nevertheless be approved (with or without conditions). This required the Tribunal to determine the relevant market(s) (product and geographic), assess market structure and concentration, consider barriers to entry and competitive constraints, and evaluate horizontal and vertical effects under section 12A(2) of the Competition Act.


The dispute involved a combination of legal characterisation (the framing of relevant markets and the application of section 12A(2) factors), economic fact assessment (market shares, competitive constraints, barriers to entry, and upstream supplier power), and the application of legal standards to the facts (whether the predicted effects met the threshold of a substantial lessening of competition, and whether conditions were warranted). It also required an evaluative judgment on whether the merger would remove an effective competitor, particularly given that Relyant was not failing but was said to remain vulnerable and not especially effective in the short to medium term.


A further legal issue concerned whether the merger would have adverse vertical effects, specifically whether it might strengthen Steinhoff’s upstream position or weaken independent furniture suppliers, thereby raising downstream barriers to entry and affecting competition.


Court’s Reasoning


The Tribunal began by addressing market definition, noting that prior furniture-retail cases had segmented consumers by LSM categories and treated the geographic market for the lower-to-middle segment as national, excluding independents, on the basis that national chains’ competitive strategies were not responsive to independents. The parties urged a single product market for furniture and appliances and a local geographic market including independents. The Commission proposed a different approach, defining a narrower product market of credit-oriented furniture retailers and maintaining a national geographic market.


The Tribunal rejected the Commission’s broad market definition that excluded LSM segmentation, holding that LSM distinctions remained salient in branding strategies and competitive positioning. At the same time, it accepted that the lower and middle segments had drawn closer together due to structural changes, including the emergence of a larger black middle class and changes in credit conditions, which made it strategically important for chains to retain customers as they moved upward through LSM categories. On this basis, it found that the merger affected two national product markets, namely a national market for retail furniture sales to LSM 3–7 consumers and a second market for sales to LSM 8–10 consumers. It indicated that the upmarket segment might have a different geographic scope, but it did not consider this determinative because it found no material competition concern in that segment.


Turning to competitive effects in the LSM 3–7 market, the Tribunal accepted evidence indicating that the post-merger market share of the merged entity would be 27.71%, making it the second-largest player after the JD Group at 45.50%. It treated the structure as comprising four significant competitors post-merger (JD Group, the merged Ellerines/Relyant, Lewis, and the Shoprite group’s OK/House & Home), and did not accept the Commission’s characterisation of Lewis and OK as “fringe” participants. While recognising that the market remained “reasonably” competitive, the Tribunal expressed concern about factors that could weaken competition, including significant barriers to entry and consolidation trends.


In applying section 12A(2), the Tribunal emphasised that entry barriers were high due to the longevity and strength of established brands and the difficulty of creating new chains in the short to medium term. It also highlighted practical difficulties for consumers in comparing offerings due to varied credit terms, ubiquitous promotions, and differences in product specifications, which, in its view, could conceal coordination even where competition appeared vigorous. It considered that there was no meaningful import competition in the downstream retail market as framed, and no countervailing power, and it flagged the potential impact of upstream supplier structure on retail differentiation and innovation.


The Tribunal gave particular attention to the question whether the merger removed an effective competitor or could be justified as a response to the JD Group’s strong position. It aligned itself with the general tenor of anti-trust reasoning that is reluctant to allow mergers between effective competitors merely to create a stronger rival to the largest firm. Nevertheless, it concluded that approval was justified on two evaluative grounds grounded in the evidence before it. First, the Tribunal considered that the post-merger structure would still comprise four significant groups and that the merger would not materially strengthen the ability to collude. Second, it accepted that although Relyant was not failing, it was not likely to be a particularly effective competitor in the short to medium term, whereas the merger would strengthen Ellerines’ competitive positioning in the crucial LSM 4–7 segment where Ellerines faced structural brand-related constraints.


On the vertical dimension, the Tribunal examined the role of Steinhoff and concerns about increasing product homogeneity, Steinhoff’s growing upstream share, and the exit of independent manufacturers. It treated the key question as whether the merger would, on balance, strengthen Steinhoff’s position or undermine independents. It accepted evidence that Ellerines had a long-standing procurement discipline limiting purchases from any single supplier and supporting independents, while Relyant historically had a closer relationship with Steinhoff, including Steinhoff’s support during periods of Relyant’s financial distress. The Tribunal concluded that the merged entity would effectively be managed by Ellerines and guided by its procurement policies, and it relied on testimony that Relyant’s methodology would “take on” Ellerines’ approach.


The Tribunal considered imposing a condition to cap purchases from Steinhoff but declined to do so. It stated that it found the relevant witness from Ellerines consistently reliable and considered that Ellerines’ existing policies and practices made such a condition unnecessary. It also noted changes in market dynamics since earlier transactions, particularly increased furniture importation supported by a strengthened currency and retailers’ desire for differentiation, which it regarded as potentially a greater threat to independent manufacturers than the merger itself.


Having assessed both horizontal and vertical aspects, and noting the absence of negative public interest implications, the Tribunal concluded that the merger was not likely to lead to a substantial lessening of competition.


Outcome and Relief


The Tribunal approved the merger without conditions. It found that neither the horizontal effects in the relevant downstream market nor the vertical concerns related to Steinhoff were likely to result in a substantial prevention or lessening of competition. It further found that there were no negative public interest implications arising from the transaction.


No special order as to costs was set out in the reasons provided.


Cases Cited


The merger between The JD Group Limited and Ellerine Holdings Limited, Competition Tribunal Case No: 78/LM/Jul00.


The merger between Massmart Holdings Limited and Furnex Stores (Pty) Ltd, Competition Tribunal Case No: 9/LM/Feb02.


The merger between First Rand and Profurn, Competition Tribunal Case No: 32/LM/May02.


The merger between The JD Group Limited and Profurn Limited, Competition Tribunal Case No: 60/LM/Aug02; appeal in Competition Appeal Court Case No: 28/CAC/May (as cited in the reasons).


The merger between Inzuzo Furniture Manufacturers and PG Bison Holdings, Competition Tribunal Case No: 12/LM/Feb04.


The merger between Ellerines and Wetherleys (intermediate merger approved by the Competition Commission, as referenced in the reasons).


The merger between Lewis and Lifestyle Living (intermediate merger approved by the Competition Commission, as referenced in the reasons).


Legislation Cited


Competition Act 89 of 1998, with specific reference to section 12A(2) (factors relevant to determining whether a merger is likely to substantially prevent or lessen competition).


Rules of Court Cited


No rules of court were cited in the reasons provided.


Held


The Tribunal held that the merger affected two product markets, namely a market for the retail sale of furniture to LSM 3–7 consumers and a market for the retail sale of furniture to LSM 8–10 consumers, and that the relevant geographic market for the LSM 3–7 segment was national. It held that, in the LSM 3–7 segment, despite a significant increase in the merged entity’s market share, the presence of several substantial competitors, together with its assessment of the section 12A(2) factors, meant that the transaction was not likely to substantially lessen competition.


On vertical issues, the Tribunal held that the merger was not likely to strengthen Steinhoff in a manner that would harm competition, and it declined to impose a procurement cap condition, relying on evidence about Ellerines’ procurement discipline and the expected post-merger management approach. It held further that there were no adverse public interest effects, and therefore the merger was approved without conditions.


LEGAL PRINCIPLES


The Tribunal applied the principle that merger assessment under section 12A(2) of the Competition Act 89 of 1998 requires a holistic evaluation of market structure and likely competitive effects, taking into account factors including entry barriers, concentration trends, the likelihood of competitive versus cooperative behaviour, vertical integration, and whether the merger removes an effective competitor.


In determining the relevant market, the Tribunal applied the principle that market definition must reflect competitive realities evidenced in branding, customer segmentation, and strategic positioning. It accepted that while historical segmentation may erode due to economic and demographic shifts, segmentation may remain sufficiently meaningful to justify separate market characterisations for competition analysis.


On the argument that a merger should be permitted to create a stronger competitor to a dominant firm, the Tribunal adopted a cautious principle, reflecting reluctance to approve mergers between effective competitors merely to reduce size disparities. It nonetheless accepted, on the facts before it, that a merger may be approved where the post-merger market structure retains several significant competitors and where the transaction is not shown to increase the likelihood of coordination, particularly when one party is not failing but is found to be vulnerable and not especially effective in the short to medium term.


On vertical effects, the Tribunal applied the principle that upstream supply relationships can affect downstream competition through impacts on differentiation, entry barriers, and supplier power. It assessed whether the transaction would likely strengthen a dominant supplier’s position and considered behavioural conditions, but it held that conditions were unnecessary where reliable evidence supported that procurement policies would not worsen upstream concentration effects.

COMPETITION TRIBUNAL 
REPUBLIC OF SOUTH AFRICA
      Case No: 56/LM/Aug04
In the large merger between: 
Ellerine Holdings Ltd 
and
Relyant Retail Ltd 
______________________________________________________________
Reasons
______________________________________________________________
INTRODUCTION
1. The Tribunal has been asked to approve the merger between Ellerines  
Holdings Ltd and Relyant Retail Ltd. 
2. The   hearing   took   place   on   7,   8   and   9   March   2005.   The   following  
witnesses were called:
1. Mr Jeff Dritz, Executive Director of Ellerines
2. Mr Bruce Sinclair, Chief Financial Officer of Relyant
3. Mr Peter Squires, Chief Executive Officer of Ellerines
4. Mr Aubrey Karp, Divisional Manager OK Furniture and House  
and Home
5. Mr Peter Griffiths, Managing Director Steinhoff Africa: Furniture  
Division
6. Mr James Moore, Managing Director of Poco International
7. Mr Alan Schlesinger, Chief Executive Officer of Relyant
3. We   have   decided   to   approve   the   transaction.   The   reasons   for   our  
decision are set out below.
THE TRANSACTION
4. This is a horizontal merger. Both merging parties are active in the retail  
market selling furniture and home appliances. They each trade through

a number of retail brands directed at various income­based segments  
of the market.  In addition, a number of vertical issues are raised by the  
transaction.     These   relate   to   the   relationship   of   Steinhoff,   a   major  
supplier of furniture, to the merging parties.
5. The primary acquiring firm is Ellerine Holdings Ltd (‘Ellerines’). It is a  
public   company   listed   on   the   JSE   Securities   Exchange.   Ellerine’s  
shares are widely held and the company is not controlled by any single  
shareholder.   Ellerines   trades   through   five   primary   branded   retail  
chains:
• Ellerines
• FurnCity
• Town Talk
• Wetherlys
• Osiers 
6. Ellerines, the oldest and strongest brand in the Ellerines Group, and  
Town Talk target the lower LSM categories. FurnCity targets the middle  
LSM categories. Wetherleys and Osiers are targeted at the top end of  
the market. There are 310 Ellerines stores, 156 Town Talk stores, 137  
FurnCity stores, 11 Wetherley stores and 6 Osiers stores. 
7. Ellerines is well positioned in the bottom and high end of the markets  
with   strong,   well­known   brands.   Its   weakness,   however,   lies   in   the  
middle segment – as we shall elaborate below, it avers that although  
FurnCity is targeted at the middle segment of the market it has never  
succeeded in differentiating itself from the more down­market Ellerines  
chains.1  
8. The   primary   target   firm   is   Relyant   Retail   Ltd   (‘Relyant’),   a   public  
company   listed   on   the   JSE   Securities   Exchange.   Relyant’s   largest  
single   shareholder   is   Poco   International,   a   German­based   furniture  
retailer. However, a consortium of banks controls a very large bloc of  
Relyant’s shares.  Relyant’s shareholding structure is as follows:
Poco International 40,54%
First National Bank 26,28%
Absa Bank 15,67%
Standard Bank   5,08%
Investec Bank   5,00%
9. Relyant operates through three primary divisions.   These are referred

9. Relyant operates through three primary divisions.   These are referred  
to as the furniture chain division, comprising a number of retail chains  
directed at the lower and middle segments of the market, a value retail  
1  See parties’ Heads of Argument, page 13 par 27.
2

division directed at somewhat higher market segments and a services  
division.  The distinction  between the  furniture  chain  division  and  the  
value chain division essentially corresponds to the distinction between,  
on the one hand, customers who purchase furniture on credit extended  
to   them   by   the   retailers   and,   on   the   other   hand,   cash   customers. 2 
Relyant trades through the following brands:
• Geen & Richards
• Beares
• Lubners
• Savells/Fairdeal
• Furniture City
• Glicks
• Dial a Bed
• Mattress Factory 
10. Ellerines intends to acquire Relyant.  This is a share­based transaction  
with   Relyant   shareholders   receiving   10   shares   in   Ellerines   for   every  
225   shares   in   Relyant.   Upon   successful   implementation   of   the  
proposed   transaction   Ellerines   will   control   Relyant.     The   share  
exchange   will   result   in   Poco   International,   currently   the   largest  
shareholder   in   Relyant,   becoming   the   largest   shareholder   in   the  
merged entity.
11. The largest shareholders in the merged entity will be:
• Poco International 14.3%
• First National Bank 10.11%
• Public Investment Commissioners 9.98%
• Investec    7.31%
• Standard Bank 4.22%
• RMB   4.12%
 
12. The post­merger Board of Directors will comprise seven non­executive  
and four executive members.   Two of the non­executive directors will  
be appointed by Poco International. Mr P.J.B. Pohlmann, the current  
chairman of Relyant and of Poco International, will serve as the non­
executive chairman of the merged entity and the current chairman of  
Ellerines,   Mr   D.S.   McGlashan,   will   serve   as   deputy   chairman   of   the  
merged entity. Mr P. Squires, the current CEO of Ellerines, will retain  
this position in the merged entity.
2  Note that ‘cash customers’ may, of course, refer to customers utilising credit cards or other bank  
credit.  The point is that they do not rely upon credit from the furniture retailers.  This point is

discussed further below.
3

THE BACKGROUND TO THIS TRANSACTION
13. The competition authorities have reviewed several transactions in the  
furniture retail sector.  In July 2000 the Tribunal prohibited a proposed  
merger of the JD Group and Ellerines. 3   In essence, the Tribunal held  
that the merger would substantially lessen competition in that segment  
of   the   furniture   retail   market   that   served   low­income   consumers.  
However,   since   the   prohibition   of   the   JD/Ellerines   transaction,   the  
competition   authorities  have  approved   five  important   mergers  in   this  
sector, these being the Massmart/Furnex transaction, 4 the First Rand/
Profurn   transaction,5  the   JD/Profurn   transaction, 6  the  
Ellerines/Wetherlys   transaction 7  and   the   Lewis/Lifestyle   Living  
transaction.8 
14. Most of these mergers were approved on the basis that the merging  
parties were not active in the same market segment. The exception is  
the  JD /Profurn   merger  where  the   Tribunal   was  extremely  concerned  
about the horizontal overlap between the merging parties.   However,  
imprudent credit granting by Profurn, aided and abetted by their largest  
shareholder, First Rand Bank, compounded by an economic downturn,  
had   brought   Profurn   to   the   brink   of   demise.     The   Tribunal   was  
persuaded   that,   absent   a   merger,   a   significant   part   of   Profurn’s  
capacity   would   have   exited   the   market.   It   accordingly   approved   the  
merger   subject   to   conditions   designed   to   address   certain   vertical  
problems.
15. The JD/Profurn transaction has proved to be something of a watershed  
in   this   sector.     JD’s   timing,   whether   a   result   of   good   fortune   or  
prescience, was brilliant.  Aided by a significant economic upturn, JD’s  
considerable managerial resources have managed, more rapidly and  
effectively than most observers believed possible, to turn around the

effectively than most observers believed possible, to turn around the  
struggling Profurn brands.  In the process,  JD’s  risk  taking has been  
rewarded   by   its   successful   establishment   of   a   portfolio   of   brands  
across the entire spectrum of LSM profiles with particular strength in  
the middle­income segment of the market, generally designated as that  
segment of the market  serving consumers in  the LSM  4­7 category.  
This, as we shall elaborate below, is particularly significant because, it  
appears, it is precisely consumption in this segment of the market that  
has fuelled the strong economic upturn of recent years.
3  See Tribunal case no: 78/LM/Jul00
4  See Tribunal Case No: 9/LM/Feb02
5  See Tribunal Case No: 32/LM/May02
6  See Tribunal Case No: 60/LM/Aug02. The Tribunal’s conditional approval was appealed and  the  
condition was withdrawn by the decision of the Competition Appeal Court. See CAC Case No:  
28/CAC/May
7  Intermediate merger, approved by Competition Commission
8  Intermediate merger, approved by Competition Commission
4

16. This   confluence   of   factors   –   the   acquisition   and   rapid   turnaround   of  
Profurn, the particular strength acquired through this transaction in the  
middle segment of the market, the economic upturn led precisely by  
consumers in this segment ­ has enabled the JD Group to assume an  
increasingly   powerful   position   in   the   furniture   retail   market.   In   short  
then, JD’s success, it is argued, lies in its ability to serve, ‘from cradle  
to grave’, the  increasingly large swathe of consumers who make up  
LSM 4­7.  In other words, in its ability to service, its customers through  
their   purchasing   life­cycle.   In   this   consumer   life­cycle,   a   powerful  
position that is focused on the lowest consumer segments – LSM 3­4 –  
has diminished in importance because, it appears, a number of factors,  
notably,   easier   access   to   cheaper   credit,   has   enabled   a   significant  
grouping of low to middle­income consumers to enter the consumer life  
cycle at a somewhat higher level than was hitherto possible and then to  
proceed somewhat more rapidly up the consumer ladder.  Hence from  
a consumer life­cycle perspective – or, expressed otherwise, from the  
critically important perspective of ‘re­serving’ customers ­ it is the ability  
to satisfy consumers in the LSM 4­7 category that is crucial.
17. The JD group is not alone in possessing this attribute. Certainly the  
Lewis group appears uniquely capable of capturing this large grouping  
of consumers within the umbrella of a single brand, and the aggressive  
OK furniture chain is a growing presence in this market.
18. However   it   is   argued   that   the   venerable   Ellerines   group   is   left  
vulnerable in the face of these market dynamics.  Although it continues  
to outrank its competitors on most operational and financial measures,  
Ellerines’ future growth is threatened by its weakness in the LSM 4­7  
market.  It pioneered the sale of furniture on credit to low income black

market.  It pioneered the sale of furniture on credit to low income black  
consumers   and   this   is   where   it   is,   for   the   most   part,   mired   as   its  
customers and their progeny steadily migrate to stores in competitor  
chains that serve higher incomes and aspirations.  It has, through the  
acquisition   of   Wetherley’s,   successfully   located   itself   in   the   upper  
echelons of the furniture market but its attempts, through the Furncity  
chain, to establish itself in the crucial  middle segment of the market  
have   met   with   only   limited   success.     Ellerines’   predicament   is  
graphically described by Mr. Jeff Dritz, an Ellerines executive director,  
who testified at the hearings:
 “ Ellerines sits like a body with legs and arms without the body  
in the middle ..”9
19. The   target   company,   Relyant   is,   for   its   part,   a   group   with   different  
problems   and   prospects.     The   group   was   formed   as   a   result   of   the  
9  See transcript of 7 March 2005, page 76.
5

merger   of   the   Amrel   and   Beares   groups,   a   merger   that   apparently  
bequeathed the new group a mixed legacy comprising a family of some  
solid   and   well­established   brands   and   a   number   of   less   salubrious  
relatives.  The group attempted to solve its inherited problem by closing  
down or repositioning some brands complemented by a programme of  
acquisitions designed to plug up gaps in the new group.  The upshot is  
that   Relyant   has,   throughout   its   lifetime,   been   characterised   by   an  
excessive number of brands in its stable and by what appears to be an  
almost permanent state of restructuring. 
20. In   fact   at   the   time   of   the   JD/Profurn   merger,   in   2002,   Relyant   had  
embarked on a strategic review of its major brands.  The upshot of this  
review   was   inevitably   a   new   strategy,   the   implementation   of   which  
required   substantial   capital.   Shortly   after   the   review   process   was  
embarked on, Poco, a German­based furniture retail company looking  
for   investments   outside   Germany,   invested   in   Relyant. 10  The  
implementation   of   the   results   of   the   strategic   review   came   to   a   halt  
while   Poco,   which   had   acquired   a   40%   share   of   Relyant   and   the  
chairmanship of the Board, attempted to negotiate more funding for the  
cash strapped Relyant with the banks, who collectively held 49% of the  
shares. However, in late 2003 these negotiations, between Poco and  
the Banks, broke down.  It appears that the banks were able to hold up  
the restructuring of Poco both through their position as sources of loan  
capital   as   well   as   through   their   equity   shareholding   and   board  
membership.     It   appears   that   Poco   offered   to   purchase   the   banks  
equity with the intention of de­listing the company but this offer was  
rejected.
21. In early 2003 the Relyant board had also appointed a new CEO, Mr

rejected.
21. In early 2003 the Relyant board had also appointed a new CEO, Mr  
Schlesinger, who was given the task of stabilising and turning around  
the Relyant business. He was immediately tasked with reviewing the  
turnaround   strategy   that   had   been   completed   some   time   earlier.     In  
February   2004   management   advised   the   Board   that   the   identified  
strategy remained viable. They also suggested that a rights issue for  
approximately   R150   million   should   proceed   to   fund   the   process.  
Although the Board was not   ad idem   on the restructuring strategy in  
view   of   Relyant’s   financial   constraints,   in   March   2004   the   Board  
approved the process and tasked Schlesinger and Sinclair with seeking  
underwriting for the rights issue. However, they could not persuade the  
Banks to support a rights issue.
22. During the latter part of 2003 Mr. Theunie Lategan, a First Rand Bank  
employee and a member of the Relyant board of directors, introduced  
10  Poco owns approximately 40% of Relyant. According to Moore its business model is not  
necessarily to control a business but to look for “ good people who know their local market because the  
furniture market is different in every country .” According to Moore the key is the people and the trust  
between partners.
6

Mr. Peter Squires, CEO of Ellerines, to Mr. James Moore, with a view  
to exploring an arrangement that would allow Ellerines to piggyback on  
Relyant’s   Triad   credit   control   hubs.   It   was   one   of   Ellerines   stated  
objectives   to   improve   its   IT   system.   This   came   to   nought   largely  
because Ellerines was anxious to ensure the confidentiality of its credit  
information and customer data. However, although this process failed,  
the meetings did pave the way for Relyant and Ellerines to canvass a  
possible merger between the two competitors.  It is this transaction that  
is before us today. 11 
THE RATIONALE FOR THE TRANSACTION
23. This then is the rationale from Ellerines perspective for this transaction:  
it is principally interested in acquiring key Relyant brands in the LSM  
4­7   category.     It   believes   that   in   the   absence   of   this   transaction  
Ellerines will be unable to penetrate this critical market segment and  
that   it   will   continue   losing   ground   to   its   better   placed   competitors,  
notably, although not exclusively, the JD Group.   It has attempted to  
penetrate this segment of the market by developing its own brands.  Its  
chosen vehicle for this task was the FurnCity brand.  However although  
FurnCity is by now a large and commercially successful chain, it has  
not effectively distinguished itself from the Ellerines brand, it has not, in  
other   words,   succeeding   in   penetrating   its   target   market.   Ellerines  
argues   that   the   power   of   its   flagship   brand   and   its   inextricable  
relationship   to   the   lowest   income   consumer   ‘taints’   all   efforts   to  
penetrate higher income segments of the market – it suggests implicitly  
that   to   aspire   to   move   into   a   higher   consumer   class   has   become  
synonymous   with   moving   away   from   those   brands   associated   with  
Ellerines. 
24. Relyant, although, on every measure, the weaker of the two parties,

Ellerines. 
24. Relyant, although, on every measure, the weaker of the two parties,  
does  not   suffer   the   same   structural  shortcomings   as   Ellerines.     It   is  
reasonably   represented   across   the   LSM   range   and   it   has   several  
strong   brands   in   the   all­important   middle   segment   of   the   market.  
Under   the   leadership   of   its   current   CEO   and   with   the   active  
participation  of  Poco,  its  largest  shareholder,  it  has  made  enormous  
strides  from  its parlous  position of  recent  times  although  it has  also  
been   assisted   by   a   favourable   economic   environment.     But,   while,  
unlike Profurn, it is careful to disavow any prospect of failure, it insists  
that its turnaround has not been secured, that it remains vulnerable to  
changes in the external economic environment and to several internal  
shortcomings.  It believes that the turnaround and rationalisation of its  
brands will be secured by access to Ellerines’ financial and managerial  
resources and its IT infrastructure. 
11  See transcript of 7 March 2005, page 80.
7

25. Moore   describes   the   situation   in   which   Ellerines   and   Relyant  
respectively find themselves as follows:
“At the moment  Ellerines  can’t  do that  because  they don’t go high  
enough and we can’t do it now because we’re not strong enough. …  
We haven’t got enough money…”  12
COMPETITION ANALYSIS 
Relevant market    
26. As already suggested, in earlier transactions in this sector, notably the  
Ellerines­JD   and   the   JD­Profurn   transactions,   the   relevant   markets  
were determined by a three­fold segmentation of furniture consumers  
into   a   low­income   category   (LSM   3­5),   a   middle­income   segment  
(LSM4­7) and an upper­income segment (LSM8). For reasons which  
are exhaustively elaborated in these decisions, it was determined that  
the   geographic   markets   were   national   –   that   is,   that   these   three  
relevant markets comprised national chains of furniture shops and did  
not include locally­based ‘independents’.  Without attempting to present  
the large body of evidence supporting the conclusion on the relevant  
geographic   market,   it  suffices   to  say  that   we  were   satisfied  that   the  
pricing and other competitive strategies of the national chains were not  
responsive to the competitive behaviour of the independents.
27. The parties to this merger have argued for a single product market, that  
being the retail market for furniture and appliances.
28. As regards the geographic market, the parties insist that these are local  
and that the independents be incorporated into those local markets in  
which they are active.  The merging parties aver that the chains have  
regard to the prices of the independent furniture stores, which act to  
constrain   the   market   behaviour   of   the   chains.   They   argue   that   the  
merchandise   supplied   by   the   independents   is   the   same   as   that  
supplied by the national chains, that they are located in the same part

supplied by the national chains, that they are located in the same part  
of  town  and  that   many  offer  credit  on  terms  much  the  same  as the  
chains.
29. In its assessment of the current transaction, the Commission argues  
that the dynamics of the furniture retail market lend support to a new  
definition of the relevant product market. The Commission found that  
although certain practical indicia pointed towards a lower, middle and  
upper   segment   in   the   furniture   market,   it   is   difficult   to   clearly   and  
accurately  distinguish between the different LSM groups  targeted by  
12  See transcript dated 8 March 2005 at page 254.
8

the   various   market   participants.   It   found   that   certain   branded   stores  
targeted   both   the   traditional   lower   segment   and   middle   segment  
customers.   Accordingly,   it   defined   a   somewhat   narrower   relevant  
product market than the parties, as furniture shops directed at credit  
sales excluding independent furniture shops and mass discounters.
30. On the geographic market the Commission recommends maintaining  
the   Tribunal’s   earlier   view   that   this   is   national.     Although   this   is  
opposed  by  the  parties  who  continue   to  insist   on   local   markets,   the  
Commission   points   out   that   the   very   arguments   advanced   by   the  
parties in  favour of this  transaction – in particular  the argument that  
scale economies represent a critical competitive advantage in the retail  
furniture   trade   –   emphasise   the   independents’   inability   to   compete  
effectively with the national chains.  
31. This view of the relevant geographic market may not hold for the up­
market chains,  those like Wetherlys and  Osiers and possibly Glicks,  
who serve consumers in the LSM range 8­10. While it appears that the  
upmarket chains are also centrally managed, these generally comprise  
a significantly smaller number of larger stores than in the case of their  
counterpart chains serving the lower LSMs.  Accordingly this segment  
of   the   market   is   not   characterised   to   the   same   extent   by   the  
simultaneous   existence   of   massive   country­wide   chains   and   locally  
based independents that is a feature of the lower segment.   This is  
consistent with the evidence that suggests that in the upper LSMs the  
independents   have   a   significant   larger   market   share   than   do   the  
independents competing with the giant chains in the lower LSMs. 13
32. We do not accept the Commission’s broad market definition.   Clearly  
the   distinction   between   the   LSM   categories   remain   an   important

the   distinction   between   the   LSM   categories   remain   an   important  
element   in   the   furniture   chains’   branding   strategies.     The   fact   that  
Ellerines acknowledges that it needs to compete in the middle market,  
in   order   not   to   lose   its   entry­level   customers   when   they   migrate   to  
higher LSM categories, evidences the continuing segmentation of the  
furniture market and of the orientation of the retail brands. 14 In fact Mr.  
Squires’   explanation   for   Ellerines’   failure   to   penetrate   the   ‘middle  
market’ – and Ellerines consequent  inability  to  achieve the  status  of  
what   Squires   terms   a   “ universal   chain ”   –   rests   on   the   continued  
salience of LSM­based segmentation. 15   Mr. Dritz  also  refers to the  
different   LSM   categories   that   exist   when   he   notes   that:   “ low­end  
consumers aspire to brands targeting higher LSM groups ”.16  
33. However we do accept that the lower and middle­income segments of  
13  See record, file 11 on page 193, in the last paragraph. (This is a confidential document.)
14  See page 11, par 22 of the parties Heads of Argument. 
15  See transcript dated 7 March 2005 on page 144.
16  Witness statement of Jeff Dritz, page 10 par 33.
9

the   furniture   market   have   drawn   closer   together.   The   greater  
congruence   of   these   previously   segmented   markets   has   been  
promoted   by   no   less   significant   a   structural   change   than   the  
emergence, for the first time in the country’s history, of a black ‘middle  
class’.     As  already  noted,  the  evidence  suggests  that  this  has  been  
facilitated   by   the   significantly   lower   rates   of   inflation   that   have  
characterised recent years, the lowering of interest rates and thus the  
effective   decline   in   the   cost   of   credit,   and   the   emergence   of   new  
sources of credit notably the extension of credit card facilities to the  
broad   middle   mass   of   furniture   consumers.     This   is,   undoubtedly,  
underpinned   by   the   de­racialisation   of   mid­   and   higher­   level  
employment   opportunities   in   both   the   private   and,   particularly,   the  
public   sectors   and   is   likely   complemented   by   a   greater   sense   of  
confidence   amongst   black   consumers   in   the   sustainability   of   these  
gains   and,   hence,   in   a   greater   willingness   to   assume   debt. 17    But  
whatever   the   underlying   cause   of   this   break   down   in   the   historic  
segmentation of furniture consumers, certainly, a major imperative of  
the furniture retail chains is to ensure that their stores provide for the  
possibility   of  a  relatively  seamless   transition  of  their  customers  from  
LSM 3 to LSM 7 or, ‘from cradle to grave’.
34. We,   therefore,   find   that   this   transaction   covers   two   national   product  
markets   these   being,   firstly,   the   market   for   sale   of   furniture   to  
consumers in the LSM 3­7 and, secondly, the market for the sale of  
furniture to consumers in the LSM 8­10 categories.
Market Shares
35. This   is   a   horizontal   merger,   although   there   are   certain   vertical

35. This   is   a   horizontal   merger,   although   there   are   certain   vertical  
dimensions that will be considered.  We have concluded that there are  
two relevant furniture markets, these being a segment whose principal  
target market is LSM 3­7 and then an upper segment focused on LSM  
8   and   above.     Our   analysis   of   the   competition   implications   of   the  
transaction will focus on the former segment, on the sale of furniture to  
consumers   in   LSM   3­7.     The   evidence   presented   does   not   point   to  
likely competition concerns in the upper segment – LSM 8­10 ­ where,  
as already elaborated, the market  shares of  the  merging  chains are  
relatively low and where the increment that accrues in consequence of  
the merger is small.  
36. Turning then to the lower segment – the retail furniture market serving  
customers   in   LSM   3­7   ­   we   note   that   although   the   principal   target  
market for this segment is LSM 4­7, key chains attached to the national  
furniture groups actively contesting this segment do focus on LSM 3­4  
17  See also the Cazenove Report, record file 5 page 557, where it refers to the steady migration to the  
middle market, which is also the fastest growing sector.
10

(Ellerines, Savells, Fairdeal).  However it appears increasingly that the  
overriding value of this exposure to the lowest reaches of the broad  
furniture retail market is to establish a bridge from there into the broad  
middle   segment.     As   already   elaborated,   Relyant’s   weakness   at   the  
lower   end   does   not   provide   it   with   a   sufficient   base   of   entry­level  
consumers to migrate into its strong mid­level brands.  Ellerines, on the  
other hand, sees its powerful position at the lower end of the market  
dissipate as its entry­level customers migrate to the mid­level brands of  
rival chains. 
37. The market shares of competitors in the middle segment market,  
LSM 3­7, before the merger are:  18
Group Brand name % market share % market share 
per group before 
the transaction
Relyant Savells/Fairdeal 4.69 16.46
Bears 4.83
Geen&Richards 1.97
Lubners 2.61
Furniture City 3.20
Ellerines Ellerines 5.33 11.25
Town Talk  3.18
Furn City 2.74
JDGroup Bradlows 4.76 45.50
Barnetts 4.44
Price & Pride 5.34
Joshua Doore 9.17
Morkels 6.27
Russels 12.72
Lewis Lewis 13.96 15.17
Electric Express 1.21
Shoprite House & Home 6.39 11.62
OK Furniture 5.22
Total 100.00 100.00
 
38. The merged entity’s market share post the transaction will be 27.71%.  
It   will   be   the   second   largest   player   after   the   JD   Group,   which   will  
remain the largest player with a market share of 45.50%.
Impact of the transaction on competition in the relevant market
39. At the risk of repetition, we note that we have identified two relevant  
markets, the first of these being the market populated by national retail  
18  Based on the revised market share table given by parties during the hearing.
11

furniture chains that serve customers broadly categorised as belonging  
to LSM categories 3­7. The relevant geographic market is national.
40. The   second   relevant   market   identified   is   that   serving   purchasers   of  
furniture in the LSM 8­10 categories.  As already noted, we are of the  
view   that   the   merger   does   not   threaten   competition   in   this   market.  
Relyant has a weak presence in this market and hence accretions to  
market share resulting from the merger are relatively slight.  Again, we  
have already noted that there are conspicuously fewer chains serving  
this segment of the market, with most having started their still relatively  
short lives as single stores in one or other of the large cities where  
they, by and large, remain.  Although the development of small chains  
of these relatively upmarket stores has resulted in a significant degree  
of   centralisation   of   purchasing   and   pricing   decisions,   it   appears   that  
competition from independent stores is significant and probably justifies  
finding that the relevant geographic market for this segment is regional.  
We will not examine this market further.
41. Turning then to the first of these relevant markets – the national retail  
furniture market serving customers in the LSM 3­7 categories ­ we note  
that   although   the   dynamic   features   of   the   market   mentioned   above  
have served to elide the distinction between the lower (LSM 3­4) and  
upper (LSM 4­7) segments of this market, there nevertheless remain  
two   discernible   segments.     Although   we   accept   that   the   precise  
location of consumers in this broad category is more fluid – that is, they  
are more upwardly mobile ­ than at any other time in South Africa’s  
economic   history   and,   hence,   that   the   LSM   4­7   categories   have  
assumed overriding importance, there are many South Africans mired  
in the lowest LSM categories.  In other words the lower segment of the

in the lowest LSM categories.  In other words the lower segment of the  
market does not merely serve as a point of entry and transmission belt  
to   the  higher  segment   of  this  market.     Many   South   African  furniture  
consumers will not ascend into the higher LSM categories and so we  
are   at   pains   to   ensure   that   this   transaction   does   not   portend   a  
substantial lessening of competition in this market.
42. However were we to segment the relevant market that we have found  
and then to refocus on the lower and upper categories of this market,  
we would find that this is a merger between one company, Ellerines,  
that holds a very powerful position in the lower segment and a fairly  
weak   position   in   the   upper   segment,   and   another,   Relyant,   whose  
profile is precisely the reverse – that is, its chains that are directed at  
the   lower   segment   are   weak   and   do   not   much   enhance   Ellerines  
position   in   this   segment   while   its   chains   in   the   upper   segment   are  
impressive.  In other words by segmenting the relevant market we limit  
the   horizontal   overlap   between   the   merging   parties.     It   is   precisely  
because we believe that this segmentation has eroded significantly –  
12

albeit not disappeared – that we are concerned about competition in a  
market that is focused on LSM 4­7, but one in which a strong presence  
in LSM 3­4 is important precisely because of the transmission belt that  
a strong position below LSM 4­7 provides to that core market.
43. Section 12A(2) of the Act provides that:
(2) When  determining whether  or  not  a merger is likely  to substantially  
prevent   or   lessen   competition,   the   Competition   Commission   or  
Competition   Tribunal   must   assess   the   strength   of   competition   in   the  
relevant market, and the probability that the firms in the market after the  
merger will behave competitively or co­operatively, taking into account any  
factor that is relevant to competition in that market, including­
a) the actual and potential level of import competition in the market;
b) the   ease   of   entry   into   the   market,   including   tariff   and   regulatory  
barriers;
c) the level and trends of concentration, and history of collusion, in the  
market;
d) the degree of countervailing power in the market;
e) the   dynamic   characteristics   of   the   market,   including   growth,  
innovation, and product differentiation;
f) the nature and extent of vertical integration in the market;
g) whether   the   business   or   part   of   the   business   of   a   party   to   the  
merger or proposed merger has failed or is likely to fail; and
h) whether   the   merger   will   result   in   the   removal   of   an   effective  
competitor.
44. It is our view that the relevant market is characterised by reasonably  
intense  competition.    The  JD   group is a very powerful  competitor  in  
each segment of this market as is Lewis.  OK, too, is a powerful and, it  
appears, rapidly growing participant in the relevant market. While, as  
elaborated   above,   Ellerines   and   Relyant,   have   problems   with   their  
representation   across   the   various   segments,   they   remain   significant

representation   across   the   various   segments,   they   remain   significant  
competitors   –   Ellerines,   certainly,   is   a   very   powerful   brand   and   its  
position   in   the   lower   segment   of   the   relevant   market   is   particularly  
significant.  However detailed consideration of the relevant factors that  
we   are   obliged   to   take   into   account   when   assessing   the   future   of  
competition in this market, undoubtedly give rise to concern.
45. Barriers to entry   (Section 12(2)(b)) are clearly significant.   The large  
furniture retail chains are characterised by the longevity of their brands  
and it is difficult to imagine the successful establishment of a new chain  
in anything approximating the short or even medium term.  The limited  
success of FurnCity even with the support of Ellerines’ infrastructure,  
managerial experience and brand awareness (although, as elaborated  
13

above, the brand is argued to be a mixed blessing) is noteworthy. 
46. OK   seems   to   have   grown   its   presence   in   the   furniture   industry  
reasonably rapidly although it is undoubtedly assisted by its brand, by  
the   deep   pockets   of   its   parent   and   by   key   aspects   of   the   group  
infrastructure,   particularly   attractive   locational   advantages.   However,  
even while enjoying these advantages, Mr. Karp, the witness from OK,  
estimated that he required 6 years to establish the brand in the middle  
market.19  
47. We have seen that although the structure of the market is reasonably  
competitive, that the trend, over the past five years at least, is in the  
direction of consolidation and greater concentration.  This process was  
given   considerable   impetus   by   the   absorption   of   the   Profurn   brands  
into  the   JD   Group.     While   we  have  no   evidence   of   collusion   in   this  
market,   it   is   very   difficult   for   potential   customers   to   engage   in   price  
comparisons   –   credit   terms   differ,   ‘specials’   are   ubiquitous,   and  
comparisons   between   the   slightly   differing   specifications   of   the  
products sold by the various chains are difficult to make.  
48. The upshot of this is that much puffery combined with credit terms that  
are difficult to reduce to a common price may provide an appearance of  
competition but may equally serve to camouflage effective co­operation  
– certainly it is extremely difficult for customers to evaluate the merits  
of   alternative   offerings.     As   we   will   outline   below,   despite   the  
appearance   of   product   differentiation,   we   believe  that   the   increasing  
homogeneity of the product offerings – and therefore the susceptibility  
of   the   market   to   collusion   ­is   promoted   by   the   increasingly   powerful  
position of furniture manufacturers, notably Steinhoff, in the upstream  
market.

position of furniture manufacturers, notably Steinhoff, in the upstream  
market. 
49. There   is   clearly   no   import   competition   (Section   12(2)(a))   or  
countervailing power  (Section 12(2)(d)) in this market.  We deal more  
fully with the question of  vertical integration  (Section 12(2)(f)) below.
50. The   dynamic characteristics of the market   (Section 12(2)(e)) have,  
as   we   have   already   shown,   exerted   a   powerful   influence   on   our  
identification of the relevant market.   In summary, a number of critical  
factors   –   rooted   in   political   change   that   is   reflected   in   the   changing  
demographic   character   of   the   labour   market   and   in   a   macro­   and  
micro­economic policy that has dampened product price increases and  
cheapened the cost of credit – has served to blur, although clearly not  
eliminate, the distinction between low and middle income consumers.  
However the impact of these dynamic features on the definition of the  
relevant market aside, the furniture market is not distinguished by its  
19  Transcript dated 8 March 2005 at page 173.
14

dynamism   –   in   particular,   as   already   suggested   above,   we   are  
concerned   that   the   structure   of   the   market   for   the   production   of  
furniture   and   the   interplay   between   the   dominant   player   in   the  
upstream market and certain of the retail chains, notably the JD Group,  
may have served to stunt innovation and product differentiation.   We  
note however that import competition in the furniture market itself, may  
facilitate differentiation in the downstream retail market.
51. We   must   then   examine   Sections   12(2)(g)   –   the   possibility   of   the  
failure   of   one   of   the   parties   to   the   merger   –   and   12(2)(h)   –   the  
removal of an effective competitor.
52. In contrast with the claims made and accepted during the JD­Profurn  
transaction, there is no claim made here that Relyant is threatened with  
failure. Indeed Mr. Schlesinger, the Relyant CEO, specifically insisted  
that   there   was   no   threat   of   failure   on   the   part   of   Relyant.     And   nor  
would this be a convincing claim.   Certainly, there was a time when  
Relyant’s   future   appeared   to   hang   in   the   balance,   however   a  
combination of the introduction of a strong and committed shareholder  
in the shape of Poco and a competent management in the shape of Mr.  
Schlesinger   and   his   team   and   a   favourable   turn   in   the   economic  
environment, has served to place Relyant on a considerably sounder  
footing.     Indeed   there   are   claims   made   throughout   the   papers   that  
Relyant has already taken the bitter medicine that the other furniture  
retail chains are yet to imbibe and that this will hold Relyant in good  
stead in the immediate future. 20  
53. Equally, however, Mr. Schlesinger, insists that although Relyant is not  
threatened with imminent failure, nor is it quite out of the woods yet:
“   What   I’ve   been   able   to   do   is   in   a   favourable   environment,   a

“   What   I’ve   been   able   to   do   is   in   a   favourable   environment,   a  
favourable business environment give people maybe a greater degree  
of   freedom,   helping   them   in   their   thinking,   in   their   planning.   In   their  
merchandise planning particularly we’ve been able to improve that. So  
there are some superficial changes, which have helped us to exploit  
the favourable economic times that we’ve been in. But I fear that in the  
event of the market becoming tight again, I think we will fight very, very  
hard   not   to   slide   back   to   being   a   poor,   weak   competitor…   At   the  
moment we are still vulnerable to down trend.”    21  
54. From his evidence it is clear then that Mr. Schlesinger is particularly  
concerned   at   the   prospect   of   an   economic   downturn   –   in   that  
eventuality,  he  argues,  the underlying  vulnerabilities  that  continue  to  
beset Relyant would be harshly exposed.  We accept this evidence and  
20  Parties’ Heads of Argument par 32 on page 16.
21  See page 287 and 288 of the transcript dated 8 March 2005.
15

argument.     And   although   it   does   not   amount   to   the   invocation   of   a  
failing   firm   defence   to   the   merger,   it   does   go   to   the   one   remaining  
factor   to   be   analysed,   namely,   the   question   of   whether   or   not   the  
merger results in the elimination of an effective competitor.
55. The   merging   parties   have   attempted   to   justify   the   merger   on   the  
grounds of JD’s increasingly powerful position in the market.  As noted,  
its position has been strengthened by the timing of its acquisition of  
Profurn   and   by   its   demonstrated   ability   to   rapidly   absorb   Profurn’s  
brands.   The Profurn acquisition has also consolidated JD’s presence  
across   the   consumer   categories,   in   particular   in   the   two   segments  
represented   in   the   market   relevant   to   this   transaction,   namely   the  
retailing of furniture to LSM 3­7.  The merging parties in this transaction  
argue   that   JD’s   growing   strength   is   borne   out   by   its   market   share,  
which as the table above shows, has advanced from 43% in 2003 to  
45.50%   in   2004.     This   evidence   is   then   deployed   to   support   the  
contention that the  merging of Ellerines and Profurn  is necessary to  
provide an effective competitive counterpoint to JD.     
56. The   Commission   has   examined   this   argument   –   including   relevant  
international jurisprudence – at some length. 22  The Commission cites  
Areeda   who   insists   that   “.. simply   reducing   size   disparities   without  
increasing   efficiency   is   not   likely   to   increase   competition ”.     It   also  
quotes from Areeda:
“When one starts with large disparities in an already concentrated market,  
however, reducing the number of firms and increasing the size of the market’s  
smaller   firms   makes   non­competitive   pricing   more   likely.   Unless   there   are  
scale economies, the merged firm is less likely to compete on price than the

scale economies, the merged firm is less likely to compete on price than the  
unmerged firms previously were …. Mutual beneficial coordination of pricing  
is much easier in a four­firm market… [M]ere reduction of size disparities is  
not a persuasive reason for treating mergers in highly concentrated industries  
more liberally.”  
57. The Commission is not convinced that the furniture market requires a  
further concentration to attain efficiencies. It is uncomfortable with the  
post   merger   market   structure   where   two   significant   firms   will   be  
competing   with   two   relatively   small   firms   and   is   concerned   with   the  
effect that this will have on what is identifies as the two fringe firms,  
Lewis and OK. 
58. We   concur   with   what   we   interpret   as   the   tenor   of   anti­trust  
jurisprudence on this question.   That is, we are extremely reluctant to  
permit the merger of two effective competitors on the grounds that the  
merged entity will provide more robust competition to the largest player  
22  See Commission’s recommendation, page 34. 
16

in the market concerned.   However we are prepared to approve the  
merger on the following grounds: 
• Given  that  the post­merger market structure  will  comprise four  
significant   groups   in   JD,   Ellerines­Relyant,   Lewis   and   OK  
Furnishers, the merger will not result in a substantial lessening of  
competition – we would not follow the Commission and describe  
the Lewis and OK chains as ‘fringe’.  Moreover, while, as noted  
above, we are not persuaded that the retail market is impervious  
to   collusion,   we   do   not   think   that   the   ability   to   collude   is  
strengthened by the fact of this merger.
• While, again as noted above, Relyant is by no means a failing firm,  
we   are   not   persuaded   that   it   is   in   the   short   to   medium   term   a  
particularly   effective   competitor.     On   the   other   hand,   we   are  
persuaded  that  the   merger  will   strengthen   Ellerines,   which,   though  
undoubtedly   an   effective   competitor,   appears   to   face   significant  
obstacles   in   its   attempts   to   establish   a   competitive   position   in   the  
upper segment of our relevant market, that is, in the sale of furniture  
to LSM 4­7.
59. The players that remain in the market post the transaction are:
• The JD Group, which has managed to set up a portfolio  
of   brands   across   the   entire   spectrum,   with   particular  
strength   in   the   middle   to   upper   sectors   of   the   market,  
thereby   successfully   attracting   and   keeping   customers  
throughout   their   lifecycle.   It   is   a   financially   strong  
company and the largest customer of the biggest furniture  
supplier, Steinhoff. 23
• Lewis, which has its roots in the traditional white market  
with stores that are usually found in the more upmarket  
part of towns, is a strong brand that spans most of the  
LSM   categories.   It   has   also   indicated   in   its   prospectus  
that   it   is   focussing   on   the   rapidly   growing   LSM   4­7

that   it   is   focussing   on   the   rapidly   growing   LSM   4­7  
categories. Although it conducts business with Steinhoff it  
has a policy of supporting independents suppliers. 24 It is  
also a large importer of furniture. 25 
•     The Shoprite Group comprising House & Home, focusing on  
LSM 7­10 and OK Furniture, focusing on LSM 5­7. It has the  
backup   of   a   large   shareholder,   favourable   locations   and   is  
23  Steinhoff letter dated 16 March 2005, provided after the hearing.
24  See File 5 on page 566 of the record.
25  See transcript dated 8 March on page 194. 
17

something of a maverick in its pricing policy, focussing on the  
volumes   of   customers   that   visit   its   supermarkets,   which   are  
located adjacent to its furniture divisions. 26
•   The merged Ellerines/Relyant Group. Ellerines dominates the  
bottom end of the LSM categories with very strong brands and  
is   clearly   intent   upon   maintaining   a   base   of   independent  
furniture   suppliers. 27  Relyant,   which   has   recently  
restructured its brands, is well represented in the middle  
market with Beares being its flagship brand. Relyant also  
boasts an advanced credit control system which is much  
more efficient than that of Ellerines. 28    
60. We have already noted that while Relyant is clearly not a failing firm –  
and   nor   has   it   claimed   to   be   –   its   recovery   nevertheless   remains  
delicately balanced.  In particular the new Relyant has not been tested  
in   an   unfavourable   economic   climate.     And   there   are   significant  
competitive lacunae that remain – these range from their inadequate IT  
infrastructure   through   to   deep   problems   in   certain   of   the   chains.  
Certainly   the   problems   at   the   ‘city’   brands   –   Furniture   City   and  
Appliance   City   –   as   well   as   Glicks   remain   unresolved   and,   possibly  
more important, the sustainability of their brands in the lower segment  
of our relevant market – Savells/Fairdeal ­ is still open to question.  Nor  
are we persuaded that these problems will be easily overcome.   It is  
clear from the evidence that restructuring the problematic brands and  
upgrading the Relyant IT infrastructure will be costly.  
61. Although Relyant has a committed and experienced shareholder in the  
shape of Poco, the latter’s positive influence has to be set off against  
the consortium of banks that together carry equal shareholder weight.  
In general the banks have shown themselves to be more than willing to

In general the banks have shown themselves to be more than willing to  
use the furniture retailers as conduits for passing on credit to a part of  
the population whose direct custom they appear to eschew.  However  
as   both   the   Profurn   and   now   the   Relyant   experience   indicate,   the  
banks are fair­weather friends, quick to withdraw their support as soon  
as   the   sale   of   furniture   on   credit   appears   to   be   under   threat.     The  
practice   of   credit­granting   by   the   furniture   retailers   is   undoubtedly  
confronting   a   somewhat   more   hostile   environment   than   hitherto,   not  
least   because   the   banks   are   entering   the   LSM   4­7   market   more  
aggressively   themselves   and   would   not   necessarily   want   to   be  
supporting   a   formidable   rival   –   the   retail   furniture   chains   –   in   this  
competition for the provision of credit. 29
26  Transcript dated 8 March 2005 on page 175.
27  The merger between JD Group Limited and Profurn Limited Case No: 60/LM/Aug02, on page 29,  
par 159 of the Tribunal’s reasons.  
28  See transcript dated 7 March 2005 page 135.
29  We were also referred to pending consumer credit legislation that, it appears, would cap interest  
18

62. Seen against the background of these continuing problems at Relyant  
and Relyant’s stronger representation in the middle market, the merger  
with   Ellerines   offers   a   compelling   synergistic­type   fit.     In   particular  
Ellerines’ undisputed strength at the lower end of the relevant market  
will bolster Relyant’s considerably weaker brands at that level (or will  
allow   for   their   consolidation   into   the   Ellerines   brand).     Ellerines  
considerable   IT   capacity   will   be   extended   to   its   partner   and   its  
managerial and financial capacity will more easily allow the new group  
to confront some of the problems that Relyant face in respect of certain  
of its chains, notably the ‘cities’ chains.
63. The potential gains for Ellerines are also considerable.   Although the  
old models of credit granting by the furniture retailers face challenges it  
is,   however,   decidedly   premature   to   proclaim   the   death   of   furniture  
credit.   The   banks’   ability   and   willingness   to   sustain   entry   into   this  
market is not proven.  And certainly Ellerines itself sees much life yet in  
the credit side of its business.  Ellerines pioneered the granting of mass  
consumer credit in South Africa and it appears to have lost little of its  
edge.     It   is,   of   course,   also   true   that   of   the   major   furniture   groups  
Ellerines is most exposed to the lower LSM segment of the market, that  
segment of the market most reliant upon credit and which the banks  
are least likely to penetrate. It is, however, likely that credit granting will  
become   more   customised,   more   closely   directed   at   the   particular  
recipient   of   credit.     To   this   end   Ellerines   will   require   access   to  
sophisticated   credit     monitoring   IT,   which   appears   to   be   a   current  
strength of Relyant.
64. But IT can be bought and Ellerines undoubtedly has the capacity to

strength of Relyant.
64. But IT can be bought and Ellerines undoubtedly has the capacity to  
make   the   necessary   investments.   However   in   order   to   enter  
successfully the upper segments of the relevant market – LSM 4­7 – it  
may well require a merger with Relyant.   Several witnesses testified  
that   the   continued   competitiveness   of   Ellerines   is   threatened   by   its  
inability to establish itself in this middle segment, which is increasingly  
regarded as the core segment of the broader furniture market.  
65. As   outlined   earlier,   its   only   exposure   to   the   LSM   4­7   market   is   in  
Furncity.     There   are   137   stores   in   this   chain   that   has,   the   various  
witnesses testify, never been able to shake off its association with the  
Ellerines brand, which, it is averred, is inextricably associated with the  
Ellerines core brand. 30 Mr. Squires testified that FurnCity gets only 1%  
to 2 % repeat business that it draws from the Ellerines and Town Talk  
rates and stamp out certain egregious practices.  For these reasons the furniture retail chains – not least  
of all Relyant – are concentrating on developing their retailing disciplines in anticipation of the  
narrower margins that will inevitably follow a decline in the proportion of credit to cash sales.  
30  The record indicates that we were given two figures for the number of FurrnCity stores – 137 and  
148.
19

brands.31  It   appears   that,   for   consumers   buying   furniture,   to   aspire  
upwards, is to aspire to leave behind the Ellerines brand in favour of a  
brand more strongly associated with serving somewhat higher income  
consumers.     Nor,   it   appears,   is   this   only   a   matter   of   consumer  
perception. Witnesses describe Furncity as a thinly disguised version  
of the Ellerines brand stores. 32   Ellerines has been well known for the  
tight,   highly   regimented   disciplines   imposed   on   its   staff.   This   has  
undoubtedly reaped a rich harvest for the company that is more than  
50 years old. However, if the witnesses are to be believed, it appears  
also to have instilled a certain rigidity that is partly responsible for the  
firm’s inability to adapt to changing market conditions.   
66. We   now   turn   to   the   vertical   aspects   (section   12A(2)(f))   of   the  
transaction.   As   indicated   earlier   a   number   of   vertical   issues   arise,  
which   relate   to   the   merging   parties’   relationship   with   Steinhoff.   The  
increasing   homogeneity   between   products   offered   by   the   retailers,  
Steinhoff’s   growing   market   share   and   the   continuing   exit   of  
independent furniture suppliers, even in these economic buoyant times,  
are   just   some   off   the   concerns   that   have   been   raised   in   this  
transaction. 
67. The   competitors   in   the   upstream   market   are   Steinhoff,   a   major  
international   supplier   that   has   supply   agreements   with   most   of   the  
major furniture retail groups, a number of much smaller independent  
local suppliers and more recently imports by retailers, mainly from the  
East.33  
68. Steinhoff   is   Relyant’s   largest   single   supplier.   Relyant   is   Steinhoff’s  
second largest customer and Ellerines its fifth largest. 34  Though both  
merging   parties   are   Steinhoff   customers,   they,   in   fact,   have   very

merging   parties   are   Steinhoff   customers,   they,   in   fact,   have   very  
different relationships with Steinhoff.
69. Ellerines is recognised in the industry as a group that strongly supports  
independents. Schlesinger also alluded to this when he noted that the  
merger must be of some concern to Steinhoff: 35
“I mean they are suppliers to Ellerines, as I understand it, but  
Ellerines   is   on   record   as   very   actively   supporting   the   small  
manufacturing sector.” 
31  Transcript dated 9 March 2005 at page 320.
32  See transcript dated 8 March on page 186 for Karp’s view on Ellerines being trapped in a lower  
segment. 
33  See Inzuzo Furniture Manufacturers and PG Bison Holdings, Tribunal Case No: 12/LM/Feb04 on  
page 6 and 7 where the Tribunal sets out the market figures in the various supplier product markets. 
34  Transcript dated 8 March on page 279.
35  See transcript of 8 March 2005 on page 277.  
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70. In the JD/Profurn transaction, in 2003, Mr. Squires had raised some  
concern   about   the   effect   that   the   transaction   would   have   on  
independent   suppliers   since   JD   and   Profurn   both   had   close  
relationships with Steinhoff. It is now two years since that merger and  
Ellerines is still committed to supporting independent suppliers insisting  
that   its   policy   of   spreading   the   ratio   of   purchases   between   the  
independent   manufacturers   (80%)   and   Steinhoff   (20%)   remains.  
According   to   Squires   the   combined   Ellerine’s   Group   currently   buys  
22.9% of all its merchandise from Steinhoff. 36
71. Relyant, however, has had a much stronger relationship with Steinhoff,  
with Steinhoff extending Relyant’s credit when it was in dire financial  
straits. As Mr. Schlesinger puts it:
“I think that during the period when Relyant was at its very lower ebb  
and   in   serious   financial   distress,   I   think   Steinhoff   probably   went  
beyond   the   call   of   duty   in   terms   of   providing   financial   support,   in  
terms of not demanding early payment at times when early payment  
would have embarrassed Relyant possibly to the point of failure.”  37 
72. Although   Relyant’s   purchases   from   Steinhoff   have   decreased   during  
the past 2 years, more so in the last 6 months 38, it seems that the  
Relyant group currently sources some 42.5% of its merchandise from  
Steinhoff.39 
73. In order for furniture retail suppliers to remain competitive two factors  
are taken into account, pricing and product differentiation. The parties  
and   also   the   Checkers/Shoprite   furniture   chain   identify   a   lack   of  
differentiation   in   the   product   offerings   of   the   competing   chains   as   a  
major problem and one that is rooted in Steinhoff’s dominant position in  
the   supplier   market. 40  Differentiation   is   achieved   mainly   through

the   supplier   market. 40  Differentiation   is   achieved   mainly   through  
importing   product   or   purchasing   from   independents   or,   for   example  
through obtaining exclusive fabric ranges. Lewis, for example, is known  
by the industry as a large importer, it imports approximately 30%, and  
Geen and Richards and Glicks approximately 20%. 
74. We are accordingly concerned at the impact of the transaction on the  
upstream   furniture   manufacturing   market.     As   in   the   JD/Profurn  
transaction, our concern, in the context of the present transaction, is  
that were this merger to further consolidate the power of Steinhoff, or,  
conversely,   weaken   the   position   of   the   independents,   it   would   raise  
already high barriers to entry into the furniture retail maket.   Here we  
36  See above on page 326.
37  See above on page 275.
38  See above on page 217.
39  See transcript of 9 March 2005 at page 333.
40  See above on page 203 – 204.
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have   a   significant   Steinhoff   customer   merging   with   a   retailer   that   is  
significantly more supportive of the need to maintain an independent  
supply   base.     Would   this   tend   to   strengthen   or   weaken   Steinhoff’s  
position? 
75. Our   view   is   that   the   merger   is,   on   balance,   not   likely   to   strengthen  
Steinhoff’s position.   The merged entity will, in effect, be managed by  
Ellerines and will, we expect, be guided by the policies that are core to  
that group, including its procurement policies.
76. Mr Squires responded as follows to the Tribunal’s questions regarding  
the merged entity’s procurement policies:
“I am a trader and I think we alluded to this on Monday when I was  
also under oath to give you a couple of givens and I think Ellerines  
history is a given and Ellerines history of 80/20 syndrome not more  
than 20% of our eggs in any basket has been a discipline that I have  
worked with for 25 years. It is a discipline if I carried on, as MD for 7  
years   and   it   is   a   discipline   that   I   will   continue,   whilst   I   am   chief  
executive   officer   of   Ellerine   Holdings.   …   Obviously,   the   Relyant  
methodology is going to take on the Ellerines methodology.”  41
77. Mr. Karp of the Shoprite/Checkers group also testified that as long as  
Ellerines   controlled   the   merged   entity,   independent   suppliers   had  
nothing to fear. 42  The Steinhoff board minutes which we scrutinised as  
well as the testimony of the witness from Steinhoff supports the view  
that, on balance and in marked contrast with the JD/Profurn merger,  
this is not a transaction which will favour Steinhoff’s narrow interest.
78. We had considered imposing a condition on our approval which would  
have obliged the merged entity to place a ceiling on its purchases from  
Steinhoff.   However, we have found Mr. Squires to be a consistently  
reliable   witness   and   this,   combined   with   the   actual   policies   and

reliable   witness   and   this,   combined   with   the   actual   policies   and  
practices of Ellerines, have persuaded us that such a condition will not  
be necessary.
79. We   note   too   that   the   dynamics   of   the   furniture   market   have   shifted  
since the JD/Profurn transaction.   In particular the strengthened local  
currency combined with the retailers’ desire to promote differentiation  
has  underpinned the  increasing importation of furniture.   Indeed this  
may, at this stage, constitute the greater threat to local independent  
manufacturers.  
80. We   accordingly   find   that   neither   the   horizontal   nor   the   vertical  
41  See transcript of 9 March at page 323 and 325.
42  See transcript of 8 march 2005 on page 163.
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dimensions   of   this   transaction   are   likely   to   lead   to   a   substantial  
lessening of competition.   There are no negative implications for the  
public interest.  The merger is accordingly approved without conditions.
05 July 2005
 
D Lewis Date
Concurring: Y Carrim and U Bhoola 
 
 
For Merging Parties: Arnold Subel instructed by Cliffe Dekker
For Relyant: Willem Pretorius
For the Commission:  Maarten Van Hoven and Rudolph Labuschagne  
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