Non-Confidential version
COMPETITION TRIBUNAL SOUTH AFRICA
Case NO: 04/LM/Jan09
In the matter between:
Masscash Holdings (Pty) Ltd Acquiring Firm
And
Finro Enterprises (Pty) Ltd t/a Finro Cash and Carry Target Firm
Panel : N Manoim (Presiding Member);
M Mokuena (Tribunal Member); and
A Wessels (Tribunal Member)
Heard during : 19 August 2009 to 08 September 2009
Decided on : 22 September 2009
Reasons Issued on : 30 November 2009
REASONS
Approval
[1] On 22 September 2009 the Competition Tribunal (“Tribunal”) approved the merger
between Masscash Holdings (Pty) Ltd and Finro Enterprises (Pty) Ltd t/a Finro Cash
and Carry. The reasons for this decision appear below.
Parties
[2] The primary acquiring firm is Masscash Holdings (Pty) Ltd (“Masscash”), a public
company incorporated under the laws of the Republic of South Africa and a wholly
owned subsidiary of Massmart Holdings Limited (“Massmart”). Massmart is a public
company listed on the JSE Limited, South Africa and its shares are widely held. It
1
Non-Confidential version
has in excess of 10 000 shareholders of which more than 7 000 are individuals.1 As
such it is not controlled by any firm. Massmart controls in excess of 70 firms.
Relevant to this transaction is the fact that Massmart owns two grocery wholesalers
in the Port Elizabeth area, a branch of its Makro chain and a cash and carry store
trading as Weirs Cash and Carry (“Weirs”).
[3] The primary target firm is Finro Enterprises (Pty) Ltd , trading as Finro Cash and
Carry (“Finro”). Finro is not controlled by any firm. Its shareholders are Neil Son-Hing
Family Trust (16.67%); Noeleen Mason Family Trust (16.67%); Gaynor Hung
(16.67%); Glenn Mason Family Trust (7%); and Noel Son-Hing Family Trust (43%) .
Finro is a family owned (i.e. independent) wholesaler of grocery products located in
Port Elizabeth.
Transaction
[4] The proposed acquisition constitutes a merger as defined in the Competition Act,
1998 (Act No. 89 of 1998). In terms of the proposed transaction Massmart, through
Masscash, intends to acquire a 75% interest in the business of Finro as a going
concern. Neil Lennith Son-Hing will post transaction hold the 25% remaining interest
in Finro. Therefore, Massmart will have de jure control over Finro post transaction.
Rationale for the transaction
Massmart
[5] According to the acquiring firm, the Finro business will complement the Masscash
wholesale grocery offering since its presence in specifically toiletries and general
merchandise is significant compared to Masscash’s current offering (also see
paragraphs 41 and 42 below).
[6] Masscash submits that it is focussed on constructing and maintaining a supply chain
to independent low-end retailers that is as competitive as the distribution centre
models2 of the large retailers, while maintaining service levels that the national
grocery suppliers find difficult to maintain when dealing directly with smaller retailers.
grocery suppliers find difficult to maintain when dealing directly with smaller retailers.
1 Source: Massmart group’s 2008 annual report.2 The major grocery retail chains, such as Pick ’n Pay, have integrated distribution channels, i.e.
grocery manufacturers supply products to the distribution centres of the multi-site retailers, who then
organise their own integrated distribution from the centres to the individual stores. The traditional
grocery wholesalers are thus excluded from this model.
2
Non-Confidential version
Masscash describes this strategy as “ decentralised execution with centralised
support”. According to Masscash, this philosophy recognizes that customers’ needs
differ between local regional markets, and allows for a flexible purchasing and
marketing strategy that makes use of local and regional suppliers. Centralised
support is provided in terms of inter alia accounting, systems, supplier relations and
business management.
[7] Masscash furthermore submits that the proposed acquisition would facilitate the
negotiation of more competitive prices from grocery suppliers at a regional level
utilising regional volumes. Masscash also anticipates that the proposed deal would
allow it to benefit from the scale economies of greater quantities of containerised
goods shipped to Port Elizabeth (where the target firm, Finro, is based).
Finro
[8] Finro submits that certain members of the business (which is family owned) wish to
exit the business; certain senior members of the family want to retire and the
younger generation decided to emigrate.
Background to the hearing
Activities of the merging parties
Massmart
[9] Massmart is active throughout South Africa in both the wholesale and retail of
grocery products, liquor and general merchandise. It is divided into four divisions
according to target markets and business models, namely (i) Masscash; (ii)
Masswarehouse; (iii) Massdiscounters; and (iv) Massbuild. The first two of the said
divisions are of relevance to this transaction.
(i) Masscash comprises of CBW Holdings (Pty) Ltd (“CBW”), Jumbo Cash and
Carry (“Jumbo”) and Shield, each of which is described in brief below:
CBW
CBW comprises of 68 unbranded cash and carry stores that supply mainly
grocery items to the lower-income consumer. CBW is overwhelmingly a
3
Non-Confidential version
wholesaler, but sells to a limited number of individual consumers. CBW has a
presence in the Port Elizabeth area in the form of a Weirs Cash and Carry
outlet.
Shield
Shield is a voluntary buying association serving independently owned grocery
wholesale and independently owned grocery retail outlets aimed primarily at
lower-income consumers. Shield has a number of members in the Port
Elizabeth area, one of which is Finro. The members of the buying group are
served directly by Shield’s grocery suppliers, with Shield consolidating the
account and facilitating the order via the provision of trade credit.
Jumbo
Jumbo has primarily been a wholesale distributor of cosmetics, toiletries and
hair care products; more recently its product offering has been expanded to
include a range of food and other groceries. However, there is no Jumbo
store located in the Port Elizabeth and surrounding areas (also see paragraph
137 below).
(ii) Masswarehouse comprises of the Makro chain of wholesale outlets, which
markets a broad range of food, liquor and general merchandise. Makro has a
so-called “hybrid” format, which means that it sells its goods to resellers (i.e.
retailers) as well as to end-consumers (i.e. individuals predominantly in the
upper LSM3 (6-10+) categories). The bulk of Makro’s wholesale trading is in
regard to food and other groceries; general merchandise is typically sold at
retail level to upper-income consumers. In the Port Elizabeth and surrounding
areas Makro has one store located in Port Elizabeth.
(iii) Massdiscounters comprises retail discount stores trading under the names
Game4 and Dion Wired5.
3 LSM is an acronym for ‘Living Standards Measure’. This measure profiles the market into
homogenous groups based on standards of living, rather than on income. The standard of living is
measured by adding the weighting ascribed to certain household products, commodities or services
which would typically be available to persons in those groups.4 Game offers a wide range of general merchandise and non-perishable groceries to end-consumers
predominantly in the LSM 5-10 categories.5 Dion Wired offers an upper-end range of hi-tech appliances and auto and digital products.
4
Non-Confidential version
(iv) Massbuild comprises of the Builders Warehouse and Builders Trade Depot
(formerly Federated Timbers) chains, which sell building supplies, hardware
and related products.
Finro
[10] As stated in paragraph 3 above, Finro is a wholesaler of groceries and general
merchandise with a single outlet in Port Elizabeth. It does not sell any products on a
retail basis. Finro’s activities are focussed on selling to independent grocery retailers,
who ultimately sell their products to consumers in the LSM 2-4 categories (i.e.
middle- to low-income consumers).
[11] Finro’s wholesale product offering covers a full range of edible and non-edible
grocery products, including perishable (frozen and refrigerated) and non-perishable
food, household cleaning products, toiletries, catering supplies, tobacco products,
over the counter patent medicines, as well as a range of general merchandise such
as toys, electrical goods, crockery, paint, stationery, ornaments, household utensils
and fishing equipment.
Summary of views of the Competition Commission, competitors and customers
Competition Commission
[12] The Competition Commission (“Commission”) has recommended that the proposed
acquisition be prohibited, primarily on the grounds that the merging parties are close
competitors and that the loss of competition between them will enable the merged
entity profitably to significantly increase prices post merger, i.e. the proposed
acquisition will give rise to anticompetitive unilateral effects. The Commission
furthermore found that the proposed deal raises no public interest concerns (see
paragraphs 200 to 209 below).
Customers
[13] No customers raised (competition or public interest) concerns in regard to the
proposed deal. The only customer on record with a view regarding the effects of the
proposed deal believes that the transaction is pro-competitive since it will “benefit the
trader who is looking for a deal”.6
trader who is looking for a deal”.6
6 Submission from Daku Spar to the Commission dated 10 February 2009.
5
Non-Confidential version
Direct and indirect competitors
[14] During the Commission’s investigations direct and indirect competitors to the
merging parties raised certain concerns:
(i) Mayibuye Wholesalers (Humansdorp) cc, trading as TradeValue Cash and
Carry (“TradeValue”) (a competitor of the merging parties) expressed the view
that Masscash is aggressively removing independent competitors countrywide
and that the proposed transaction will lessen competition in the Port Elizabeth
market. However, it also states that it and “ other independent wholesalers in
the region will try to find other means to maintain their market position,
although this would be quite difficult as they will have less negotiating power
with the suppliers than before.”7
(ii) Unitrade Management Services (Pty) (Ltd) (“UMS”), a voluntary buying group
(of which TradeValue is a member), refers in its comments regarding the
proposed deal to the broader issue of “ the loss of the independently owned
supermarket or wholesale family businesses in this country ” and “ purging of
the independent trade ”. UMS suggests legislation aimed at the protection of
these family owned businesses (also see paragraphs 202 to 209 dealing with
SMME’s below).8
Witnesses
[15] The following witnesses gave evidence at the hearing on behalf of the Commission
and merging parties respectively:
For the Commission:
• Mr. Fermino Gomes (“Gomes”) was called as factual witness. He is the
executive general manager of UMS;
• Mr. Ryan David Hawthorne (“Hawthorne”), a Commission employee, gave
testimony on the purpose and methodology of the Commission’s customer
survey and the assistance provided to the Commission in that regard;
7 Meeting with the Commission on 29 January 2009, and submission to the Commission dated 30
January 2009.8 Submission of the CEO of UMS to the Commission (undated).
6
Non-Confidential version
• Dr. Lizelle Fletcher (“Fletcher”) was called as an expert witness on statistics.
She is a statistician from Statomet, a bureau of the University of Pretoria; and
• Mr. Robin Noble (“Noble”) from Oxera, an economics consultancy, testified as
an economics expert.
For the merging parties:
• Mr. Robin Andrew Wright (“Wright”), the chief executive officer of Masscash,
was called as factual witness; and
• Mr. Simon Baker (“Baker”) from RBB Economics, an economics consultancy,
testified as an economics expert.
Competition analysis
Market definition
Relevant product market
[16] As indicated above, Finro is a wholesaler of groceries and general merchandise with
only one store located in Port Elizabeth. Massmart is active in the wholesale of
groceries through its Masscash and Masswarehouse divisions, which are
represented in the Port Elizabeth and surrounding areas by one CBW store trading
as Weirs, and one Makro store respectively. Accordingly there is a horizontal overlap
in the activities of the merging parties in regard to the wholesaling of grocery
products. As is evident from paragraph 9 above, there is also a vertical relationship
between the merging parties, since Finro is a current member of the Shield buying
group.
[17] In line with existing Tribunal decisions, the wholesale of grocery products is
regarded as a separate relevant product market from the retail of grocery products.
In Massmart Holdings and Jumbo Cash and Carry 9 the Tribunal makes this
distinction and articulates it as follows: “The parties ... effectively serve as the
intermediaries between, on the one hand, a vast number of manufacturers of a wide
range of products and, on the other, the consumers of those products. Certain of
their customers are the final consumers of the product – this describes the retailing
activities of the parties. In other instances the customers are themselves retail
activities of the parties. In other instances the customers are themselves retail
9 Case no. 39/LM/Jul01, ‘Large merger between Massmart Holdings Ltd and Jumbo Cash and Carry
(Pty) Ltd’, see paragraphs 9 to 13.
7
Non-Confidential version
outlets who purchase the products for on-sale to the final consumer. The latter
activity describes the wholesaling activities of the parties.”
[18] Thus, wholesalers provide a link between manufacturers and retailers in the grocery
supply value chain by which products are ultimately marketed to end-consumers.
Insofar as the end-consumer is concerned, competition primarily takes place at the
retail level. However, the grocery supply chain is more complex than a stylised
manufacturer-wholesaler-retailer model, as illustrated in Diagram 1 below.
Diagram 1 Typical supply chain of grocery products
[19] In the same decision as quoted in paragraph 17 above, the Tribunal stated that
“[g]rocery products encompass food, cigarettes, health and beauty products and
non-edible consumables such as detergents and house care products ”. In the
context of this transaction, the broad term ‘groceries’ also includes general
merchandise to the extent that it is stocked by the wholesalers in question.
8
End-consumers
Buying groups
(eg. S hield,
UMS )
Wholesalers (eg. Weirs/ Finro)
Independent retail (including
informal traders)
(eg. superettes, spaza shops,
petrol station forecourts, hawkers)
Corporate
retail/Spar
(eg. Pick ‘n Pay,
Shoprite/Checkers)
Manufacturers/Suppliers
(eg. Cola-Cola, British American Tobacco (BATSA), Cadbury, Unilever)
Hybrids
(eg.
Makro)
Distributio
n Centres
Non-Confidential version
[20] The merging parties submitted information that shows that various customers of the
“full-line” wholesalers (such as Finro, Weirs, Metcash 10 and others), are willing and
able to shop at the more specialised wholesalers who offer a limited range of
products. Gomes in this regard confirms that “ some other customers such as spaza
shop owners and superette owners can generally afford to shop around between
different wholesalers within individual grocery categories, such as confectionary and
they do not necessarily buy all of their products from one store ”. The merging parties
also submitted examples of requests sent out by a number of grocery retailers to
wholesalers for quotes on specific product lines, which the retailers then proceed to
purchase on a product line-specific basis.
[21] For a proper understanding of the potential competition and public interest issues in
this matter, it is important to be acutely aware of the distinction between (i) the
customers at wholesale level (the level at which Finro, Weirs and Makro11 are active),
and (ii) the end-consumers of grocery products at retail level (the level at which the
customers of the merging parties are active). The customers at the wholesale level
comprise a diverse array of outlets, including superettes, market traders, hawkers,
spaza shops, independent convenience stores, organised convenience stores and
petrol station forecourts. End-consumers purchase their grocery products from these
outlets, or from the large formal retailers such as Pick ‘n Pay, Shoprite/Checkers and
Spar.
[22] It is noted that hawkers do not form a material part of the customer basis of either of
the merging parties, nor do any of the merging parties’ stores have a preferential
location for access by such customers to their stores (also see paragraph 131
below).12 Gomes confirmed that “Weirs certainly hasn’t got a huge spaza, particularly
below).12 Gomes confirmed that “Weirs certainly hasn’t got a huge spaza, particularly
spaza clientele and Finro would also have limited customers, very few customers
that would, although he does have spazas and hawkers, but it is not a big
component of his business no”. This is an important fact since the available evidence
suggests that specifically hawkers cannot shop around for their product needs due to
time and other constraints and therefore usually only buy from a single wholesaler,
i.e. they do so-called “one-time” shopping.
10 Metcash submits that there are approximately [...] common lines that both it and the merging parties
trade in.11 As stated in paragraph 9 above, Makro is a hybrid store with both wholesale and retail functions.12 The Commission’s customer survey of 399 customers of Weirs and Finro (although the Finro
customer data include only the top 1 000 customers) mirrors this: only 2 of the 399 responses
obtained were from hawkers.
9
Non-Confidential version
[23] Both the Commission and the merging parties conclude in their closing arguments
that the applicable relevant product market for the assessment of the proposed
acquisition is the wholesaling of grocery products, which includes a variety of food
and non-food items.
[24] Based on the above, we conclude that the relevant product market is the wholesale
of grocery products, including a variety of food and non-food items as well as general
merchandise to the extent that it is supplied by the wholesale.
[25] As stated in paragraph 18 above, the grocery supply chain is more complex than a
stylised manufacturer-wholesaler-retailer model. The complex relationships in this
sector are sketched in Diagram 1 above and relate to inter alia:
(i) direct supply by grocery manufacturers to independent grocery retailers (thus
bypassing the wholesale);
(ii) procurement of grocery products by independent grocery wholesalers and
independent grocery retailers through buying associations or groups; and
(iii) internal distribution of grocery products by the large corporate retail to its
various individual stores.
[26] Each of the issues mentioned in paragraph 25 above, will be dealt with in detail
below as part of the analysis of the likely competitive effects of the proposed
acquisition (see paragraphs 154 to 183 below).
Relevant geographic market
[27] As already indicated above, the activities of Finro are confined to one store in Port
Elizabeth; Massmart is represented in the broader Port Elizabeth area by one Makro
store and one Weirs store.
[28] Finro submits that the majority of its customers are located in the Port Elizabeth
area, with some customers from towns such as Despatch, Uitenhage, Humansdorp
and Jeffreys Bay. It further submits that [80 - 100]% of its products are sold to
customers based in Port Elizabeth within a 50 kilometre radius from the store’s
10
Non-Confidential version
location. The local nature of the relevant market is also underscored by Masscash’s
philosophy of a “ [...] are specifically tailored for the individual requirements of local
customers and local markets”.13
[29] Furthermore, the Commission’s customer survey results indicate that approximately
90% of the respondents travel up to 150 kilometres to their main wholesale shopping
location; and that the furthest distance that 88% of the respondents travelled to do
their wholesale shopping is also a maximum of 150 kilometres.
[30] Based on the above, the relevant geographic market for the purposes of assessing
this acquisition is defined as Port Elizabeth and its regional surroundings, including
Despatch, Humansdorp, Jeffreys Bay and Uitenhage. The merging parties and the
Commission do not contest this geographic market definition.
Analysis
[31] As indicated in paragraph 16 above, the proposed acquisition has both horizontal
and vertical dimensions. To assess the likely effects of the proposed transaction on
competition, three potential theories of harm are relevant, namely (i) horizontal
unilateral effects 14; (ii) horizontal coordinated effects; and (iii) vertical effects. The
potential vertical aspects are first dealt with below, followed by the unilateral aspects.
[32] There is no evidence that suggests that the proposed transaction is likely to result in
coordinated effects, and since this is not contested by either the Commission or the
merging parties, these Reasons will focus on the likely unilateral (non-coordinated)
effects of the proposed deal.
Vertical analysis
[33] Although Finro has certain direct supply agreements with its suppliers of toiletries,
general merchandise and confectionary, it has since 1986 been a member of the
Shield buying group, purchasing a proportion of its supplies through Shield. In 2008
Finro purchased grocery products from Shield to the value of approximately R[...]
Finro purchased grocery products from Shield to the value of approximately R[...]
million. This accounts for approximately [0 - 20]% of Finro’s total stock purchases in
2008.
13 Source: Masscash strategic documents.14
11
1
Unilateral effects occur when a merger enhances the ability of the merged firm to exercise market
power independently.
Non-Confidential version
[34] Masscash submits that Finro will post merger no longer require the services of
Shield, as it will be able to source stock directly from grocery suppliers as part of the
Massmart group. Post transaction suppliers would thus continue to supply Finro,
albeit directly. Therefore, even if Finro would post merger purchase 100% of its stock
from Shield, it would not be foreclosing other buying groups to a greater extent than
in the pre-merger scenario. Clearly customer foreclosure is not likely.
[35] There are a number of alternative buying groups to Shield present in the relevant
market under consideration, including significant sized groups such as UMS and OK
Foods/MegaSave (also see paragraph 163 below). Shield’s estimated market share
of buying groups in the Port Elizabeth and surrounding area is less than 30%. Thus,
the proposed deal is also highly unlikely to result in input foreclosure.
[36] Based on the above, it is concluded that it is unlikely that the proposed deal would
result in either input or customer foreclosure. This conclusion is not contested by
either the Commission or the merging parties.
Horizontal unilateral effects analysis
[37] The rest of these Reasons will focus on the pertinent theory of harm hypothesis,
namely anticompetitive unilateral effects. The characteristics of the relevant market
are first discussed below; followed by market share and concentration analysis; an
analysis of the closeness of competition between the merging parties including
diversion ratio analysis; the Commission’s economic modelling of likely post merger
price effects; certain supply-side factors that affect the competitive landscape; and
efficiency considerations.
Market characteristics
[38] To a greater or lesser degree virtually all markets involve some element of product
or service differentiation. If significant differentiation is present, this would affect the
or service differentiation. If significant differentiation is present, this would affect the
analysis of the likely competitive effects of a proposed merger. In the instant case the
available evidence clearly indicates that the relevant market is characterised by a
considerable degree of differentiation, as explained in detail below. This fact is
attested to by Gomes, Wright, Noble and Baker.
12
Non-Confidential version
[39] The differentiating factors in the relevant market relate to individual firms altering
their wholesale grocery offerings in terms of price, overall product ranges, ranges of
products within particular product categories, relative strength/focus of product lines,
store location, as well as levels of service such as delivery (including the option to
have products delivered, delivery charges and delivery times) and the terms of
business (for example the supply of credit and credit terms).
[40] The available qualitative information on the relative differences between the merging
parties’ product and service offerings at wholesale level, or put differently the
closeness of horizontal competition between the merging firms, is summarised
below.
Product range and product mix
[41] CBW has insignificant offerings in regard to general merchandise and a limited
range of cosmetics. Weirs currently has product strengths in commodities, liquor and
non-edible groceries (for example washing powder, candles, matches, cleaning
detergents and the like). Finro, on the other hand, has particular strength s in
cosmetics (including pharmacy and toiletries), confectionary and general
merchandise (specifically hardware) compared to Massmart’s current product mix in
Port Elizabeth.
[42] The product mix of Finro and Weirs is compared in Table 1 below:
Table 1 Product mix of Finro in comparison to Weirs
Product line Finro Weirs (PE)
Food […]%
(of which confectionary
comprises […]%)
[…]%
(of which confectionary
comprises […]%)
General merchandise […]% […]%
Cosmetics […]% […]%
Customer profiles
[43] Weirs targets larger, high-spending customers, whilst Finro’s customer base is
generally made up of smaller lower-spending customers. [60 - 100]% of Weirs’ sales
are derived from high-spending customers whose purchases exceed R950 000 per
are derived from high-spending customers whose purchases exceed R950 000 per
annum; the comparative figure for Finro is [0 - 10]%. Conversely, lower-spending
13
Non-Confidential version
customers whose purchases (at the relevant party) are less than R36 000 per annum
account for approximately [0 - 30]% of Finro’s sales, but only [0 - 10]% of the sales of
Weirs.
Prices
[44] “Snapshot” pricing information 15 submitted by the merging parties regarding a
basket of products sold by inter alia Finro, Weirs and Makro at their individual stores
in the relevant market indicates notable overall price differences in the aggregate
basket of grocery products sold by each store, as well as on an individual grocery
item basis sold by each store.
Margins
[45] In general, grocery wholesalers operate on a low cost structure model and margins
are on average below 10%, but can differ significantly per product category. For
example, margins on cigarette sales, relatively speaking, tend to be very low whilst
margins on meat and fruit and vegetables tend to be higher.
[46] A review of the annual accounts of Masscash and Finro for 2008 shows that their
aggregate gross margins were [...]% and [...]% respectively.
Location
[47] The competitors in the relevant market operate from two main geographical areas,
namely Port Elizabeth and Uitenhage. Finro and Weirs both operate in Port
Elizabeth, but they are no closer to each other than they are to the other five
wholesale stores active in the main hub. Makro is situated in downtown Port
Elizabeth, approximately eight kilometres from the main cluster of wholesalers.
Delivery
[48] Weirs operates a more comprehensive delivery service through a fleet of trucks
compared to Finro; Finro is primarily a cash and carry store with limited deliveries.
This is attested to by Wright who states that Finro has “a small fleet of pretty much 4-
tonners whereas we [Weirs] have a large fleet of 8 and 14-tonners delivered to a
much wider radius”.
15 Massmart performed a “shop out” at a number of wholesalers in the relevant market during a
15 Massmart performed a “shop out” at a number of wholesalers in the relevant market during a
specific week of July 2009, .i.e. it bought one unit each of some 140 products from each supplier and
compared those prices.
14
Non-Confidential version
[49] Masscash submitted figures that show that approximately [50 - 100]% of Weirs’
sales in the relevant market are delivered to its customers and approximately [50 -
100]% of Makro’s sales in Port Elizabeth are delivered; the corresponding figure for
Finro is only [0 - 10]%.
Credit terms
[50] The merging parties submitted information that indicates that some [80 - 100]% of
Weirs’ sales are made on credit; in contrast: approximately [80 - 100]% of Finro’s
sales are cash sales.
Conclusion
[51] As is evident from the above comparison, Finro and Weirs are significantly
differentiated and therefore from a qualitative information perspective, cannot be said
to be close competitors.
Market shares and concentration levels
[52] The merging parties submit that the size of the wholesale grocery market in the
greater Port Elizabeth area is in the region of R2 billion.16
[53] The Commission’s and the merging parties’ estimates of the market shares of the
players in the relevant market are summarised in Table 2 below. Note that these
market share estimates exclude sales by buying groups.
Table 2 Market shares of firms in the wholesale grocery market in the
greater Port Elizabeth area
Firm Commission’s
estimate (%)
Merging parties’
estimate (%)
Weirs [10 - 20] *[10 - 20]
Makro [10 - 20] *[10 - 20]
Massmart total [20 - 30] [20 - 30]
Finro [10 - 20] *[10 - 20]
Merged entity [30 - 40] [30 - 40]
Alliance Cash and Carry [0 - 10] *[10 - 20]
D F Scott [0 - 10] *[0 -10]
16 As comparison: TradeValue, in its submission to the Commission dated 30 January 2009, alleges
that the overall size of this market is in the region of R2.5 billion (as per its discussions with suppliers).
However, there is no valid reason to believe that the size of the relevant market is larger than that
indicated by the merging parties.
15
Non-Confidential version
Metcash total17 [10 - 20] [10 - 20]
TradeValue [10 - 20] *[10 - 20]
Springbok 14 11
United Cash and Carry 8 6
Keens Wholesalers 5 4
Afri-Save Cash and Carry 4 3
Other (including Orient) 9 8
Total 100 100
HHIs
Pre-merger HHI 1 28418 1 42619
Post-merger HHI 1 856 2 024
Change in HHI 572 598
* Based on actual turnover figures for 2008 as provided by the relevant firms (also see footnote 17
below).
[54] Wholesale market shares calculated by the Commission based on (limited)
information supplied by a number of large grocery suppliers (i.e. share of inputs
purchased) are likely to be distorted and are therefore less reliable. Be that as it may,
the latter methodology yields only a marginally higher post merger market share for
the merged entity than that quoted in Table 2 above, namely [30 - 40]% (compared
to [30 - 40]%). There is however no reason in this case to deviate from the orthodox
approach to market share calculation based on the actual turnovers of the players in
the relevant market as a reliable information source.
[55] It should be noted that TradeValue has one outlet in Port Elizabeth and one in
Humansdorp. Metcash Trading Limited (“Metcash”) has two stores in the relevant
market: one located in Port Elizabeth (D F Scott) and one located in Uitenhage
(Alliance Cash and Carry).
[56] From Table 2 above it is evident that the merged entity’s post merger market share
in the relevant market is [30 - 40]%.
[57] It is also evident from Table 2 above that there are at least nine players (including
Orient) active in the relevant market pre-merger, operating from at least 12 outlets.
Post merger there would still be three significant rivals to the merged entity with
market shares in excess of 10%, namely Metcash, TradeValue and Springbok, as
17 The Commission and the merging parties disagree on the Metcash total market share since it is not
clear if the turnover figures provided by Metcash include grocery sales only. As a result, the
clear if the turnover figures provided by Metcash include grocery sales only. As a result, the
Commission’s estimated market share for Metcash is lower than that estimated by the merging
parties.18 Assumes that the “other” category comprises of five firms: four with market shares of 2% each; and
one with a market share of 1%.19 Assumes that the “other” category comprises of four firms with market shares of 2% each.
16
Non-Confidential version
well as four smaller competitors. One of these smaller competitors, namely Orient,
merits further mention: there is undisputed evidence that Orient will in future become
a significant player in the relevant market, as testified to by Gomes (see paragraphs
140 to 142 below).
[58] The Herfindahl-Hirschman index (HHI) calculations contained in Table 2 above
show that the relevant market is highly concentrated post merger and that the
increase in concentration as a result of the proposed deal is significant. These
results imply that further, more detailed analysis is required to determine whether or
not the proposed acquisition is likely to substantially prevent or lessen competition in
the relevant market considering inter alia the characteristics of the relevant market in
question, specifically the degree of market differentiation. One cannot simply infer a
substantial lessening of competition (SLC) from a highly concentrated market or from
a significant increase in market concentration in a relevant market such as that under
consideration which is undisputedly notably differentiated (see paragraphs 38 to 51
above).
[59] It is well established in economic literature that in significantly differentiated markets,
market shares and/or market concentration levels are less informative of the degree
of rivalry between firms and therefore of the merged entity’s potential post merger
market power.20 Economic theory suggests that unilateral anticompetitive effects are
more likely in situations where differentiated-product firms compete closely, each
representing the best alternative to the other for a substantial volume of business.
Two firms might be very close competitors because they supply products and
services that are seen as very similar by customers, and a merger between such
firms might create a larger reduction in rivalry than would a merger between more
differentiated firms.
differentiated firms.
[60] Ultimately, unilateral anticompetitive effects are based in the following logic: As the
price of the goods of Firm A (for example of Finro) rises, some customers will shift
from Firm A to Firm B (for example from Finro to Weirs). Prior to the merger these
revenues would (due to customer diversion) be lost to Firm A. Post merger however
Firm A and Firm B have the same owner and thus do not lose these revenues. As a
result, the price increase is more profitable to the merged entity.
20 See, for example, Shapiro (1996), ‘Mergers with Differentiated Products’, Antitrust, Spring issue.
17
Non-Confidential version
[61] Therefore, in assessing the likely competitive effects of the instant transaction it is
relevant to consider whether or not the parties to the merger can, based on
quantitative evidence, be regarded as close competitors.
Closeness of competition: diversion ratio analysis
[62] It is standard practice in differentiated-good markets to determine diversion ratios as
a quantitative measure of the closeness of competition between the individual parties
to a merger, and to then combine it with information about pre-merger gross margins
to ultimately through economic modelling predict the potential price-raising
consequences of a merger. This was also the approach adopted by the Commission
in this case.
[63] The concept underlying diversion ratio analysis is easily comprehensible: If Firm A
(say Finro) raised its price, what fraction of its customers will turn to its rival, Firm B
(now merger partner, say Weirs)? This analysis is then repeated for Firm B. The
diversion ratios thus measure the degree to which the parties to the merger are
competitors.
[64] Two types of diversion ratios can be determined:
(i) Customer diversion ratios (CDRs)
This ratio simply measures the number of customers that would switch/divert (in
response to a small but significant price increase) from a focal supplier to another
supplier (say from Finro to Weirs), as a proportion of the total number of customers;
and
(ii) Revenue diversion ratios (RDRs)
This ratio measures the amount of sales revenue that would divert (in response to a
small but significant price increase) from a focal supplier to another supplier as a
proportion of the total sales revenue. Thus, the relative size of the customer’s
demand is taken into account.
[65] Economic theory predicts that the loss of a competitive constraint between the
merging parties will alter the profit-maximising incentives faced by the firms. Post
merging parties will alter the profit-maximising incentives faced by the firms. Post
merger the merged entity will capture the sales revenue that would otherwise have
18
Non-Confidential version
been lost to one another in response to a small but significant price increase. Thus,
the key to the profitability of any post merger price increase implemented by one of
the merging firms is (i) the proportion of demand that is retained; (ii) the proportion of
any diverted sales revenue to the other merging party; and (iii) the additional profits
made by that party as a result.
[66] It is important to highlight the fact that in the instant case the sales revenues of the
merging parties are not distributed evenly across their customers, i.e. their individual
customers differ significantly in terms of the quantum and value of their purchases -
this is likely to be the case in many markets. Therefore, not only must the
proportionate number of customers that would divert be considered but - more
importantly - the proportionate value of the sales revenue that would divert. The
RDRs (as opposed to the CDRs) are thus the appropriate diversion measure to use
in this context since it more accurately captures the likely impact of the proposed
acquisition on unilateral market power. The latter fact is testified to by Baker and
conceded to by Noble. It is noted that the appropriate measure of diversion must be
assessed on a case-by-case basis: CDR evidence may be considered reliable in
markets characterised by insignificant differences in the merging firms’ sales revenue
distribution amongst their individual customers (which clearly is not the case here).
Customer survey, statistical analysis and economic modelling evidence
Background
[67] The Commission embarked on a customer survey and statistical data analysis
exercise to determine the degree of closeness of competition between the merging
parties. This analysis includes diversion ratio analysis and economic modelling of the
likely post merger price effects.
[68] The Commission contracted external assistance for the field work, sample
[68] The Commission contracted external assistance for the field work, sample
framework, questionnaire design and data analysis:
• A.C. Nielsen Marketing and Media (Pty) Ltd (“Nielsen”) conducted the survey,
which consisted of ‘computer aided telephonic interviews’ (CATI).
• Dr. Lizelle Fletcher and Prof. Deon Van Zyl from Statomet analysed the data,
prepared the design of the sample of customers to be contacted for the
survey and assisted the Commission with the drafting of the survey
19
Non-Confidential version
questionnaire. As stated in paragraph 15 above, Fletcher was called by the
Commission as an expert witness on statistics.
• Oxera, an economic s consultancy, was contracted to interpret the survey
data in the context of the proposed acquisition and to predict the likely post
merger price effects through economic simulation.
Data and statistical analysis
Survey sample design
[69] For the purpose of the Commission’s customer survey, it requested customer data
from the merging parties. Finro submitted a list of a subset of Finro customers
compiled from Finro’s list of debtors ( limited to the top 1 000 customers); Weirs
provided a full list of Weirs customers. The Commission submits that, in view of the
very small number of retail customers in the Shield list and the limited sample of
Makro customers provided by the merging parties, it did not include the Shield and
Makro customers in the sample of customers to be surveyed. Therefore, the sample
was drawn from the full list of Weirs customers and the top 1 000 customer list of
Finro.
[70] The Commission determined the total sample size as 399. In the case of Weirs 253
customers21 were selected and in the case of Finro 146 customers 22. Customers
were furthermore divided into four groups according to the relative value of their
purchases during 2008, namely (i) very large; (ii) large; (iii) medium; and (iv) small. 23
This allowed for the testing of correlations between customer responses to specific
questions and the relative size of the customers.
[71] It is noted that sample size is an extremely important factor in understanding the
issues pertaining to the statistical analysis in this case. More specifically, it is
essential to note the extent to which the original sample size of 399 shrinks with
subsequent splicing of the data, as explained in more detail in the paragraphs below.
[72] The Commission determined the total sample size from all available Weirs and Finro
[72] The Commission determined the total sample size from all available Weirs and Finro
customer data such that the sample proportion of all Weirs and Finro customers with
21 10.3% of all Weirs customers.22 14.7% of all Finro customers.23 ‘Very large’ in this context means purchases of more than R950 000 per annum; ‘large’ means
between R370 000 and R950 000; ‘medium’ means between R70 000 and R370 000; and ‘small’
means up to R70 000 of purchases per annum.
20
Non-Confidential version
a specific attribute is within 0.05 (i.e. 5%) of the proportion with that attribute among
all Weirs and Finro customers with a probability of at least 0.95. The Commission
thus set out to be at least 95% certain that the sample proportion differs by less than
0.05 of the population proportion (also see paragraph 86 below).
[73] Regarding the sizes of the customers included in the sample, the Commission
states that “due to the relatively larger effects of the large customers’ actions on the
merging parties’ business than the effects of smaller customers’ actions, we
endeavoured to ensure that large customers in particular were reached during the
course of the survey ”. This approach ties in with the fact that the relatively larger
customers, in terms of the value of their annual purchases from the merging parties,
have a proportionately larger effect on the RDRs than the smaller customers.
However, although this approach is correct from a RDR calculation perspective (i.e.
a quantitative approach), it is not particularly sympathetic towards the potential
effects of the proposed acquisition on the smaller customers, who from a public
interest (i.e. SMME) perspective, may be the most vulnerable (see paragraphs 202
to 209 below that deal with SMMEs).
Diversion ratio data and analysis
[74] For an understanding of certain pertinent issues in this case, inter alia survey
design/construction and execution and the testing of the empirical robustness of the
statistical data (i.e. statistical inference) , it is important to quote the relevant survey
questions that were used in or influenced the Commission’s calculations of the
diversion ratios. These questions are quoted below:
• Question 2:
“Whose customer”.
This indicates from which store list , either Finro or Weirs, the respondent was
drawn. Note that this question was not asked from respondents, i.e. it was not
drawn. Note that this question was not asked from respondents, i.e. it was not
“read out”, but taken from the data provided by the merging parties.
• Question 5:
“Total spend of customer in 2008”.
This is the amount spent by the respondent at either Finro or Weirs in 2008. Note
that this question was also not asked/read out, but taken from the data submitted
by Finro and Weirs.
• Question 11:
21
Non-Confidential version
“Which of the following stores do you mainly buy your groceries for your shop
from?”
• Question 30:
“If [insert whichever is applicable from [the answer to] question 11] was no longer
available what would your next best alternative be for buying groceries for your
shop?”
Note that this question is the central question in the Commission’s determination
of customer diversion and therefore it is discussed in more detail below (see
paragraphs 97 to 100).
[75] From the above-mentioned survey questions and background discussion of
diversion analysis, it is evident that the unknown population parameter in the present
case is the CDR, or more appropriately the RDR (see paragraph 66 above). The
Commission calculated both the CDRs and RDRs.
CDRs
[76] As can be inferred from the quoted survey question 30 above, the CDRs show the
distribution of the proportion of customers who would divert from Finro should the
store no longer be available, and from Weirs in response to it no longer being
available.
[77] Regarding the CDR sample size it is important to note that the dataset used to
calculate the CDRs reduced significantly compared to the total sample size: the
CDRs were calculated based on 276 responses compared to the total sample size of
399 (see paragraph 71 above).24
[78] Since the appropriate measure of diversion in the instant case is the RDRs as
opposed to the CDRs (as concluded in paragraph 66 above), the latter will not be
discussed any further in these Reasons.
RDRs
[79] In the Commission’s calculations, the RDR for customers who buy mainly from Finro
to Weirs is the ratio of the total revenue from all customers in the population who buy
mainly from Finro to the total revenue of these customers that would divert to Weirs
should Finro “ no longer be available ”. To estimate this ratio from the sample, the
24 The 276 responses include 160 customers who shop mainly at Finro and 116 who shop mainly at
24 The 276 responses include 160 customers who shop mainly at Finro and 116 who shop mainly at
Weirs (see question 11 quoted in paragraph 74 above). 94 of the 399 respondents did not answer
question 11. A further 29 respondents indicated that they shop mainly at other stores and not at Finro
and/or Weirs.
22
Non-Confidential version
Commission used unbiased estimates of the total revenue and the revenue that
would divert. The ratio of these two unbiased estimators gives the estimated RDR.25
[80] Again it is crucial to reflect on the size of that dataset that the Commission used for
the calculation of the RDRs. For customers selected from the Finro debtors list only
the revenue to Finro (i.e. the amount spent at the store in 2008) was available. The
implicit assumption was made that the figures on the Finro top 1 000 customer list
represent the revenue derived from their customers. Similarly, for customers
selected from the Weirs list only the revenue for Weirs was available. The RDR from
Finro can therefore only be determined using customers from the Finro list; and the
RDR from Weirs can only be determined using customers on the Weirs list.
Furthermore, to calculate the RDRs only the responses for which survey question 2
and survey question 11 matched could be used since the annual spend from survey
question 5 directly related to the response to survey question 2 rather than survey
question 11.
[81] As a result the dataset used for calculating the RDRs is significantly smaller than
that used for calculating the CDRs - i n total a sample size of 211 responses 26
(compared to 276 responses in the case of calculating the CDRs and the total
sample size of 399) (see paragraphs 71 and 77 above).
[82] This splicing of the data significantly influences the level of confidence which as a
result becomes lower at 90% (also see paragraph 86 below), as well as the
confidence intervals which become significantly wide (see paragraphs 87 and 88
below), as reflected in Table 3 below:
Table 3 Commission’s estimated RDRs, confidence level and confidence
intervals
RDR
(Column A)
90% confidence interval
(Column B)
From Finro
to Weirs 0.165 (0.073; 0.281)
RDR
(Column A)
90% confidence interval
(Column B)
From Finro
to Weirs 0.165 (0.073; 0.281)
25 This estimate is equivalent to a weighted mean of the RDRs for each stratum where the weight for a
stratum is an unbiased estimate of the total revenue from customers in that stratum who buy mainly
from Finro divided by an unbiased estimator of the total revenue from customers in the whole
population who buy mainly from Finro.26 The RDR calculations were based on those customers coming from the Finro debtors list who
mainly shop at Finro (99 respondents), and those customers coming from the Weirs’ customer list
who mainly shop at Weirs (112 respondents).
23
Non-Confidential version
to Makro 0.412 (0.250; 0.616)
to Weirs or Makro 0.576 (0.390; 0.812)
From Weirs
to Finro 0.561 (0.041; 1.000)
Interpreting estimates calculated from sample data
Confidence level, intervals and limits
[83] It is well accepted in statistics literature and practice that one requires an
assessment of the accuracy of statistical estimates. The field of statistics can be split
into descriptive statistics 27 and statistical inference. Statistical inference deals with
estimating (or “inferring”) unknown population parameters from sample data - that is
statistical inference aims to say something about the overall population by looking
only at a particular subset of that population.
[84] There are two types of estimates in statistical inference: a ‘point estimate’
(the values in Column A of Table 3 above, which are single values) and an ‘interval
estimate’ (the values in Column B of Table 3 above, with an upper and a lower
bound). A point estimate predicts the relevant population parameter. The confidence
interval estimate measures the accuracy of the point estimate. Accuracy refers here
to how close the point estimate is to the true population parameter. Fletcher explains
during her testimony that in calculating diversion ratios from sample data, you get a
relative frequency and when you interpret it as a proportion, “ what you really saying
is this proportion from this sample is representing the population”.
[85] In plain language definition: the confidence interval is the likely range of the true
value of the population. Note that there is only one true value for the population and
that the confidence interval defines the range where it is most likely to be. The wider
the confidence interval, the less the precision. The confidence limits refer to the two
extremes of the range, i.e. the values at each end of the interval.
[86] Furthermore, the interval estimate is usually constructed such that the probability of
[86] Furthermore, the interval estimate is usually constructed such that the probability of
it containing the true population parameter is high, say 95%. This is known as the
confidence level. The higher one sets the level of confidence, the wider will be the
27 Descriptive statistics deals with the description of the behaviour of a particular dataset, highlighting
where the data are concentrated and how variable it is.
24
Non-Confidential version
confidence interval, i.e. the confidence level and interval are inversely related. As
stated in paragraph 72 above, the Commission originally constructed the survey
sample to indicate with 95% confidence that the margin of error would be 5% or less,
or put differently that the precision is within 5%. However, for the RDR calculations in
Table 3 above, the Commission lowered this confidence level to 90%.
[87] Fletcher makes an important observation (as quoted below) regarding the
confidence intervals of the CDRs and, furthermore, confirms under oath that exactly
the same principle would apply to the confidence intervals of the RDRs:
“the lower limit [of the confidence interval] is perhaps of more interest as it
indicates, with at least 90% certainty, the minimum CDR if the stores were no
longer available.”
[88] Fletcher furthermore acknowledges that the confidence interval of the RDR from
Weirs to Finro is from 4% to 100% (at a 90% level of confidence) (see Column B of
Table 3 above). This is a direct result of the data splicing that occurred (see
paragraphs 77 and 80 to 82 above). In this regard Fletcher testifies that she
“cautioned against splicing, because it is diluting the sample to the extent that you
now get an estimator that is really ... very unstable ...”.
[89] When considering the relative roles of point and interval estimates it is perhaps
more appropriate to think in terms of a continuum: where the sample is large and the
population fairly homogenous, the confidence intervals are likely to be quite narrow –
so that the point estimate is fairly accurate. As the sample size dwindles and/or the
population becomes more heterogeneous, the confidence interval becomes wider
and one’s confidence in the point estimate’s ability to accurately forecast the
population parameter becomes smaller. It is therefore evident that the issue of
population parameter becomes smaller. It is therefore evident that the issue of
statistical robustness is case specific and must be assessed on a case-by-case
basis.
[90] In this case the overall sample size was not chosen with the intent of accurately
estimating RDRs and Fletcher as statistics expert conceded that the sample size for
the calculation of the RDRs was problematic. Therefore, there are sufficient
statistical grounds to be sceptical of the accuracy of the point estimates.
[91] Regarding the issue of sample size it is noted that it is a relative concept: statistical
literature does not suggest that any absolute sample size number is sufficient.
Indeed, an appropriate sample size will inter alia depend on the nature of the
25
Non-Confidential version
population, i.e. whether it is homogenous or heterogeneous. Under conditions of
significant population heterogeneity, a larger sample is preferable. Sample size in the
case of stratified sampling is more complicated, but in all cases it is necessary to
match the sample size choice with the ultimate aim of the analysis.
[92] In this matter it appears that while the sample sizes were consistent with the aim of
approximating population proportions, these were not consistent with the aim of
diversion ratio calculation – which required further stratification of the data. The
extremely wide confidence intervals for the RDRs in the instant matter suggest that
the sample size was too small.
[93] The Tribunal a ccepts that there is inevitably some uncertainty regarding the
reliability of any survey results and that the significance thereof must be assessed on
a case-by-case basis. What must however be stressed in the instant case is that that
uncertainty is extreme, given the small sample size for the RDRs and the resulting
extremely wide confidence intervals.
[94] Based on the above, w e will consider the RDRs in the following sections of these
Reasons by reference to the lower bounds of the confidence intervals (as opposed to
the point estimates).
Survey design and execution and sense-checking against other facts
[95] It is common cause that the quality of quantitative survey data must be evaluated by
way of a sense-check against other evidence, for example industry, economic and
commercial facts. Survey data results must for example always be checked against
the available information regarding the characteristics of the relevant market under
consideration, which may include factors such as the elasticity of demand, if relevant.
Shapiro emphasises that the results of quantitative analysis must be checked against
the views of market participants, company documents and other (qualitative)
the views of market participants, company documents and other (qualitative)
information sources.28 Both Noble and Baker accepted this principle as best practice.
[96] In the above context we will specifically consider the construction of and responses
received to the Commission’s survey questions 30 and 31, given their significance in
the calculation of the RDRs.
28 Shapiro (1996), ‘Mergers with Differentiated Products’, Antitrust, Spring issue.
26
Non-Confidential version
Survey questions 30 and 31
[97] The first issue regarding question 30 (as quoted in paragraph 74 above) relates to
the fashion in which Nielsen executed the survey. Testimony revealed that the long
list of potential responses to this question was ‘read out’ to certain respondents, i.e.
to the first 53 respondents in the survey, but not to the others. The Commission’s
intention was that this exceptionally long list of potential responses, i.e. 25 individual
firms in total, should not have been read out at all. Furthermore, Nielsen pooled the
said 53 responses with the other responses without disclosing this fact to the
Commission prior to the hearing. 29 Exclusion of these 53 observations from the
dataset is likely to further influence the already wide confidence intervals of the
RDRs. We will not deal with this issue in any detail, save to say that it raises
questions regarding the integrity with which Nielsen conducted the survey pertaining
to survey question 30 and subsequently reported thereon to the Commission.
[98] The second issue is that the hypothetical scenario portrayed in question 30, i.e. that
the main supplier “ was no longer available ”, will not present itself in the post merger
reality. Ultimately one does not seek to model the effects of either a Weirs or a Finro
store closing, but instead want to measure the added incentive caused by the merger
to raise price in the relevant market. However, the responses to survey question 30
do not provide any information regarding the behaviour of customers if one of the
parties to the merger were to post merger increase prices by a small but significant
amount (a particular finite price increase), or if current quality, range or service
worsened post merger.
[99] The Commission’s survey question 30 in fact essentially equates to an infinite price
increase. This means that it elicits responses not only from “marginal” consumers
increase. This means that it elicits responses not only from “marginal” consumers
who would divert to an alternative supplier in the event of a small but significant price
increase, but also from “infra-marginal” consumers who would not divert to an
alternative supplier in the event of a small but significant price increase.
[100] Given that the sales to infra-marginal consumers would remain with the party who
post merger hypothetically increases the price, it is clear that the responses of
marginal consumers are what really matters in measuring the likely competitive
effects of a merger. In this regard Noble concedes that “ ... marginal diversion ratios
are in fact the correct theoretical approach ...” and “ ... as you’ve heard from Dr
Fletcher, she has concerns about the empirical robustness of the marginal diversion
29 This only came to light on 26 August 2006 during the hearing.
27
Non-Confidential version
ratio values”. The Commission’s marginal diversion ratio calculations are discussed
below.
[101] To overcome this practical dilemma, the Commission used the responses to
survey question 31 to identify as best can the marginal customers. Customer survey
question 31 reads as follows:
“READ OUT
What percentage price increase would cause you to use this alternative?
1 - 5%.................................................
5 - 10%...............................................
10 - 25%.............................................
25 - 50%.............................................
More than 50%...................................
I would not switch ..............................”.
[102] By including only those customers who in the survey indicated that they would
respond to a price increase of between 1% and 10% (and excluding all other data),
the Commission calculated the RDRs based on marginal customers only.
[103] The available evidence indicates that the latter approach has the following effect
on the Commission’s predicted post merger price increases: the predicted price
increases are significantly lower on the basis of RDRs constructed from the
responses of marginal consumers only than corresponding estimates on the basis of
RDRs constructed from both marginal and infra-marginal consumers. This suggests
that there could be significant systematic bias if both marginal and infra-marginal
responses are relied on, as opposed to relying only on the marginal responses.
[104] Furthermore, two problems are associated with this latter approach:
(i) The dataset used for the calculation of the RDRs become very small and
unreliable:
Fletcher states in this regard that “ ... in splicing data from a sample that was not
designed to accommodate subsets, you end up with very small subsets and the
problem is that you then get estimates that are very unreliable ”. Fletcher testified
problem is that you then get estimates that are very unreliable ”. Fletcher testified
that even if you splice the data at a price increase of up to 10% (as opposed to
up to 5%), the estimates would still not be robust, given the small sample.
28
Non-Confidential version
In conclusion, the relevant data from responses to survey question 31, based on
its lack of empirical robustness, cannot be used to calculate marginal consumer
diversion – which as conceded by Noble is the appropriate measure to use in
this context (see paragraph 100 above).
(ii) The manner in which survey question 31 was posed to respondents and the
responses received thereto raise concerns in the context of the relevant market
characteristics. This survey question when subjected to a sense-check against
other facts appears to be nonsensical, as discussed in detail below.
[105] A sense-check of the magnitude of realistic post merger price increases in the
relevant market under consideration reveal that price increases of above 25% - as
considered plausible by the Commission in survey question 31 - are absurd in the
context of the wholesale grocery market.
[106] As will be discussed in a latter section of these Reasons, the evidence shows that
the large corporate retail places a ceiling on the achievable extent of price increases
at wholesale level (see paragraphs 174 to 177 below). In this context Wright testified
that the prices in large corporate retail outlets are approximately 10% to 12% higher
than in the wholesale sector (compare this to the Commission’s hypothetical 25%
and higher price increases at wholesale level in survey question 31).
[107] Gomes was of the view that there are no meaningful differences, at a specific
product level taking promotional prices into account, between prices in independent
wholesalers and corporate retailers. This view was not supported by any evidence
however and was disputed by Wright. If price differences were indeed non-existent
as suggested by Gomes, then the independent wholesalers would simply not be able
to maintain their position in the grocery supply chain. Be that as it may, hypothetical
price increases of the magnitude suggested in the Commission’s survey question 31
price increases of the magnitude suggested in the Commission’s survey question 31
(i.e. exceeding 25%) are clearly far removed from any commercial reality in the
relevant market.
[108] Furthermore, from a customer perspective, especially in the current economic
climate and considering the nature of the products in question (i.e. grocery products),
one would expect the customers of the grocery wholesalers to be price sensitive.
The merging parties submitted some evidence in support of this, namely that certain
29
Non-Confidential version
customers at wholesale level as a matter of course request prices from various
wholesalers. Also, there is no evidence to suggest that customers incur any
switching costs when altering their wholesale supplier, as confirmed by competitors
such as Metcash. 30 Yet, 18% of respondents to the Commission’s survey indicated
that they would only switch to an alternative supplier in the event of a price increase
of more than 25% (excluding 10% of respondents who indicated that they would not
switch under any circumstances). It is also noted that a large number of these same
respondents indicated in the survey that they are indeed price sensitive.
[109] In the above context it is not surprising that the merging parties produced
information that indicated that the Commission’s survey results regarding the
sensitivity of customers to particular increases in relative prices are starkly at odds
with the elasticities implied by the parties’ own pre-merger margins.
Other survey anomalies: Springbok
[110] We will not deal extensively with the merging parties’ allegations regarding further
anomalies in the Commission’s survey results, but will focus our attention on one of
these identified anomalies given its relative importance from an effect perspective,
namely the questionable responses of Springbok (a competitor of the merging
parties and a member of the Shield buying group). Springbok is by far the largest
customer included in the survey data; it accounts for approximately [0 - 20]% of all
revenue in the survey sample and therefore significantly affects the RDRs.
[111] A number of Springbok’s responses in the Commission’s survey have been shown
to be factually incorrect. It, for example, indicated that it does not purchase any
supplies from buying groups, when it in fact purchases approximately R[...] million of
product annually from Shield. The Springbok representative interviewed by Nielsen
product annually from Shield. The Springbok representative interviewed by Nielsen
ought to have known this fact and, given that certain other answers were also
factually incorrect, the Springbok data are highly suspect. Fletcher and Noble agreed
with Baker that if there is good reason to doubt the integrity of a particular
respondent’s response, it should be excluded from the analysis. In this regard
Fletcher states “... the way to deal after that with your data with integrity is, if it is
clear that the observation is incorrect, it should be excluded from the analysis ”.
Springbok was, however, not excluded from the Commission’s data analysis.
30 Metcash’s submission to the Commission dated 4 March 2009.
30
Non-Confidential version
Economic modelling of likely post merger price effects
[112] The Commission used an economic model that acts as a framework to analyse the
changes to the post merger profit-maximising incentives of the merging parties. The
model compares one equilibrium where the firms compete with each other, with
another where they are merged and act as a single profit-maximising entity. The
model used is a differentiated-goods Bertrand model of competition, which assumes
that the parties are differentiated from one another and that they compete by setting
prices and other competitive parameters.
[113] The Commission employed two economic models, namely (i) the standard
symmetrical model and (ii) the asymmetric model. Although both of these models
use estimated diversion ratios (RDRs) and pre-merger gross margins as variables
they are premised on very different assumptions:
(i) Standard symmetrical model
This model assumes that the RDRs and the pre-merger margins of the individual
firms to the merger are the same. Clearly this model cannot be applied to this case
since both the calculated RDRs and the margins of the merging parties differ
significantly. This model will therefore not be discussed any further in these Reasons.
(ii) Asymmetric model
This model allows for differences in the RDRs and the gross margins of the individual
parties to the merger. Both Nobel and Baker agreed on the score that this is the
appropriate model to utilise in this case. Noble also submitted that this model is
preferable as it “relies on fewer assumptions and uses more data”.
[114] As a general principle, the larger the gross margin the lower the RDR necessary to
raise anticompetitive concerns. As stated in paragraph 45 above, grocery
wholesalers operate on a low cost structure model and margins are on average
below 10%. Therefore, relatively high RDRs will be required to show anticompetitive
price effects.
price effects.
[115] The other crucial issue to this type of economic modelling is the assumed shape of
the demand curve. Either linear or isoelastic demand specifications can be assumed:
(i) Linear demand
31
Non-Confidential version
Linear demand implies that the elasticity of demand rises as prices increase.
(ii) Isoelastic demand
Isoelastic demand implies that the elasticity of demand remains constant as prices
increase. In other words, consumers’ willingness to reduce demand in response to
price increases remains unchanged as prices rise.
It is accepted that p rice effects for the isoelastic variant will always be higher than
that of the linear variant. The theory is that price rises are less profitable the greater
the elasticity of demand since greater elasticities imply more volume loss for a given
price rise. One should therefore be cautious of making this particular assumption and
the importance of finding a priori support (in documents, in the testimony of
witnesses or in survey data) for this form of demand is stressed across the relevant
economic literature.31
[116] Thus, the demand system used to predict post merger price effects should conform
to the available evidence. However, no qualitative or quantitative evidence was
provided in this case in support of an isoelastic demand assumption. Therefore the
Tribunal does not consider isoelastic demand relevant and it will not be discussed
any further in these Reasons.
[117] The third assumption on which the Commission’s model is based is that firms set
prices both pre- and post merger in a way that is consistent with the Lerner index.
This index represents the degree of market power held by a firm. The more market
power a firm has, the lower its firm-specific elasticity of demand, and the greater its
ability to raise prices above marginal cost. The assumption implies that firms set
profit-maximising prices based on this degree of market power. In this model, gross
margins are used to infer, using the Lerner index, the elasticity of demand faced by
the firm. The Commission used gross margins of [...]% and [...]% for Weirs and Finro
the firm. The Commission used gross margins of [...]% and [...]% for Weirs and Finro
respectively (also see paragraph 46 above). These imply elasticities of [...] and [...]
respectively.
[118] Baker severely criticised the Commission’s use of the single-product Lerner
condition, arguing that it fails to take into account the complex real world
complementarities and substitutabilities between each of the firms’ products. He
expressed the view that this approach is likely to provide a poor representation of
how the merging firms actually set their prices, given the diverse range of different
31 See, for example, Shapiro (1996), ‘Mergers with Differentiated Products’, Antitrust, Spring issue.
32
Non-Confidential version
products that the parties to the merger supply. Baker also criticised the use of pre-
merger margins based on actual accounts data in this case since it is likely to
understate the true firm level own-price elasticities faced by the parties, i.e. own-
price elasticities would be more price elastic, according to Baker.
[119] The Commission’s modelled post merger price effects are summarised in Table 4
below. These predicted effects are based on the following:
• the lower limits of the RDR confidence intervals are relied on;
• the asymmetric model is used;
• linear demand is assumed; and
• (at this stage) any potential efficiency gains are excluded from the model.
Table 4 Commission’s predicted post merger price increases based on
the lower limits of the confidence intervals of the RDRs,
excluding any efficiency assumptions
Price rise Asymmetric model, assuming linear demand
Predicted price rise for Weirs 0.6%
Predicted price rise for Finro 2.0%
[120] Thus, the Commission’s economic simulation predicts that the merging parties
would not be able to raise prices by more than 2% post merger - this is without any
regard to possible repositioning by existing rival firms or efficiency gains of the
merged entity (see paragraphs 148 to 153 (repositioning) and 184 to 189
(efficiencies) below). As can be seen from Table 4 above, the predicted price rise for
Weirs is an insignificant 0.6% (without regard to potential efficiencies and supply-side
responses from rival firms in the relevant market).
[121] It is noted that this likely price rise evidence is not directly related to the choice of
market definition (i.e. whether defined more broadly or more narrowly). Furthermore,
it is noteworthy that the merging parties submitted information that shows that if
market shares are used to infer diversion ratios (instead of the RDRs derived from
the Commission’s customer survey), the model predicts post merger price decreases
the Commission’s customer survey), the model predicts post merger price decreases
in one scenario (Finro to Makro), and insignificant increases (0.6%) in the remaining
two scenarios (Weirs to Finro and Finro to Weirs). These results were not contested
by the Commission.
33
Non-Confidential version
[122] Regarding the price increase threshold for a likely substantial prevention or
lessening of competition, Noble suggests that a 5% predicted price increase
“represents a useful threshold when assessing whether the lessening of competition
predicted by the model is significant ”. According to Noble’s evidence on the basis of
this suggested threshold, the Commission’s model predicts that the merging parties
will face an incentive to engage in an insignificant lessening of competition.
[123] However, Gomes submits under oath that a 5% price increase in the wholesale
grocery sector would be excessive. He states: “ I do not believe that anybody in the
Port Elizabeth market is going to be wanting to be pushing up their prices by 5% ”
and “... in our industry 1% is significant”.
[124] Gomes is not referring here to the relevant price increase threshold that would be
indicative of a significant lessening of competition (SLC) in the relevant market from
a competition perspective, but what post acquisition price increase in his view is
realistically achievable based on his knowledge of and experience in this market.
One can assume that he allows in this 1% figure for possible supply-side reactions
from rivals. He, however, later also suggests that “ the fact that they [the merging
parties] might be one or two percent better off is necessarily good for their trading
ability, they can choose where they want to put that into aggressive pricing or put
that into the bottom line of their business ”. Efficiencies are discussed in paragraphs
184 to 189 below.
[125] Both Baker and Noble agreed that two further factors are critical in the assessment
of the likely post merger price effects, namely:
(i) likely changes in prices or product offerings by rivals, including entry,
expansion and repositioning. Note that this cannot be accounted for within the
Commission’s economic simulation - they are so-called “off model”
Commission’s economic simulation - they are so-called “off model”
adjustments; and
(ii) synergies that lower marginal costs and reduce the predicted price increases.
Efficiencies on the other hand can be incorporated into the Commission’s
economic model, as Oxera has in fact done (see paragraph 189 below).
[126] Therefore, the Commission’s simulated maximum post merger price increase of
2% may not occur in practice due to the above-mentioned factors that could defeat
the predicted price increase. These supply-side factors as well as efficiencies are
analysed below.
34
Non-Confidential version
Supply-side considerations and efficiencies
Supply-side considerations
[127] In the next section we will discuss the following ‘off model’ adjustments: potential
new entry (including barriers to entry); competitive repositioning by rival firms; direct
supply by grocery manufacturers to retailers; the role of buying groups; the large
retail as potential constraint on the wholesale; and lastly the anticipated and
modelled efficiency adjustments.
Entry
[128] The Commission identified certain potential barriers that may impede or slow entry
into the relevant market, namely:
(i) capital costs, including the costs of stock, fixtures, fittings, land and
buildings; and
(ii) economies of scale, i.e. a sufficient scale to negotiate discounts with
suppliers.
Capital costs, including suitable land and buildings
[129] Finro identifies suitable location as one of the main barriers to entry during
discussions with the Commission. Internal Masscash documents also refer to the fact
that “... new sites are proving challenging”. However, Masscash avers that this
statement relates to retail sites in South Africa in general and not specifically to
wholesale sites.
[130] Contrary evidence is the fact that Orient in 2007 found suitable premises in
Uitenhage. The parties also submitted estate agent details showing that a number of
warehouses of a suitable size are currently available in the relevant geographic
market. However, no specific evidence was provided regarding the suitability of
these warehouses from a micro-location perspective.
[131] From testimony provided it can be deduced that the suitability of any particular
location would largely depend on the business model of the wholesaler, including the
relevant target market and pricing strategy. The evidence furthermore suggests that
micro-location, for example the proximity of a wholesaler to a taxi rank, is not
35
Non-Confidential version
paramount if hawker trade (by implication attracting relatively immobile customers) is
not a priority. As stated in paragraph 22 above, the merging parties do not
specifically target hawker trade and their warehouses are not located close to taxi
ranks - in contrast to players such as Springbok and TradeValue who are in fact
located in close proximity of a taxi rank.
[132] Furthermore, many wholesalers (including Weirs) offer a delivery service which
implies that the location of its warehouse is less important; larger customers also
have their own transport. However, convenient access to the warehouse could be an
important requirement from a customer perspective. TradeValue, for example, states
that a suitable location for a new store is essential since customers prefer buying
from stores located close to a highway. 32 Gomes testified that TradeValue is slightly
better located than its competitors in terms of proximity to a highway, but that there is
no major difference between the locations of the merging parties’ stores and that of
their competitors. As stated in paragraph 131 above, pricing strategy also affects the
choice of location since the more price aggressive the wholesaler, the further
customers might be willing to travel to that location.
[133] According to TradeValue new entry would require a capital investment of R35 -
R40 million (assumingly including the costs of owned land and buildings) and
additional sunk costs (i.e. marketing costs) of R2 million. Gomes estimated the costs
of entry at a scale comparable to Finro at approximately R83 million (including
approximately R38 million for land and building ownership).
[134] However, land and buildings do not necessarily have to be owned and can be
leased. Gomes conceded that lease arrangements can be entered into in respect of
land and buildings but that “ your requirement ... from fixtures and fittings and stock ”
remains.
remains.
[135] Information that surfaced during the hearing suggests that a warehouse type
structure of at least 3 000 square metres 33 and stock of approximately R10 million 34
would be required to achieve credible entry with a turnover of approximately R100
million per year. This translates into a market share of approximately 5% in the
32 Meeting of 29 January 2009 between the Commission and TradeValue.33 As comparison: the size of Finro’s sales and warehouse areas is approximately [0 – 20 000] square
metres.34 As comparison: Finro’s stock as at 30 September 2008 is approximately R[...] million. However, the
due diligence report on Finro suggests that it is [...].
36
Non-Confidential version
relevant market.35 Gomes testified that this would be a “ viable business” in the
relevant market. For comparative purposes: Gomes testified that the size of Orient’s
building (a new entrant in the relevant market) is an estimated 10 000 square metres
(see paragraphs 140 to 142 below).
Economies of scale
[136] Gomes confirmed in his testimony that volume plays a key role in the wholesale
grocery sector, which influences trading terms with suppliers, rebates and
advertising. TradeValue in its submissions also underscores the importance of scale
economy advantages.36 This is furthermore reiterated by Massmart’s rationale for the
proposed transaction (see paragraph 7 above) and the merging parties’ alleged
efficiency claims (see paragraph 185 below).
[137] Barriers to entry at a scale and competitiveness level comparable to Finro are put
into perspective by Wright’s testimony. Wright when asked why Masscash does not
simply open a Jumbo 37 store in Port Elizabeth responded as follows, drawing from
Masscash’s experience to open a new store in Durban:
“...the reality is it’s not as simple as it seems, because Finro indeed is a very
profitable business. If you opened a Jumbo store, you could well be in the
situation that we’re faced in Durban where we were actually trading at a loss for
a number of years before ... it’s currently broken even, but we traded for several
years at a loss. So business is not as simple as it sounds, you don’t just open up
tomorrow and guarantee, and particularly in a market where Finro are already
well established and extremely aggressive competitors, ... ”.
[138] Wright also testified that it would take three to four years for a new entrant in the
relevant market to develop to the size of Finro.
[139] Gomes expressed a similar sentiment to Wright regarding the fact that sufficient
time is required to become established as a competitor: “ ... with the opening of a
time is required to become established as a competitor: “ ... with the opening of a
brand-new store the most important thing for us would be to establish a market
presence ... our profit and loss and cash flow projections for the next 6 months with
35 A total market size of R2 billion is assumed.36 Letter to the Commission dated 30 January 2009.37 Jumbo, elsewhere in the country, carries similar product lines to Finro.
37
Non-Confidential version
that business would be at best to break even because as a new entrant we have to
pay school fees in that town.”
Actual and potential entry
[140] In contrast to the Commission’s view, the merging parties alleged recent
successful entry into the relevant market by players such as TradeValue and Orient.
However, the evidence showed that TradeValue is not a recent entrant into the
relevant market, and in fact has been active in that market for more than 10 years.
Gomes states: “ Trade Value ... as it stands today in that business certainly is not a
new entrant. Many, many decades of experience and at least 12 years of operating
doesn’t qualify him to be termed a recent entrant.”
[141] Orient, on the other hand, is indeed a recent entrant in the relevant market; it
entered in 2007 and is located in Uitenhage. Gomes testified that Orient is affiliated
with Shoprite Holding’s MegaSave division (a buying group division of Shoprite) and
that MegaSave facilitated its entry. Wright estimated Orient’s current turnover at
R135 million per annum, but the Commission obtained a turnover figure from Orient
for 2008 which is significantly lower than that suggested by Wright. The Commission
did not obtain Orient’s actual turnover for the period January 2009 to September
2009.
[142] However, although Orient’s actual turnover to date is disputed, the available
evidence is clear on the fact that it will become a significant player in the relevant
market in future. In regard to Orient Gomes testified that “ ... they are very
aggressive in pricing”; “I don’t think they have taken much market share from many
people, but if they continue with their current aggressive marketing campaign, I
certainly believe that within the short-term they will be a volume player in the
industry, yes, in that particular area , ...”; “ ... it certainly is going to become a player
industry, yes, in that particular area , ...”; “ ... it certainly is going to become a player
in that industry going forward”; and “... I see them as a future threat”.
[143] As was the case with Orient, buying groups generally speaking may facilitate new
entry in the wholesale grocery market. Gomes summarised the role of buying groups
as follows: “our [UMS’] primary goal is to help independent retailers and help
independent wholesalers compete effectively in the markets that they are serving ”;
and “... the values that buying groups do provide is the access to stock, it is the
access to credit and it is the access to marketing and advertising . ... We do facilitate
38
Non-Confidential version
[the] opening of stores. That is what buying groups specialise in .” He further testified
that UMS assists new businesses with issues such as store layout, the building,
refrigeration, till points and point of sale.
[144] Further testimony, however, revealed that buying groups with an existing
membership in the Port Elizabeth geographical area are unlikely to facilitate the
opening of a new store in the same area in direct competition with its current
member(s). Wright testified that it would be “ pretty silly” and “pretty disloyal” to open
a new trading outlet in the same area where one of Shield’s customers operate as
that would result in the loss of those members as Shield customers. Gomes
expressed the same sentiment: “We [UMS] wouldn’t sign on anybody who competes
with TradeValue ...” and “ If I [UMS] have a member in Queenstown that I’m trading
with, there is very little chance that I would entertain another member trying to join
my organisation”.
[145] The current membership of buying groups in the relevant market is summarised in
Table 6 below (see paragraph 163 below). MegaSave, UMS and Independent
Buying Consortium (“IBC”) are represented in the relevant market. However, Gomes
pointed out that Independent Cash and Carries (“ICC”) does not have a trading
partner in Port Elizabeth and also testified that it “ is a really massive business
representing very, very big players ”. Wright testified that BEC and Elite are also not
represented in the Port Elizabeth area. Therefore, there appears to be some scope
for facilitated entry into the relevant market.
[146] Testimony furthermore revealed that entry into the relevant market by family
owned, independent wholesalers such as Africa Cash and Carry (Gauteng), Kit Kat
Group Cash and Carry (one store in Pretoria), Devland Cash and Carry (one store in
Gauteng North), and Trade Port (one store in KwaZulu Natal) is highly unlikely - even
Gauteng North), and Trade Port (one store in KwaZulu Natal) is highly unlikely - even
in response to a post merger price incentive. This is due to their family orientated
business model, which allegedly is also the cornerstone of their success. In this
regard Gomes testified that “[m]ost of them [family owned wholesalers] are managed
by one family and the family formula has traditionally worked well for people like Kit
Kat and Devland. So that particular formula you can’t replicate totally in Port
Elizabeth, ... a lot of independents in Southern Africa have become very successful
because it is one family committed to driving that particular one business .” It is also
noted that these wholesalers have all been in existence for many years and none of
them have reacted to opportunities in and thus expanded into other geographic
39
Non-Confidential version
areas. In this context Gomes states: “ All these businesses that we are talking about
are between 15 and 25 years old and have been in the same premises for the last
15 to 25 years and their formula is because it is family owned, family driven ...”.
Conclusion
[147] In conclusion, barriers to de novo entry on balance appear to be high; it will take
significant time and expense. However, small scale entry possibly aided by a buying
group does not appear entirely unlikely, although this would not provide effective
competition to the merged entity in the short or medium term, as testified by Right.
Potential entry would thus, viewed in isolation from other evidence, not alleviate
potential unilateral anticompetitive concerns arising from the proposed deal.
Competitive repositioning by rival firms
[148] The other supply-side response that must be considered in the context of this
merger is the ability of existing players in the relevant market to reposition their
offerings to take advantage of the opportunities presented by a hypothetical post
merger price increase. In theory, precisely such a scenario of higher prices may
incentivise a rival firm to reposition itself, and this threat could deter the merged
entity’s price increase in the first place.
[149] Repositioning in this relevant market can take two forms: (i) expansion into grocery
product categories in which a particular firm was not previously present, and (ii) up-
weighting of presence in a grocery product category in which a particular firm is
already active.
[150] The likelihood of repositioning would depend inter alia on the sunk costs
associated with repositioning, as well as the length of time that any such supply
response would take. The higher the sunk costs associated herewith and the longer
it takes, the less likely they are to deter or defeat a hypothetical post merger price
increase by the merged entity.
increase by the merged entity.
[151] The available evidence indicates that repositioning by incumbent firms in the
relevant market by expanding their product categories is an actual pre-merger
phenomenon. Qualitative evidence was provided of incumbent players who were
specialising in a particular product range and who have successfully expanded their
product ranges into other lines. Notably, Springbok has undisputedly expanded from
40
Non-Confidential version
being a wholesaler of fresh and frozen meat and chicken into a broader range of
commodities, in particular maize and flour; and Keens Cash and Carry, traditionally
only a tobacco supplier (i.e. a commodity product supplier), has branched out into a
broader food and confectionary offering. As is clear from Table 2 above, Springbok
has a significant market share in the relevant market of more than 10% (see
paragraph 53 above).
[152] TradeValue is another example of successful expansion in the relevant market. Its
initial entry was facilitated by the Shield buying group and its expansion was aided by
UMS. Gomes testified that TradeValue (and Orient for that matter) “ in the last year
and a half really made tremendous strides ”. Furthermore, notwithstanding Finro’s
strength in cosmetics, TradeValue has managed to introduce cosmetics as part of its
product offering in 2008. TradeValue submits regarding this expansion into
cosmetics that “it has taken us around [...] months to become profitable ”.38 According
to Gomes, TradeValue has also identified opportunities in confectionary and chicken,
which it had traditionally neglected. Gomes furthermore testified that buying groups
assist independent wholesalers and retailers with assessing whether or not it would
be viable to expand into new product ranges, for example the addition of a butchery
or bakery to the business.
[153] As stated above, economic theory predicts that any post merger price increase
may incentivise a rival to reposition its offering so that it is more closely aligned to the
product offering of the merged entity and in that way attract volume away from it.
This could ultimately affect the ability of the merged entity to sustain a likely price
increase, i.e. it could make the price rise unprofitable. There is no substantive
evidence in the instant matter that suggests that the barriers to existing rivals’
reactions (such as the expansion of product ranges) in the context of a price
incentive are prohibitive. To the contrary, the available qualitative evidence indicates
that rival firms have managed to successfully reposition their product offerings pre-
merger and the proposed deal is unlikely to alter that.
Direct supply by manufacturers to retailers
[154] As can be seen from the typical grocery supply chain illustrated in Diagram 1
above, certain producers of grocery products bypass the wholesale channel and
supply products directly to independent retailers. Examples of such suppliers are
38 Correspondence with the Commission dated 13 August 2009.
41
Non-Confidential version
Coca Cola, British American Tobacco (BATSA), ABI, Sasko, Tiger Brands, Simba,
Willards and Alpha-Pharma. This is the analogue of the backward integration
possibility considered under an assessment of buyer power.
[155] This direct supply is significant: Masscash estimates that direct supply by grocery
manufacturers into the relevant market amounts to approximately R600 million per
annum (however, this figure includes some sales to formal retail chains). TradeValue
puts the importance of a number of major suppliers further in context: “ although
there are a huge number of suppliers in SA, only about 10% of them provide
approximately 80% of the wholesale stores’ stock requirements”.39
[156] CBW board meeting minutes 40 confirm this trend of direct supply and reveal that
“big banner members are [...] the big buying organizations. ... businesses like Kit Kat
are able to get the same deal as ICC, etc and are given credit by suppliers
(Suppliers diversifying risk)”. In the same vein the Masscash board minutes 41 confirm
that the “ [...] direct distribution model appears to be having an impact on our [...]
category”.
[157] Gomes testified that membership of a buying group does not preclude a member
from buying directly from manufacturers. He submits that there are many suppliers
whose ranges and market strategy lend itself to not supplying through buying groups
and dealing directly with a trader. This way they extract costs from the system and
achieve the lowest possible selling prices, according to Gomes.
[158] Furthermore, the Commission’s customer survey evidence shows that respondents
(retailers) use the direct supply channel to a significant extent, albeit more for
selected product categories (as detailed in paragraph 160 below):
• 64% of the respondents indicated that they make use of the direct supply
channel;
• 55% indicated that they “ one or more times per week ” buy groceries for their
channel;
• 55% indicated that they “ one or more times per week ” buy groceries for their
shop directly from a manufacturer;
• 27% indicated that they spend more than 25% of their total annual demand
directly with manufacturers; and
39 Meeting of 29 January 2009 between the Commission and TradeValue.40 Meeting of 29 January 2007.41 Meeting of 28 July 2008.
42
Non-Confidential version
• 7% of respondents indicated that they spend more than 50% of their total annual
demand directly with manufacturers.
[159] From a customer size perspective, the available qualitative information suggests
that, because of efficiency and thus cost considerations, direct supply is normally
limited to larger quantities delivered to larger buyers, i.e. direct supply is not a real
option for the small (informal) retailer. However, contrary to this qualitative evidence,
the Commission’s survey evidence indicates that a significant number of smaller
retailers do actually make use of the direct supply channel, although to a lesser
extent than ‘medium’, ‘large’ or ‘very large’ customers: 52% of the ‘small’ category of
respondents make use of this channel, compared to 76% of the ‘medium’, 77% of the
‘large’ and 63% of the ‘very large’ category. In this context Gomes confirmed that a
limited number of manufacturers, for example Simba and Coca-Cola, have very good
distribution systems and “wouldn’t be concerned about delivering 30 deliveries at 20
cases each to little superettes”.
[160] It is important to reflect on the product categories that retailers mostly source
directly from manufacturers. The Commission’s survey results regarding the product
lines that retailers mostly buy directly from manufacturers are summarised in Table 5
below.
43
Non-Confidential version
Table 5 Product categories bought directly from manufacturers
Product category % of 257 respondents42
Non-alcoholic beverages, such as Coke 90
Perishable food products, such as dairy products 52
Tobacco 38
Confectionary, such as chocolates and sweets 21
Commodity food products such as dried produce, frozen chicken,
maize, malt, oil, rice, sugar, wheat
21
Non-edible groceries, such as cleaning materials 12
Toiletries 14
Edible groceries, such as canned food 11
[161] As is evident from Table 5 above, direct supply is clearly more prevalent in some
product categories than in others, although it does extend to all the major product
categories.
[162] Based on the above qualitative and quantitative evidence, it is reasonable to
expect that the merging parties would post merger be cognisant of the seemingly
real threat of direct supply when setting prices regarding the competing lines being
supplied directly by manufacturers.
Buying groups as link between suppliers and independent wholesalers/retailers
[163] As already indicated above, voluntary buying groups, such as Shield, UMS, IBC
and MegaSave, are active in the area of grocery procurement from suppliers on
behalf of their members. The membership of firms in the relevant market of buying
groups is summarised in Table 6 below:
42 257 out of 399 respondents (64%) indicated that they make use of the direct supply channel.
44
Non-Confidential version
Table 6 Buying group membership in the relevant market
Firm Affiliated buying group
Finro Shield
TradeValue UMS
Springbok Wholesalers Shield
Afrisave IBC
Desais (Uitenhage) Shield
Orient MegaSave (Shoprite)
[164] Gomes confirmed that these buying groups serve both independent retailers and
independent wholesalers. TradeValue43 also confirmed the presence and function of
buying groups in the grocery supply chain: “ [t]he independent wholesalers have
formed buying groups which enable them to gain some countervailing power in order
to negotiate better trading terms with suppliers .” The formation of new buying groups
is also expressly articulated in Masscash’s strategic documents 44, which state the
following regarding Shield: “the voluntary buying group model [...] proliferation of new
entrants eg. UMS + ICC resulting in [...] ....”. It, however, also appears from
Masscash’s strategic documents that switching of wholesalers/retailers between
buying groups may be difficult in practice. The Masscash board minutes 45 suggest
that Shield members would be required to use “ the [...] system with deal
management integration, which would add significant buying management
functionality to the member whilst [...]”.
[165] The rationale for buying groups is that it allows independent wholesalers and
retailers to aggregate their demand in order to secure better terms than they would
be able to achieve each acting individually. Physical distribution to the buying group
member is undertaken by the supplier. Buying groups, however, also provide their
members with other value added services in addition to grocery procurement, as
testified by Gomes, and already elaborated on in paragraph 143 above. Gomes
highlighted the fact that the role of buying groups has significantly changed from 20
years ago when they were mostly concerned with prices, products and rebates, to
years ago when they were mostly concerned with prices, products and rebates, to
more advanced value-added services, for example labour management, advertising
and marketing, cost analysis and business development. Gomes further testified that
the vast majority of buying groups pay fixed rebates to their members, although
some of the rebate payouts are subject to the achievement of a particular target. The
buying groups generally take a margin of 1% to 3% for their services.
43 Meeting of 29 January 2009 between TradeValue and the Commission.44 Source: Masscash Strategy Document dated May 2008.45 Meeting of 30 July 2007.
45
Non-Confidential version
[166] Gomes and Noble testified that buying groups typically have minimum thresholds,
such as annual turnover, that members must meet in order to make use of their
services. UMS, for example, focuses on larger customers with annual purchases of
R[...] million and above. However, testimony indicated that other buying groups like
Shield and BEC are more willing to trade with smaller retailers. Shield, for example,
has numerous customers with purchases of less than R500 000 per annum.
[167] The Commission’s customer survey evidence confirms that retailers to some
extent use buying groups. The survey shows the following results:
• approximately 19% (of 399) respondents indicated that they use a buying group
“one or more than once a month” (14% use this channel “once or more than once
a week”; and 5% use it “once or more than one a month but not every week”);
• 15% of respondents buy more than 10% of their total annual demand through a
buying group; and
• 78% of respondents, however, never make use of a buying group.
[168] From a customer size perspective Gomes testified that from a buying group level
small customers are expensive to maintain and that the selection criteria of a new
member start at the turnover of that new member, and extend to the quality,
credibility and risk profile of the member. Gomes also stated that from a UMS
perspective the larger customers specifically are catered for. He further pointed out
that buying group membership is still largely governed (and thus restricted) by the
rules of the manufacturer regarding supply logistics: as indicated above the
manufacturer still physically delivers the products to the member.
[169] The Commission’s survey evidence, however, shows that only 12% of the ‘very
large’ category of respondents make use of buying groups, compared to 19% of the
‘small’ category, 27% of the ‘medium’ category and 28% of the ‘large’ category. In
‘small’ category, 27% of the ‘medium’ category and 28% of the ‘large’ category. In
regard to these results Baker states: “ buying groups do appear to be a significant
source of groceries for what I concede is a small number of customers, mainly in the
medium and large categories.”
[170] In summary, the quantitative survey evidence shows that buying groups are an
option to some 19% of the interviewed retailers who use buying groups “ once or
46
Non-Confidential version
more than once per month ”. It furthermore suggests that it is a more meaningful
source of supply for the ‘medium’ and ‘large’ customers. The low percentage of ‘very
large’ customers that use buying groups (according to the Commission’s survey
results) contradicts the qualitative evidence that many buying groups specifically
target larger wholesale and retail outlets. If the relative size of the customer is a key
factor for making use of a buying group, and that certainly is Gomes’ contention, then
logic dictates that there is no reason why ‘very large’ customers would make less use
of buying groups than ‘medium’ and ‘large’ customers (as per the survey evidence).
Thus, a higher proportion of revenues are likely at stake than that suggested by the
survey evidence.
Large retail as potential constraint
[171] There is general consensus regarding a growing penetration of the large corporate
retail grocery chains in South Africa. As stated in paragraph 6 above, these chains
have created their own distribution centre (warehousing) systems, and the
efficiencies and scale thereof impact the margins and ultimately the prices charged
by them.
[172] Although these large supermarket chains have also started targeting the lower
LSM consumers, it appears from internal Masscash documents that they have
enjoyed limited success in this regard. Masscash states: [w] hilst the major retail
chains are targeting the lower LSM sector they have not been able to develop a
successful small store (R10 – 40m pa) format. Usave, Score, Friendly, Ok formats
are not successful and the sector continues to be dominated by the Independents
and informal traders who typically have a lower cost base and an ownership
mindset”.46
[173] In the context of this acquisition two issues must be considered regarding the role
of the large corporate retail and its potential impact on the pricing conduct of the
of the large corporate retail and its potential impact on the pricing conduct of the
wholesale: (i) direct demand-side substitution, and (ii) indirect demand-side
substitution.
Direct demand-side substitution
[174] Direct-demand side substitution would occur if the independent smaller retailers
could purchase products directly from the large retail stores such as Pick ‘n Pay,
46 Source: Masscash Strategy Document dated May 2008.
47
Non-Confidential version
Shoprite and Spar, specifically when price promotions are offered on certain product
lines.
[175] The merging parties submit that “ to a limited extent, smaller, independent traders
will occasionally source supply from large retailers during particular promotions ”.
However, Gomes contradicted this notion. He testified that retailers typically ban
traders from their stores or limit the amount of goods that the traders are allowed to
purchase. Following Gomes’ testimony, Wright then conceded that in regard to
independent retailers buying so-called “loss leaders” such as Coke from the formal
retail, the formal retailers “... would limit quantities or they would make it difficult ”.
Wright also testified that “... there are not many medium and large size independent
retailers shopping at retail formats. They just aren’t geared up to do it”.
[176] Wright furthermore testified that a “save” differential between the prices of the
wholesale and the large formal retail is between 10% - 12%. He stated: “ Wholesale
pricing must be cheaper than retail by virtue of the fact that their model is a 20%
gross profit mark up and ours [the wholesale] is 10%.” Wright estimated that the
major retail chains on average charge a 10% premium above the corresponding
Weirs price (also see paragraph 106 above).
[177] In conclusion, the available evidence suggests that the purchase of goods by
independent retailers from the large formal retail chains, i.e. direct demand-side
substitution, is not a viable alternative for the merging parties’ customers. On
balance it appears that the large retail chains at best place a ceiling (i.e. maximum
limit) on potential price increases by the wholesale since the large retail is
approximately 10% - 12% higher priced.
Indirect demand-side substitution
[178] In this acquisition context indirect demand-side substitution refers to the potential
[178] In this acquisition context indirect demand-side substitution refers to the potential
constraint placed on the focal product market by the downstream consumers, i.e.
end-consumers. From an end-consumer perspective, the small informal and large
formal retail theoretically could be viable alternatives, depending on a number of
factors, inter alia the income of the individual consumer, the proximity of the informal
and formal retailers (i.e. the convenience of the various locations from a customer
perspective) and the mobility of the consumer, for example the mode of transport
used. Depending on these factors, hypothetically speaking, if the merging parties
were to increase prices post merger, and these prices are in full or in part passed on
48
Non-Confidential version
to end-consumers, the latter consumers may direct their demand away from the
retailer supplied by the merging parties to alternative distribution channels (such as
the large formal retail chains).
[179] The available information submitted by the merging parties shows that the large
retail chains have expanded extensively in the relevant market, such that there is
currently a high density of major retail grocery chains (for example Pick ‘n Pay,
Shoprite and Spar) in the Port Elizabeth region. They submitted a map indicating the
locations of approximately 54 corporate retail outlets in the Port Elizabeth area,
covering effectively all the high density and shopping areas.
[180] The ultimate effect of any indirect demand-side substitution on prices would inter
alia depend on three factors:
(i) the extent to which the smaller independent retailers would absorb any price
increases by the wholesale (which will be largely influenced by the magnitude
of the price increase in the first place, bearing in mind that the margins under
which the independent retailers operate is relatively low47);
(ii) the effect that any pass-through of price increases at wholesale level would
have on the prices of the independent retailers, bearing in mind that
wholesale prices constitute a very significant portion of the final selling price
of the retailers; and
(iii) the effect that higher retail prices would have on the sales of the independent
retailers to end-consumers (this would inter alia depend on the ability of
consumers to switch their purchases to other retailers not supplied by the
merged entity).
[181] Although it could be argued that the merged entity’s own demand is determined by
downstream (i.e. end-consumer) demand, one should be mindful of the fact that
Massmart is already active in the grocery retail market through its hybrid Makro
store, and therefore to some extent in competition with its customers for the business
store, and therefore to some extent in competition with its customers for the business
of end-consumers. Massmart may also expand further into the Port Elizabeth retail
market in future. The merged entity may thus post merger not be entirely concerned
with the downstream demand for its customer’s products.
47 Masscash estimates its customers’ gross margins to be in the region of 25%.
49
Non-Confidential version
[182] Furthermore, for many of the end-customers that traditionally purchase from the
informal retail, the formal retail does not provide a real alternative due to factors such
as the convenience of location, extended hours of trade that the small informal
retailers provide and the limited mobility of many end-consumers, specifically in the
more rural areas.
[183] In conclusion, there is no compelling evidence that the formal retail would pose a
constraint on the merged entity’s post merger wholesale pricing strategy, apart from
the fact that it does place an ultimate ceiling (i.e. maximum limit) on potential price
increases by the wholesale since the formal retail is approximately 10% -12% higher
priced (according to Wright’s testimony).
Efficiencies
[184] Merger-specific efficiencies (in particular reductions in post merger marginal costs)
could in theory potentially offset or at least reduce post merger price increases.
Reductions in incremental costs can offset the incentive to raise prices, since the
merged entity will have an incentive to set a lower price, the lower its incremental
costs. Two issues are crucial to this analysis: (i) whether or not the savings are
merger-specific; and (ii) if the savings are likely to be passed on to customers; as a
general rule only savings that lower the merged entity’s incremental (i.e. marginal)
costs are likely to be passed on to customers (also see paragraph 187 below).
[185] Masscash submits that immediate efficiency benefits could be realised from the
proposed deal by extending the typically higher rebates secured by Masscash to
Finro’s purchase volumes. Competitors of the merging parties such as Metcash and
TradeValue concur with this expected benefit. Metcash is of the view that post
merger Masscash’s “purchasing power from suppliers may increase and they will be
in [a] better position to negotiate prices” .48 TradeValue submits that post merger
in [a] better position to negotiate prices” .48 TradeValue submits that post merger
“Finro would gain the advantage of bulk pricing and more favourable rebate schemes
available to it through Masscash”.49 Gomes also expects cost savings from the
proposed deal: he states “... the costs of good would be lower. Would they realise a
higher rebate margin? Yes, they would ”. Thus, the presence of post merger
purchase cost benefits cited by merging parties appears to be a realistic expectation.
48 Metcash’s submission to the Commission dated 04 March 2009.49 TradeValue’s submission to the Commission dated 30 January 2009.
50
Non-Confidential version
[186] As a quantification of these efficiencies the merging parties submit that “ [a]t best,
the merged entity is hopeful that Finro’s [...]% gross profit may be improved to [...]%
if all efficiencies are realised ”. This implies that the parties expect savings of 1% to
2% of sales. Wright confirmed this in his testimony: “ We believe that there will be
some synergies, but our estimate is that that is going to be between 1% and 1.5%.”
[187] These purchase costs savings equate to reductions in the merged entity’s marginal
costs and are merger-specific. Noble submits that since the merging parties’
expected saving is expressed as being an improvement in gross profit, it is
reasonable to interpret this as being a marginal cost saving. It is generally accepted
that marginal costs savings are more likely than fixed costs savings 50 to be passed
on to customers in the form of lower prices.
[188] However, based on concessions made by the merging parties one can in this case
accept that not all efficiencies will be passed on to customers in the form of lower
prices. The merging parties submit that “[a] significant proportion of that [efficiencies]
is likely to be ploughed back into the business (improving systems, advertising and
refurbishment)”.
[189] The Commission (Oxera) incorporated efficiencies into its economic modelling by
subtracting an estimate of the resulting cost saving, expressed in proportionate
terms, from its estimated price increase. This is calculated for only the standard
symmetrical model (which, as concluded above, is not applicable in this case) and
regrettably not for the asymmetrical model since the calculations in the latter case
are significantly more complex. The Commission, however, submits that “ the results
will not produce a significantly different result as the optimisation incentives are the
same within both model frameworks ”. These results indicate that a 1% efficiency
same within both model frameworks ”. These results indicate that a 1% efficiency
assumption reduces the predicted price increases by 0.5% for both Weirs and Finro
(assuming linear demand). This means that the Commission’s predicted price rise for
Weirs reduces to a totally insignificant 0.1% and for Finro this is 1.5%, without
considering the necessary ‘off model’ corrections for rival responses (also see
paragraphs 120 and 125 above).
Conclusion on unilateral competition analysis
50 Economic theory predicts that reductions in fixed costs, i.e. cost that do not depend on the volume
of the output, will not be translated directly and immediately into reductions in price.
51
Non-Confidential version
[190] Finro is undoubtedly an effective competitor to Weirs and Makro in the Port
Elizabeth grocery wholesale market. This factor and the fact that the market is highly
concentrated post merger must be assessed in the context of the other qualitative
and quantitative evidence, considering inter alia the fact that the relevant market in
question is characterised by substantial differentiation. Post merger there remain
several significant competitors in the relevant market, including three large
wholesalers effectively competing with the merged entity each with market shares
exceeding 10%, namely Metcash, Trade Value and Springbok, as well as four
smaller competitors. It is also important to note that at least one of these competitors,
namely TradeValue, has very significantly increased its market share in the past two
years and has also successfully repositioned itself in terms of its product offering.
Furthermore, there is undisputed evidence that Orient will become a significant
player in the relevant market in the near future.
[191] It is accepted that market shares and concentration levels do not effectively proxy
for the likely extent of sales diversion between parties to a merger in differentiated
product markets, i.e. they are not a reliable indicator of unilateral market power in
differentiated-goods markets. Acknowledging this, the Commission embarked on a
customer survey to determine RDRs and used these ratios together with the gross
margins of the parties’ wholesale outlets to through economic simulation predict the
likely post merger price effects of the proposed deal. This simulation, based on the
asymmetric model and assuming linear demand, shows a weak ability of the merged
entity to increase prices, even when efficiency assumptions are initially ignored. For
Weirs the Commission’s anticipated price increase is an insignificant 0.6% and for
Weirs the Commission’s anticipated price increase is an insignificant 0.6% and for
Finro it is a modest 2%. If post merger efficiencies of 1% are assumed and
incorporated in the simulation, the predicted price increases are reduced by
approximately 0.5%: the Commission’s predicted price rise for Weirs reduces to a
totally insignificant 0.1% and for Finro it is 1.5% (without considering essential ‘off
model’ corrections for rival responses).
[192] As stated above, the Commission’s economic simulation does not allow for ‘off
model’ external supply-side factors, i.e. various potential reactions from incumbent
firms in response to a price incentive, for example competitive repositioning by
expansion of product ranges or enhancing of presence in a specific product
category. Even the Commission’s own economics expert, Noble, had to concede that
there is mixed evidence on these supply-side factors, which could potentially mitigate
a hypothetical substantial lessening of competition.
52
Non-Confidential version
[193] First and foremost it is stressed that the identified potential mitigating factors must
in this case be viewed in the context of weak indications of the merged firms’ post
merger incentive to increase prices. Second, two further points must be stressed in
this case in regard to the potential impact of any mitigating factors and their
assessment in relation to a hypothetical substantial lessening of competition, i.e.
these factors:
(i) need not be viable alternatives for all customers or viable strategies for all
competitors of the merging parties to effectively constrain the incentive to
increase price; and
(ii) need not individually or in isolation constrain the post merger ability of the
merging parties to increase prices, rather their aggregate impact must be
considered.
[194] The available qualitative and quantitative evidence confirms that a number of
constraints are relevant that could collectively mitigate the merged entity’s muted
post merger ability (as per the Commission’s economic simulation) to raise prices.
These are:
(i) the ability of incumbent firms to expand and/or reposition their competitive
offering in response to a price incentive, for example rival firms may reposition
or expand their product ranges. There is clear and undisputed evidence that
this is an actual pre-merger phenomenon in the relevant market. Notably,
Springbok, Keens Cash and Carry and TradeValue have all expanded their
product offerings. There is no evidence that suggests that the proposed
acquisition would alter this ability of rivals to reposition themselves;
(ii) the undisputed evidence of the expected future growth of Orient that is cited
to become a significant player in the relevant market in the near future
(according to the testimony of Gomes);
(iii) the significant direct supply of certain product lines by grocery manufacturers
(iii) the significant direct supply of certain product lines by grocery manufacturers
to grocery retailers, as confirmed inter alia by the Commission’s customer
survey evidence; and
(iv) retailers’ procurement of supplies through buying groups which is a distinct
alternative for the larger retailers, as per the qualitative evidence.
53
Non-Confidential version
[195] In the final analysis it is concluded that, based on the Commission’s simulated
weak ability of the merged entity to unilaterally increase prices post merger, as well
as the considerable collective threat of a number of mitigating factors there is no
basis to conclude that consumers would as a result of this acquisition be worst off,
either from a pricing or service delivery perspective. Based on the available evidence
it is thus concluded that the proposed acquisition is unlikely to result in a substantial
prevention or lessening of competition in the relevant market, either from a horizontal
or vertical perspective.
[196] Although the Commission only analysed the merger in terms of its unilateral effects
in respect of possible post merger price increases this is not the only theory of harm
that required consideration. Largely as a result of internal board minutes that we
received through subsequent requests, the possibility that Massmart might use the
acquisition of Finro to further a strategy of predation against rivals needs to be
considered. Hypothetically speaking, the merged entity could raise barriers to entry
in the relevant market if it had a known predatory reputation or if the merger would
allow it to gain or enhance such a predatory reputation.
[197] According to Masscash’s strategic documents its vision is to “ selectively [...] the
wholesale and distribution sector of the Southern Africa food, liquor, personal care,
Gen[eral] Merch[endise] and cellular markets serving LSM 2-6 consumers,
predominantly through warehouse formats, thereby: being the preferred supplier to
our Customer, [...] each regional market in which we trade . ...”. 51 Although
Massmart’s quoted mere strive for dominance cannot be faulted from a competition
law perspective, when it is read in context with certain other statements contained in
the board minutes the ambition to achieve dominance acquires a much more sinister
hue.
the board minutes the ambition to achieve dominance acquires a much more sinister
hue.
[198] The then chief executive of Weirs and now chairman of the board suggested in
relation to the food market that it “[e] xamine the necessity of establishing a “fighting
fund” to take out competitors ”. He was mapping out “ the way forward for the CBW
core business”.52 He also stated in relation to a Massmart rival firm that “ we have to
force them into a position where they make no money. We cannot allow our
competitors to flourish. Our margins may have to drop to fend off competitors”.53
51 Masscash Strategy Document dated May 2008.52 Minutes of the CBW Board of Director’s meeting of 11 August 2004.53 Minutes of Massmart Executive Committee meeting of 11 June 2007.
54
Non-Confidential version
[199] The above quotes clearly go far beyond “bullish” commercial talk of fierce rivalry
and healthy competition practices. Baker in his testimony conceded that these
quotes are indicative of predatory intent. Wright, however, denied that a predation
strategy had ever been implemented against rivals or that a ‘fighting fund’ had been
constituted. The economists both considered the issue and whilst conceding that
predation was a legitimate issue for consideration, argued that a predation strategy
needed to be public in order to deter rivals. Without evidence that Masscash had a
reputation of engaging in predatory strategies in the past it was unlikely to deter new
entry. It is also not clear whether the merger affords Masscash any more opportunity
to engage in predation than it could pre-merger through Weirs and Makro which it
already controls in the Port Elizabeth area. There is no evidence that Masscash has
engaged in predatory tactics in this area prior to the merger. On this basis there is no
evidence to suggest, despite these unfortunate pronouncements in its minutes that
Masscash is likely to engage in a predatory strategy post merger, as a result of the
merger.
Public interest considerations
[200] The effect of the proposed acquisition on employment and small businesses
(SMMEs) will be discussed below.
Employment
[201] The parties confirmed that there will be no retrenchments of employees as a result
of the proposed transaction. According to the ‘ Memorandum of Understanding’
entered into between the parties, all employees (save for certain existing
shareholders in Finro and family members who wish to retire) will be taken over and
section 197 of the Labour Relations Act, 1995 is applicable to such transfer of
employment. The parties further submit that it is the Massmart group’s intention to
continue to operate Finro as an independent business for the foreseeable future.
continue to operate Finro as an independent business for the foreseeable future.
Therefore, there will be no negative effect on employment as a result of this deal.
Small businesses
[202] The Commission, despite its finding that the proposed transaction is likely to
substantially prevent or lessen competition in the relevant market, concludes that the
said deal would have no adverse impact on small businesses (a very large number
55
Non-Confidential version
of the customers of the merging parties, specifically of Finro, can be classified as
such). The Commission also does not respond to the concerns raised by UMS as
quoted in paragraph 14 above. UMS is specifically concerned about the effects of
certain developments in the sector on the viability of small independent grocery
traders. It states that the large retailers “ took hold of the opportunities now available
to access the markets normally generally operated by the previously disadvantaged
communities. Sadly many smaller house shops, spazas, mobile shops, garage
shops disappeared from the areas”.
[203] In line with the spirit and specific public interest provisions of the Act the potential
effects on small businesses, in this case small retail businesses such as spaza
shops, small superettes and the like, deserve a larger focus in the Commission’s
analysis of potential public interest effects. The Act is unequivocal that “ the ability of
small businesses, or firms controlled or owned by historically disadvantaged
persons, to become competitive” must be considered in merger analysis.
[204] In the above context, it is necessary to reflect on a number of developments that
have changed the grocery sector landscape in recent years and that potentially
directly and indirectly affect the small businesses in this sector. Traditionally, end-
consumers in the lower-end of the retail market have shopped at smaller
independent retail enterprises, the format being that of a typical “spaza” or other
relatively informal traders. More recently, however, the purchasing habits of these
consumers have changed due to increased urbanisation and a broadening of the
middle class.
[205] Furthermore, Masscash’s strategic documents54 identify the expansion of the large
formal retail chains as one of the key challenges to the wholesale sector: it states
formal retail chains as one of the key challenges to the wholesale sector: it states
that there are “[...] growth opportunities as a result of the mature state of the
wholesale industry aggravated by aggressive expansion of the major retail chains
into lower LSM (2-5) markets ”. Minutes of the CBW board meetings mirror this “ ... it
is common cause that the wholesale food sector is under immense pressure (our
traditional customers are being eroded by the expansion of the major retailers into
these areas)” 55 and “ ... our customers are indeed suffering from the formal chains /
suppliers penetrating their catchment areas.”56
54 Source: Masscash Strategy Document dated May 2008.55 Meeting of 01 February 2006.56 Meeting of 03 August 2006.
56
Non-Confidential version
[206] Corporate retailers, such as Shoprite with the Usave concept 57, have identified the
lower segment of the grocery market as a potential growth area. However, as stated
in paragraph 172 above, Massmart questions the general success of these
undertakings. Regarding the Port Elizabeth market Wright testified that 18 new
corporate retail outlets have opened in the last five years targeting the lower LSM
categories.
[207] As stated in paragraph 12 above, the Commission in this case argued that the
transaction would likely result in a substantial lessening of competition, but in stark
contrast thereto foresaw no negative post merger effect on the customers of the
merged entity. Unfortunately the Commission did not in its customer survey make
provision for qualitative questions to the small business owners regarding the likely
effect of the proposed deal on them. The only customer on record with a view
regarding the effects of the proposed transaction expects a pro-competitive outcome
based on the fact that it expects Masscash to post acquisition be more willing to
provide deals to traders than Finro pre-merger (see paragraph 13 above).
[208] In the context of the developments sketched above, it is evident that for
independent retailers to remain in the market and compete effectively with the large
formal retail, they need access to suitable product ranges at competitive prices.
Thus, their ability to remain competitive depends in part on the cost-effectiveness
and distribution efficiencies of the wholesalers who supply them. As stated in
paragraph 187 above, it is generally accepted that marginal costs savings such as
that identified by the merged entity are more likely than fixed costs savings to be
passed on to customers in the form of lower prices (although in the instant case the
evidence is clear that the merged entity will not pass on all identified benefits). Be
evidence is clear that the merged entity will not pass on all identified benefits). Be
that as it may, there is no evidence to suggest that this transaction would have a
significant negatively impact on small businesses in the area.
[209] Regarding UMS’ plea for legislation aimed at the protection of the family owned
businesses in the grocery sector, the Tribunal is not in a position to comment in the
context of this acquisition on the broader policy issue of the desirability of such
legislation.
Conclusion
57 Source: www.shopriteholdings.co.za.
57
Non-Confidential version
[210] Based on the available qualitative and quantitative evidence, there is no sound
basis to conclude that the proposed acquisition is likely to substantially prevent or
lessen competition. Likewise; there is no evidence of public interest concerns arising
from the proposed deal.
Discovery
[211] Although the proposed acquisition is cleared based on a lack of economic or other
evidence of a substantial prevention or lessening of competition, the Tribunal notes
its displeasure and dismay at the lack of full and timely disclosure of relevant
documents by Massmart.
[212] In this case the Tribunal both prior to and during the hearing had to make periodic
requests to Massmart for additional documentation. For example, strategic Massmart
documents revealed that the Massmart Executive Committee (Management Board)
is responsible for various approvals including the “ divisional strategies and new
stores” and the Tribunal had to request these minutes from the merging parties.
Furthermore, when questioning Wright on the issue of a (lack of) motivation for this
deal to the relevant board (which Wright later testified is the Masscash board), the
Tribunal became aware of the fact that it was not in possession of a complete minute
trail. More specifically, the Commission identified a Masscash board meeting minute
of 03 November 2008 that was not discovered and which made specific reference to
the Finro transaction and the fact that “ concerns exist regarding Competition Board
approval”. Subsequently the merging parties during the hearing submitted additional
Masscash board minutes referring to Finro which were not submitted to the
Commission at the time of the merger filing, as well as certain so-called Execucom 58
minutes which also refer to the Finro transaction.
[213] It was further discovered at the hearing that the proposed merger arose not in
[213] It was further discovered at the hearing that the proposed merger arose not in
2007 as presented by the merging parties, but that this merger was contemplated as
far back as 2004. 59 According to Wright’s subsequent testimony Finro rejected this
offer in 2004. The relevant 2004 minutes however also note the reservations of one
of the directors regarding the possible purchase of Finro. Given this said reservation
it is even more surprising that no minuted motivation exists at Masscash board level
for this deal. The Tribunal also notes that the Masscash board meeting minutes have
become extremely terse and perfunctory in its reference to merger transactions.
58 This is the executive committee of Masscash which meets on a monthly basis.59 Minutes of the CBW Board of Director’s meeting of 12 May 2004; the said issue minuted under
‘matters arising’.
58
Non-Confidential version
[214] If merging parties desire the expeditious adjudication by the Tribunal of merger
cases, they must ensure opportune and apt disclosure of all relevant information.
Onus of proof
[215] It has not been necessary in this case to deal with the argument by counsel for the
Commission that the merging parties bear the onus of establishing that a merger
does not give rise to a substantial prevention or lessening of competition. Novel and
interesting as this argument was, we have largely decided this case on the facts
accepted by the Commission’s own witnesses. This case is therefore not one where
it is necessary to decide whether to depart from the practice as set out in the large
merger between the Tongaat-Hulett Group and Transvaal Suiker Beperk 60 where we
held the following in respect of section 12A of the Act:
“... it is for the Commission to establish a lessening of competition; it is for the
parties to establish that the efficiencies sacrificed by an anti-competitive
merger are countervailed by efficiency gains.”
Guidance
[216] Since this is the first contested matter before the Tribunal that involves extensive
economic modelling and customer survey and statistical data analysis (specifically
diversion ratio analysis), the Tribunal deems it necessary (as guidance to future
cases involving survey, statistics and economic simulation evidence) to make a
number of comments regarding:
(i) the use of quantitative economic evidence in merger analysis in general;
(ii) customer survey design, execution and data analysis; and
(iii) the need for supplementary qualitative information in support of quantitative
evidence.
[217] As a general comment, the Tribunal is highly supportive of the (increased) use of
economic analysis in merger cases, supported by expert economic evidence.
Furthermore, well conducted customer surveys can provide very valuable insights
Furthermore, well conducted customer surveys can provide very valuable insights
into the dynamics of a particular relevant market, for example the degree of
competition between rival firms in differentiated-goods markets. This case lays a very
good foundation for the consideration of survey evidence, statistical analysis and the
60 Case no. 83/LM/Jul00, paragraph 100.
59
Non-Confidential version
use of economic modelling tools to predict likely post merger unilateral price effects
as indicator of any incentive to engage in a substantial prevention or lessening of
competition.
Survey and statistical evidence
[218] Customer surveys are unquestionably useful additions to the evidence base in
merger cases; they can provide very meaningful insight into inter alia market
characteristics and dynamics, as well as customer behaviour and preferences,
provided that they are well designed, both in terms of their construction and
subsequent implementation.
[219] Questions in surveys that lead respondents to particular sets of answers or that are
likely to give rise to biases in the responses of respondents must however be
avoided. For example, in this case the Commission’s survey question 30 (the central
question for the determination of diversion ratios) contained an exceptionally long list
of potential responses, i.e. 25 firm names in total, and these names had best not
been read out to respondents to prevent any potential biased responses. The
integrity with which Nielsen conducted the survey pertaining to survey question 30
and subsequently reported thereon to the Commission raises questions.
[220] To provide empirically robust measurements surveys should furthermore be
designed with its intended purpose(s) as key objective. It was abundantly evident in
the instant case that the customer survey was not designed and constructed with a
specific preconceived hypothesis, i.e. with the measurement of conceptually relevant
CDRs in mind, less still RDRs. The statistical experts employed by the Commission
were not aware that this was the intended use of the survey data. Thus, the sample
of respondents contained in the Commission’s survey evidence was not designed to
test the key economic issues in this matter, namely the calculation of RDRs and
test the key economic issues in this matter, namely the calculation of RDRs and
more specifically marginal customer behaviour (i.e. marginal diversion ratio values).
[221] Surveys should also be custom designed having regard for the specific relevant
market(s) under consideration. The validity of survey results as inputs to empirical
economic analysis is undermined when it does not reflect the underlying commercial
or industry realities. To test the reliability of data, an industry or economic sense-
check (in essence a reality or plausibility check against other evidence) is required to
ensure consistency between qualitative information, on the one hand, and
quantitative survey data, on the other hand. If the survey data conflict with factual
evidence, then the survey evidence must either be discarded or valid reasons for
60
Non-Confidential version
such differences must be provided to safeguard the integrity of the survey data.
Questions that are based on implausible hypothetical situations and that are abstract
from any commercial reality in a relevant market, for example hypothetical price
increases of above 25% in the wholesale grocery market (as contained in the
Commission’s survey question 31), must be prevented.
[222] The Tribunal accepts that there is inevitably some uncertainty regarding the
reliability of any survey results; however, although all surveys are to an extent
subject to uncertainties of measurement and interpretation, this does not detract from
their useful contribution to evidence. Statistical data and analysis are case-specific
and therefore the statistical or empirical robustness of sample data must always be
assessed on a case-by-case basis. It is stressed that in this case the Commission’s
customer survey results are not rejected in their totality, rather it was found that
certain definite statistical data were insufficiently robust, i.e. the point estimates of
the RDRs were found to be unreliable given the data stratification that occurred and
the resulting small sample size for the marginal diversion ratio values, as well as the
extreme confidence intervals of the RDRs. However, robust conditions may be
present in other (future) cases under which one could more readily rely on the point
estimates.
Economic modelling
[223] Economic modelling is one step in a multi-evaluation process. Such quantitative
economic analysis supplements and does not obviate, substitute or moderate the
need for contextualised qualitative analysis, focused on a particular theory of harm,
in this case potential unilateral anticompetitive effects and adverse public interest
effects on small businesses.
[224] In the context of supplementary evidence, it is surprising that in the instant matter
[224] In the context of supplementary evidence, it is surprising that in the instant matter
only one customer response (Daku Spar) was obtained outside of the Commission’s
quantitative survey. Large scale, quantitative surveys contracted to third parties
(Nielsen in this case) tend to be rigid in the sense that they do not allow for the
motivation by a respondent of a particular answer or for follow-up questions in the
case of ambiguous responses. The staff of market and media companies like Nielsen
is not trained in antitrust and therefore cannot conduct in-depth interviews relating to
competition issues. In-store, face-to-face, in-depth interviews, including some open-
ended questioning, would have presented possibilities of exploring the breadth of
61
Non-Confidential version
customers’ perspectives, particularly from a public interest (small business)
perspective. Furthermore, the Commission did not obtain detailed responses from
grocery manufacturers regarding their perspectives on the proposed deal’s potential
competitive effects, despite the fact that direct supply by manufacturers is an integral
and significant part of the grocery supply chain. The same lack of representation
applies to buying groups, other than USM, which have an important role in the supply
chain given its wide range of value added services to existing independent
wholesalers and retailers and potential new entrants in the relevant market under
consideration.
[225] Merger simulation models of the type relied on in this matter are static given their
exclusive focus on customers’ demand-side responses, i.e. only two variables are
used, namely RDRs and gross margins. These simulation models do not consider
‘off model’ exogenous supply-side reactions possibly triggered by price incentives,
such as potential post merger rival responses. Factors such as repositioning and
expansion by existing rivals are undisputedly an integral part of the overall analysis
of the likely anticompetitive effects of the merger, specifically in cases such as that
under consideration where repositioning is an actual and significant (pre-merger)
component of the competitive reality. Failure to consider these ‘off model’ factors
would invariably overstate the likely post merger anticompetitive effects.
[226] In the instant case factual details were lacking regarding actual expansion by
former niche players in the relevant market. It is surprising that the Commission did
not obtain more factual details from the former niche players such as Springbok and
Keens who have expanded their product offerings. Information regarding for example
investments made in expansions, the time required to successfully expand and other
investments made in expansions, the time required to successfully expand and other
barriers, if any, encountered by these firms, as well as future expansion plans, if any,
would have been informative.
[227] In situations where third parties such as actual and potential competitors are
unwilling to co-operate with the Commission and provide the needed quantitative
and/or qualitative information, the Commission should not hesitate to utilise the
extensive powers given to it by the legislature to force such person(s) to submit
information (subject of course to appropriate and substantiated confidentiality claims
by the parties submitting the information). Situations should be avoided were
witnesses start speculating about factual information that can, as part of the
Commission’s investigation process, be obtained directly from the party who owns
62
Non-Confidential version
that information, for example turnover information - in this case the “disputed”
turnover figures of Orient.
[228] Lastly, economic modelling should not mechanically follow a formulaic approach
without an assessment of the relevance of underlying assumptions, for example
linear versus isoelastic demand assumptions in economic simulation. No evidence
was provided in the instant matter in support of the presence of isoelastic demand
conditions and therefore the Commission’s economic simulation based on this
assumption had to be disregarded by the Tribunal.
___________________ 30 November 2009
A Wessels Date
Tribunal Member
N Manoim and M Mokuena concurring
Tribunal Researcher : J Ngobeni
For the merging parties : Adv J Wilson instructed by Cliffe Dekker
For the Commission : Adv V Ngalwana SC
63