The merger between Imerco/Inspiration Copenhagen Economics Breakfast Club. Jacob Borum, Assistant Head of Division MTF - 10.

Transcription

1 The merger between Imerco/Inspiration Copenhagen Economics Breakfast Club Jacob Borum, Assistant Head of Division MTF November 2017

2 Outline 1. Parties and the transaction 2. Relevant market 3. Assessment 4. Remedies 5. Trustee 6. Points of interest

3 1. Parties and the transaction

4 The parties and the transaction The Acquirer The Seller 153 stores + web shop Products: Housing articles The Target 45 stores + web shop

5 2. Relevant Market i. The parties view ii. Market investigation (collection of data) iii. Legal and economic context iv. DCCA analysis

6 The parties view

7 Market investigation (collection of data) Suppliers Questionnaires and meetings - Trading conditions Competitors Questionnaires and meetings - Turnover and market shares - Specificities of the market Customers Consumer survey (Incentive and Wilke) About 2000 replies Store survey 404 replies, 12 stores in 5 areas - Closeness of competition - Competitors - Travel distance

8 Legal and economic context A tool to identify and define the boundaries of competition between firms The main purpose of market definition is to identify in a systematic way the competitive constraints that the undertakings involved face Commission Notice on the definition of relevant market, para 2

9 DCCA analysis The DCCA analyzed Replies to questionnaires etc. Prices Range of products Diversion ratio

10 Prices it is difficult for supermarkets in Denmark to sell [housing article] products within the higher price points. These more expensive products are better sold in specialist stores. Fiskars Average realized prices - kitchenware There is also a difference between the price points in the supermarkets and in the specialist stores, and to the customers' expectations of the breadth in the range of products Dansk Supermarked

11 Range of products Amount of brands - kitchenware Product numbers - kitchenware

12 Diversion ratio Diversion ratio from Inspiration Diversion ratio from Imerco

13 Prices combined with Diversion ratio Kitchenware Average realized prices Diversion ratio from Inspration to other retailers

14 Conclusion Based on the investigation: Retail sale of mid-range/highend housing articles Considered the following further segmentation Product category: (i) Kitchenware, (ii) Table setting, (iii) electrical appliances and (iv) other housing articles Sales channel: physical stores and web shop Left further segmentation open

15 3. Assessment i. The counterfactual scenario ii. Market shares and HHI iii. Diversion ratio iv. Upward Pricing Pressure (UPP) v. Illustrative Price Rise (IPR) vi. Market response (dynamic effects) vii. Local effect viii. Efficiencies

16 The counterfactual scenario In assessing the competitive effects of a merger, the Commission compares the competitive conditions that would result from the notified merger with the conditions that would have prevailed without the merger In most cases the competitive conditions existing at the time of the merger constitute the relevant comparison for evaluating the effects of a merger. However, in some circumstances, the Commission may take into account future changes to the market that can reasonably be predicted (Guidelines on the assessment of horizontal mergers, para 9)

17 The counterfactual scenario Inspiration argued: [x] physical stores would close absent the merger The DCCA focused on: 1. Whether the stores would exit the market in the foreseeable future absent the merger 2. Whether there was no alternative buyer causing less competitive harm The DCCA was not convinced => status quo

18 Firm Market share(pct.) Market shares and HHI Merging parties combined [30-40] Imerco [20-30] Inspiration [5-10] Kop & Kande [10-20] Magasin [5-10] Online retailers [5-10] Market share and HHI are less suitable as an indicator of market power in markets with differentiated products Elgiganten [5-10] Din Isenkræmmer [5-10] Bahne [0-5] Others [20-30] Total turnover (mio. DKK.) HHI before [ ] HHI after [ ] Delta HHI [>300]

19 Diversion ratio economic context Measures how large a part of a firm s loss resulting from a price increase is gained by another firm Market definition agnostic Price increase question vs. closed questions

20 Diversion ratio legal context a merger between two producers offering products which a substantial number of customers regard as their first and second choices could generate a significant price increase. Thus, the fact that rivalry between the parties has been an important source of competition on the market may be a central factor in the analysis (Guidelines on the assessment of horizontal mergers, para 28)

21 Diversion ratio - analysis Diversion ratio from Inspiration [40-50] pct. Diversion ratio from Imerco [30-40] pct.

22 Upward Pricing Pressure (UPP) Indicates whether the merger will give the parties an incentive to increase or decrease prices but not by how much Market definition agnostic Input: diversion ratio, gross profit, efficiency gains and the relative price relationship

23 Upward Pricing Pressure (UPP) Min. size of efficiency gains to compensate for UPP 1. Inspiration [30-40] pct. 2. Imerco [20-30] pct. Merger related efficiency gains: 1. Inspiration [0-5] pct. 2. Imerco [0-5] pct.

24 Illustrative Price Rise (IPR) Calculate the amount of an estimated price rise as a result of a merger Market definition agnostic Input: same as UPP + assumptions of demand

25 Illustrative Price Rise (IPR) Assumptions of demand: linear demand curve in a model with asymmetrical firms Expected average price increase after the merger: 1. Inspiration [10-20] pct. 2. Imerco [10-20] pct.

26 Market response (dynamic effects) Limitations of UPP and IPR: static methods Do not take into account the response of other firms Importance of dynamic effects: Response of other firms may counteract negative effect of the merger

27 Market response (dynamic effects) Economic theory: In a market with differentiated products it will typically be profit-maximizing for competing firms to raise prices if the merger firms do so Market investigation indicated that it is Imerco and Inspiration that primarily initiates price promotions the other specialist stores largely follows the pricing initiatives enacted by Imerco and Inspiration

28 Local effects: When is it relevant? Some competition parameters set locally: Local promotions, service, range of products and opening hours (ability) Location is important for the customers according to the consumer survey (incentive) => Relevant to consider local effects

29 Analysis Screening Local effects: Method 1. Demarcation of geographical area around each store where local effects may occur 2. Identification of overlaps between the parties 3. Identify number of competitors (excluding the merging parties) within these areas 4. Identify areas with too few competitors 5. Analyze these risk areas

30 Local effects: Result of analysis Screening: likely significant restriction of competition in a number of local areas Analysis - store survey (5 areas, 12 stores, 404 replies): Insufficient observations to identify areas Not necessary in light of the remedies Sufficient observation to Confirmed high diversion ratio Confirm that distance is an essential factor

31 Local effects: Importance of distance

32 Efficiencies Economic context: Efficiencies may offset negative effect of merger Only variable costs Legal context: 1. Verifiable 2. Benefit the consumer 3. Merger specific The parties has the burden of proof

33 Efficiencies Parties efficiency claims relates to: (i) inventory management (ii) staff (iii) rent and operation (iv) marketing and (iv) administration Only (i) inventory management relates to variable costs UPP and IPR take account of efficiencies Conclusion: Not sufficient even with fixed cost efficiencies

34 4. Remedies i. Legal framework ii. Process iii. Final Proposal iv. Assessment of proposal

35 Legal framework Remedies must remove the harmful effects of the merger KL 12 e (1) and 12 c (2) Distinction: structural and behavioral remedies DCCA prefers structural remedies

36 Process First proposal (23/5 supplement on 12/6) Market test of proposal Suppliers and competitors Investment advisors Second and third amended proposal (21/6 and 25/6) Fourth amended proposal (27/6) Final proposal (8/8/17)

37 Final proposal Structural 20 of the 45 stores are transferred to the seller (3C) Behavioral Establish [x] new stores Financial guaranties (equity, marketing, rent obligations etc.) Web shop Trustee

38 Assessment of proposal New concept must be a viable business 3C must be a suitable purchaser Sufficient to offset significant impediment to effective competition

39 5. Trustee

40 Trustee Monitors the implementation of the remedies on behalf of the DCCA Significant powers of inspection Reports to the DCCA on a regular basis

41 6. Points of interest

42 Points of interest Unilateral effects: Moderate combined market shares very high diversion rates! Diversion ratio measured three ways (consumer survey, customer club members and store survey) => similar results The relation between diversion ratio and distance

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