APPENDIX B Key aspects of the economic analysis for Stage 1 of the local competitive effects methodology Part 1 Introduction 1. Stage 1 of our local competitive effects methodology involves identifying a local market in which to apply a screening rule. The local market has a product-market dimension (ie which fascias and sizes of store compete with each other) and a geographic-market dimension (ie how wide their customer catchment areas are). This appendix summarizes four key aspects of the economic analysis undertaken at Stage 1. 2. Our findings are that: • the product market used at Stage 1: — should not include the LADs, ie Aldi, Lidl and Netto, nor Marks & Spencer; but — should include all stores of 280 sq metres (3,000 sq feet) or more (including one-stop shops); • the geographic market used at Stage 1 should use 5-minute drive-time isochrones for urban stores and 10-minute drive-time isochrones for rural stores; and • in circumstances where an acquired store’s local market share was higher pre- merger (ie where it appears to have faced less competition) its margins also tended to be higher, especially in rural areas. A corollary of this result is that the local markets for which acquired stores’ market shares have been calculated by Somerfield may be relevant markets, especially in rural areas. 3. The remainder of this appendix is organized as follows. Part 2 reports the results of an analysis of the impact on Somerfield and Kwik Save sales of the opening of various competitor fascias, which helps to define the product market (ie which competing fascias constrain Somerfield and Kwik Save). Part 3 reports the results of an analysis of NOP’s survey results and how much customers spend at Somerfield, which also helps to define the product market (ie which sizes of store compete with each other). Part 4 reports the results of an analysis of Somerfield customer loyalty card data and NOP’s survey results on how far customers travel to Somerfield stores, which helps to define the geographic market (ie how wide is a store’s catchment area). Part 5 reports the results of an analysis of pre-merger margins over direct cost at the acquired stores and their local market shares, which helps to define both the product and geographic markets, and helps assess the degree of competition removed by the acquisition. There is a technical annex. Part 2 Product market definition: competitor opening impact analysis 4. Somerfield submitted that, in assessing competition in local grocery retail markets, account must be taken of all competing fascias including LADs (ie Aldi, Lidl and Netto), Marks & Spencer and the symbol groups (eg Londis, Spar). Somerfield also provided an analysis of the impact on Somerfield, Kwik Save and Gateway sales of B1 competitor store openings.1 The data underpinning Somerfield’s analysis may also be used to assess whether the LADs and Marks & Spencer should be included in the set of effective competitors.2 This section uses regression analysis of that data to help assess whether the LADs and Marks & Spencer may be considered part of the appropriate competitor set. 5. We note that there are two aspects to product market definition in our inquiry: which sizes of store compete effectively with each other and which fascias compete effectively with each other. This section deals with the latter, which we refer to as the ‘competitor set’. 6. The results of our analysis suggest that: • For both Somerfield and Kwik Save, the competitor fascias that had the biggest impact on sales when they opened in the area were Morrisons (including Safeway), then Tesco, then Asda. The opening of an Aldi, Lidl or Marks & Spencer had a significantly smaller impact on sales, implying that they may not be part of the competitor set. • The impact on sales of a competitor store opening was greater for Somerfield stores than for Kwik Save stores (by [] percentage points, on average) and the relative effects of different competitor fascias (and other factors) also varied depending on whether the affected store was a Somerfield or a Kwik Save. This is significant because, although our results for Somerfield and Kwik Save are similar (eg both appear to suggest the LADs and Marks & Spencer could be excluded from the competitor set), they are not identical. Any differences in their respective competitor set raise the issue of whether Somerfield’s competitor set should be some union of our results for Somerfield and Kwik Save. 7. Two caveats to our results, which concern the data, are in order, however: • Somerfield has measured the impact on its stores’ sales by comparing two months’ trading figures after the date of opening of the competitor store with an equivalent two months’ trading figures before the date of opening of the competitor store, both periods being within six months before or after the date of opening of the competitor store—when the sales impact according to Somerfield is usually stabilized—and at a distance of 8km or less.3 Somerfield submitted that its impact measure reflects the commercial reality of its defensive investment and marketing decisions.4 • Somerfield has not been able to provide us with the number of stores in an area prior to the competitor fascia opening, nor whether the opened fascia is a new- build or an acquisition, both of which may affect its impact. 8. Our results are summarized in Figure 1, which shows the fascia-specific effect of each competitor’s store openings, holding constant other things that might affect 1Somerfield submitted this as evidence that the major multiple grocery retail chains (MMGRs)—and especially their one-stop shops—constrain its mid-range supermarkets. 2Somerfield’s competitor impact data cannot be used to help assess whether the symbol groups may be considered part of the competitor set, however, because their openings are not recorded in the data. 3We suspect this may affect the impact of competitor store openings in rural areas more so than in urban areas because customers tend not to travel more than 8 km in urban areas. We do not know which competitor store openings are in urban and rural areas in Somerfield’s data, so we have been unable to explore this point. 4Further, Somerfield submitted that, for nine of the affected stores, the sales impact at two months differed in absolute terms from the sales impact after one year by only three percentage points on average. B2 Somerfield and Kwik Save sales.5 That is, the results summarized in Figure 1 control for the size of both the affected Somerfield or Kwik Save and the size of the competitor store opened, as well as the drive-time from one to the other, macro- economic factors (ie movements in the business cycle and regional differences in, for example, income) and whether there are multiple openings of competitor stores in the catchment area of each Somerfield or Kwik Save. FIGURE 1 Estimated effect (per cent) on Somerfield and Kwik Save sales two months after competitor fascia openings Panel A: effect on Somerfield sales Panel B: effect on Kwik Save sales [] [] Source: CC calculations on Somerfield data. Notes: Number of openings per fascia in parentheses. Fascias with statistically significantly different effects to Tesco (in Panel A) and Asda (in Panel B) in bold. 9. The estimated effects of various competitor fascia openings on Somerfield sales appear, from Panel A in Figure 1, to organize themselves into two distinct groups: • fascias (in bold) with a sales impact statistically lower than that of Tesco, including two of the LADs (Aldi and Lidl, but not Netto) and Marks & Spencer (with an impact averaging [] per cent), as well as Budgens and Co-op (with an impact averaging [] per cent); and • fascias with a sales impact not statistically different from that of Tesco, including Waitrose, Netto, Asda, Sainsbury’s, Morrisons and Safeway, averaging [] per cent. (Plausibly, one might argue that this group could be further divided into Waitrose and Netto, averaging [] per cent, and Sainsbury’s, Asda, Morrisons and Safeway, averaging [] per cent. However, the estimated effects of Waitrose and Netto are not statistically different from Tesco, although they are quantitatively different.) 5The individual fascia effects underlying the results in Panel A of Figure 1 are estimated relative to Tesco and Asda in Panel B, although they are expressed in Figure 1 in absolute terms for ease of interpretation. B3 10. A similar picture emerges for Kwik Save from Panel B in Figure 1 where competitors appear also to organize themselves into two distinct groups:6 • fascias (in bold) with a sales impact statistically lower than that of Asda, including Marks & Spencer, Co-op, Lidl, Aldi, Waitrose and Sainsbury’s with an impact increasing sales by [] per cent on average;7and • fascias with a sales impact not statistically difference from that of Asda, including Iceland, Tesco, Morrisons and Safeway (averaging [] per cent). 11. The remainder of this section is organized into results and analysis. Results 12. Somerfield submitted that the LADs should be included in the competitor set partly because of [] Somerfield stores in the data described below that were affected by a Lidl store opening; [] have subsequently closed. 13. To assess this claim, we analysed data submitted by Somerfield on the impact of [] competitor store openings of 18 fascias from March 1998 to November 2004 on Somerfield sales. We also looked at the impact of [] competitor store openings of 14 fascias from April 1998 to August 2004 on Kwik Save sales8 using regression analysis to control for the size of both the competitor fascia opened9 and the affected Somerfield or Kwik Save, the drive-time from one to the other, the date the competitor fascia opened (to control for business-cycle movements in the macro economy), regional effects (eg differences in income) and whether there are multiple competitor fascia openings in the area in the time period.