Norwegian Retail Mergers

Association of Competition Economics, 18 November 2011 Session 3b: Merger control – local vs. national markets (Norway)

Norwegian retail mergers

Harald K. Selte Senior Economist Bugge, Arentz-Hansen & Rasmussen law firm, Oslo 18 November 2011

#2452413 1. Norwegian merger control

2. Three Norwegian retail mergers

3. Conclusions

2 Norwegian merger control – some highlights

• Very low notification thresholds in Norway ◦ From 1.5.2004 – 31.12.2006 • Combined > NOK 20m (~ EUR 2.5m) • At least two parties > NOK 5m (~ EUR 0.6m) ◦ From 1.1.2007 • Combined > NOK 50m (~ EUR 6m) • At least two parties > NOK 20m (~ EUR 2.5m) • Still significantly lower than our neighbours • Norway one of the “usual suspects” when screening jurisdictions • +/– 400 notifications annually ◦ Protection of competition in local or narrow markets clearly stated as a background for the low thresholds • However no interventions in “pure” local concentrations so far ◦ If EU dimension: Norway covered by the Commission’s jurisdiction • Objective test ◦ “Create or strengthen a significant restriction of competition” • Deviates from SIEC/SLC test in that (it may be argued that) it should be intervened even in marginal changes in concentration where competition is found to be significantly restricted pre-merger ◦ Total welfare standard – at least in principle • Active enforcement ◦ 16 interventions and 6 prohibitions by the NCA since the current law came into force in 2004

3 1. Norwegian merger control

2. Three Norwegian retail mergers

3. Conclusions

4 3 recent retail mergers (and 1 asphalt merger)

• Daily consumer goods: REMA 1000 Norge / Lidl Norge • Acquisition of Lidl’s entire business in Norway following Lidl’s decision to withdraw from the Norwegian market • Retail sales of consumer goods

• Book retailers: Norli / Libris • Merger between two major specialist retail book chains • Vertically integrated

• Retail fuel sales: Norske Shell / assets of YX Energi Norge • Long-term lease agreement regarding infrastructure for retail fuel sale at a number of YX’ sites in Norway • Store sales not included in transaction • Notified also in Sweden and Denmark; no intervention

• Asphalt merger: Lemminkäinen / Mesta Industri

• Focus on the retail mergers

5 Some issues to consider

• Micro-focus on local markets ◦ No general method of market definition, each local market defined according to local characteristics ◦ Effects on competition analysed in detail in each market ◦ In contrast to the European Commission’s approach in similar markets • National markets • Aggregation of effects in a range of local markets to effect on national market

• Wide range of theories of harm applied in local markets ◦ Unilateral effects • Dominance (even if term not used) • Unilateral effects below dominance, closest competitor within defined local market ◦ Coordinated effects • In context of multi-market contact ◦ In contrast to the Commission approach • General approach to unilateral effects based on cross section studies • No attempts to analyse each affected local (sub-) market in detail

• Mild remedies ◦ In contrast to Commission approach

6 Daily consumer goods merger: REMA 1000 / Lidl Norge (2008)

• Lidl entered Norwegian market for daily consumer goods in 2004 ◦ 50 stores operating at time of transaction ◦ Hard discount profile • Generally not considered as a success at the time of the transaction ◦ Exit • Lidl remaining in the market was not the alternative situation • The transaction ◦ REMA 1000 acquired all Lidl stores + warehouse facilities • REMA 1000 established in the soft retail segment; the largest chain in the Norwegian market • REMA 1000 (also) part of Reitangruppen ◦ Lidl brand phased out quickly after completion • Stores rebranded to REMA 1000 or used for other purposes

• No dispute regarding product market ◦ Notification: • Daily consumer goods • All segments from mini markets to hyper stores in the same segment • Convenience retailing (where Reitangruppen is a leading player) not part of the market ◦ NCA agreed

7 Daily consumer goods merger: REMA 1000 and Lidl close substitutes within product market?

• The discount segment is relatively large in Norway ◦ Not as clear-cut as the hard discount profile of Lidl • Branded products • More SKUs • Increasing focus on fresh food

• REMA 1000: REMA 1000 and Lidl were not each others closest competitors ◦ Other soft discount chains closer competitors to REMA than Lidl ◦ Nielsen’s consumer survey: • High general preference for REMA 1000; number 2, among super markets • REMA 1000 best score among discount chains on parameters like quality, choice and service • REMA 1000 and the discount chains in general are challenging the supermarkets ◦ Fresh food ◦ Service ◦ Big shopping • Lidl scored substantially worse than REMA on most parameters, also on price ◦ Relevance given Lidl’s decision to leave Norway?

8 Daily consumer goods merger: Geographic market definition

• Notification: ◦ Market has both a national and a local dimension ◦ National market: • Competition between chains • Strategy, concept development, advertising • National pricing • National price comparisons in media • Knock on-effect ◦ Local market for the single consumer ◦ Not necessary to define market • No negative effects to competition under any possible market definition • NCA ◦ Local markets • Refers to ◦ UK: CC Market investigation 2008 ◦ Commission: REWE/Delvita (COMP/M.4590) • No general definition of the size of the local market; must be assessed in each case • Acknowledges possible “national dimension” in market definition, but no further investigations • Market data for national, regional and local level presented during the NCA’s investigation ◦ Modest market shares at national and regional level

9 Daily consumer goods merger: Daily consumer goods: Umbrella chains and concepts Lidl; 1,5 % Smart Club; 0,8 %

Coop Marked 3,6 % REMA 1000 Coop Coop Obs! 5,2 % REMA 1000 17,3 % 23,8 % 17,3 % Coop Prix 7,3 %

Coop Mega 7,7 % Kiwi 11,5 %

ICA Maxi

ICA Super 3,9 % Meny 8,6 % ICA Nær NorgesGruppen 3,9 % 39,2 % ICA Norge Rimi 6,9 % Spar 17,4 % 6,7 % Bunn- Andre Joker pris Ultra 3,1 % 3,3 % Source: ACNielsen

10 Daily consumer goods merger: Modest concentration by county

40 % Incl. Smart Club Råde 30 % 27 % 26 %

20 %

10 %

0 %

REMA 1000 Other (Smart Club, Lidl) Source: ACNielsen, dagligvarerapporten 2008

11 Daily consumer goods merger: Local markets: Some markets with high combined market shares

• Iterative process: ◦ Scope of investigation narrows as NCA “closes” markets where there are no concerns – lots of maps presented to the NCA, e.g. 15 min driving from Lidl site ◦ Only two markets with combined market share > 40% within 15 min driving ◦ Only two markets where only 3 players present post merger within 15 min driving ◦ Remedies offered early ◦ Most expedient merger decision with intervention ever in Norway • NCA: Intervention related to one local market: Nordfjordeid ◦ Post-merger market share [45-55%], HHI 3873 ◦ Access to suitable premises significant barrier to entry ◦ No buyer power ◦ Effects in other local markets not discussed • NCA (normally) only presents its analysis when it intervenes • Norfjordeid a small and isolated area ◦ Population within 15 min driving about 5000 – no knock-on • Remedy: ◦ Offer one of the two properties in Nordfjordeid to a competitor not present in the local market at market conditions by sale or lease ◦ The competitor given the offer was not interested; property remained with REMA 1000 ◦ One of the stores subsequently closed, currently only one REMA 1000 in Nordfjordeid

12 Daily consumer goods merger: Contrast: REWE/Meinl (IV/M.1221), REWE/ADEG (COMP/M.5047)

• In both REWE/Meinl and REWE /ADEG the commission defined national markets for daily consumer goods in Austria ◦ Local markets (20-30 min) but knock-on effect ◦ In contrast to Czech Republic where the Commission defined local markets (20-30 min driving) in REWE/Delvita (COMP/M.4590) • Competition analysis in REWE/ADEG still at local level ◦ No direct negative effects at national level found • Merger simulation presented by competitor Spar showed only marginal upwards pressure on prices and dismissed by the Commission ◦ Effects in national market still found through aggregation of local effects into national level • Necessary to look at effects in local market to see if these aggregates into negative effects in the national market • The Parties’ market position in 121 local political districts examined ◦ Not assumed to approximate local geographic markets • 24 “critical areas” identified: ◦ Pre-merger market share > 45% and increase ◦ Pre-merger market share 35-45% and increase > 5% • Divestment remedy related to critical areas

• Clearance decision brought into General Court by competitor Spar (case T405/08); still pending

13 Book shop merger: Norli / Libris (2011)

• Merger between two of the major Norwegian book shop chains ◦ Norli, owned by publisher Aschehoug ◦ Libris, owned by daily consumer goods giant NorgesGruppen • Narrow markets defined ◦ Product market • Specialist bookshops only ◦ Distant sales (book clubs, Internet) excluded ◦ Alternative retail channels (e.g. supermarkets) excluded ◦ Niche retailers (e.g. academic, religious) excluded ◦ Geographic market • Both national and local market defined • Local market from a demand point of view • National market: ◦ Market largely organised in national chains ◦ Pricing, selection and service level partly determined on national level – differs between the chains • Local market inspired by OFT and CC in HMV/Ottakar (2006) ◦ 1 mile (1609 m) radius • No exact radius defined by NCA • Extension of local market to be assessed from market to market dependent of local conditions ◦ Population centres ◦ Localisation of malls relative to city centres ◦ Extremely detailed assessment of market definition in the seven markets analysed

14 Book shop merger: Norli/Libris: Trondheim city centre market

Byåsen (4 km) Excluded

City Lade (3.5 km) Excluded

KBS senteret (3+ km) Excluded

Valentinlyst (3.4 km) Excluded

Moholt City Syd (4.2 km) (9 km) Excluded Excluded All information from NCA decision

15 Book shop merger: Focus on local markets

• Effects in national markets not discussed ◦ Possible issues not discussed • Horizontal: National competition between chains; merger between two of 4-5 national chains • Horizontal: Between book shops and other distribution channels controlled by owners • Vertical: Between publishing and retail sales • Seven local markets studied in detail ◦ Focus on substitutability between local alternatives • Size: One-way substitution; shops with large assortment and turn-over substitute to smaller shops but not opposite ◦ On what grounds? • Closeness: Distance between alternatives • Local market shares ◦ High entry barriers at local level • Access to suitable premises restricted • Irreversible costs ◦ Example Trondheim, Norway’s third largest city • Market shares • Assessment

16 Book shop merger: Pre-merger: «Moderate selection» Competition significantly restricted 10-20 %

«modest selection» 0-5%

220 m Intervention:

These are «less good • Competition restricted pre- «wide selection» «wide selection» Norli and Libris substitutes» to Ark 20-30 % merger and the parties’ city 5-10 % «particularly close book shops 130 m substitutes» to each other • Merger between particularly close substitutes

0-5% ◦ The parties’ stores in 190 m Dronningens gate 350 m “particularly close substitutes” «very wide ◦ Non-empirical diversion ratio selection» No «satisfactory 30-40 % analysis? substitutes» to this due its wide selection and high ◦ Relevance of the selection «Moderate selection» turn-over criterion? 10-20 % (dominance???) • Divestment remedy

All information from NCA decision

17 Book shop merger: Norli/Libris: Trondheim city centre market

Local market?

18 Book shop merger: Contrast: Advent / EMI / WH Smith (IV/M.1112) and Egmont / Bonnier (Denmark) (COMP/M.4611)

• Low entry barriers: ◦ “There are moreover indications that entry, even on quite a large scale, does not face significant barriers.” ◦ “But the cost of acquiring such sites is likely to be largely or fully recoverable on exit, making ‘sunk’ costs – generally regarded as the most important physical entry factor – relatively low.” IV/M.1112 – ADVENT INTERNATIONAL / EMI / WH SMITH, ¶ 18 • Product market including all distribution channels: ◦ “Furthermore, the market investigation did not bring forward any element on the basis of which a distinct ‘distant sale’ market, including book clubs, mail orders and sales via Internet, could be identified within the overall market for the sale of books to final consumers. Rather, some replies indicated that, in Denmark, different sales channels, in which also the sales through supermarkets should be included, can be considered as part of one single market for sale of books to final consumers.” COMP/M.4611 – EGMONT / BONNIER (BOOKS) , ¶ 13 • National market: ◦ “The market investigation confirmed that the geographic scope of the above markets can be considered national within all the book groups along the entire value chain. Therefore, for the purpose of the present case, all relevant markets are considered to be national in scope.” COMP/M.4611 – EGMONT / BONNIER (BOOKS) , ¶ 21

19 Retail fuel merger: Norske Shell / assets of YX Energi, 2008

• Both parties active within retail fuel sales in Norway

• The transaction: ◦ Long-term lease of fuel supply infrastructure at 92 previous YX- stations across Norway ◦ Store sales remained with YX which belongs to Reitangruppen; a major Norwegian player in both the daily consumer goods and the convenience retail/kiosk market ◦ Stores at affected stations to be rebranded to 7-Eleven; fuel sales under the Shell brand

• No reduction in the number of players at the national level: ◦ YX remained in the retail fuel market both through a chain of automated petrol stations (branded Uno-X) and a chain of independent manned stations (YX) ◦ But shift in market shares (petrol) Shell YX/ Uno-X Statoil Esso Other 2007 25.2% 19.5% 29.6% 21.1% 4.6% 2009 27.4% 13.2% 32.8% 21.6% 5.0% Source: Norsk Petroleumsinstitutt

20 Retail fuel merger: Market definition

• Product market: Forecourt sales of fuel (retail) ◦ Petrol and diesel in same (retail) market ◦ Motorway sales included in relevant market • Few motorways in Norway • No significant price difference ◦ NCA agreed • Geographic market ◦ The notifying party: National market • Knock-on effect • National competition parameters ◦ NCA • Price correlation studies indicates local markets ◦ NCA collected price data from all chains ◦ Price correlation across chains within a local area bigger than correlation between members of a chain across areas ◦ Indicates that national pricing policies within chains are not traceable at local level • Size of local markets ◦ How long would a price sensitive consumer drive to avoid a 5-10% price increase • 18 km, not counting time cost ◦ Amount of through traffic: Markets bigger when the amount of through traffic increases ◦ Local markets must be defined based on the specific circumstances in each market

21 Retail fuel merger: NCA’s market definition in intervention markets Correlated E6 • Focus on narrowing down the scope during process ◦ Iterative process ◦ Maps ◦ Characteristics of markets under investigation Less • Traffic correlated 10 km • Localisation • NCA ◦ Distance (18 km radius) ◦ Correlation studies based on data collected from FÅVANG oil companies ◦ Absolute price differences Correlated • Fåvang – population: 688 (2011) ◦ 2 to 1 situation ◦ Correlation among YX and Shell at Fåvang Different absolute E6 ◦ 18 km circle includes neighbouring Ringebu price level • YX Ringebu not in the scope of the transaction ◦ Correlation study indicated Fåvang as a separate market 19 km • Higher correlation between Fåvang stations than between areas Tretten ◦ Distance and price difference indicated Fåvang separate from Tretten ◦ Amount of through traffic not sufficient to include neighbouring areas – even if located at the E6 main route

22 Retail fuel merger: NCA’s market definition in intervention markets

• Egersund in south-west Norway • Population: 10,749 (2011) • 18 km radius around Egersund includes station in Helleland outside central Egersund ◦ Helleland also in the scope of the transaction HELLELAND • Correlation in prices between Helleland and Egersund • Helleland station included in Egersund market • Also separate market for the Helleland station ◦ Correlated with other stations along the E39 main route ◦ Possible knock-on effect not sufficient to enlarge Egersund market beyond Helleland EGERSUND • Volumes larger in Egersund (numbers redacted)

23 Retail fuel merger: NCA’s theory of harm

• Egersund ◦ 3 to 2 market ◦ Risk of coordinated effects pre-merger • Conditions present prior to concentration ◦ Shell [20-30%] ◦ Statoil [20-30%] ◦ YX (Egersund and Helleland) [50-60%] • Homogenous products, stable market conditions • Symmetry not necessary condition in local market as Shell and YX symmetric size on national level • Deviation easy to detect • Sanctions possible; not necessarily in the same local market ◦ Consistent with local market definition? ◦ Existence of coordination mastermind at chain HQs not discussed ◦ Possibility to communicate (what are competition, what are sanctions, what are external shocks etc. not discussed) ◦ Identification between chain and local franchisees not discussed • Entry not likely ◦ Prices at average national level; indicates that competition not significantly restricted premerger ◦ Post-merger • Possibility of coordinated effects strengthened • Shell [70-80%] • Easier to detect deviations from tacit strategy • Sanctioning of deviation more efficient due to multi-market contact • Fåvang ◦ 2 to 1 market – given the NCA’market definition

24 Retail fuel merger: Remedy easy to implement

• Carve-out of one of two Egersund stations and the Fåvang station from the scope of the agreement • YX remained in the market, no need to find suitable buyer • Implemented before NCA decision

25 Retail fuel merger: Contrast: StatoilHydro/ConocoPhillips (COMP/M.4919)

• Statoil’s acquisition of ConocoPhillips chain of automated fuel stations in Scandinavia (branded “Jet”) • Product market: Retail sales of motor fuels • Geographic markets: National ◦ “Knock-on” pricing effects ◦ Competitive parameters decided at national level ◦ Similarities in market shares across counties ◦ On balance: national market but assessment has to take into account that competition takes place at local level • Assessment Norway – unilateral effects ◦ Statoil [30-40%] ◦ Jet [0-5%] ◦ Jet’s deviating strategy in a “highly concentrated market” • Only completely automated chain in a market where only 17% of the stations are automated ◦ Jet’s role of greater importance than market share indicates • Only located in south-east Norway with [5-10%] market share ◦ The Commission’s econometric study indicated that Statoil’s prices in local markets were [0- 5%] lower whenever Jet was present in a Statoil cluster • Significant ◦ Coordinated effects not considered • Remedy: Divest Jet’s entire network in Norway incl. supply agreement

26 1. Norwegian merger control

2. Three Norwegian retail mergers

3. Conclusions

27 Retail mergers in Norway

• Narrow product markets ◦ Alternative distribution channels not included (books)

• Mainly focus on effects in local markets ◦ No general approach to market definition used in any of the cases; size of each local market defined according to local characteristics ◦ Entry barriers

• No attempts to analyse national effects ◦ However moderate effects on national level in (at least) 2 of 3 cases

• No reservations towards applying different theories of harm

• How efficient are the remedies? • Lack of remedy studies in Norway

• Contrasts with Commission approach to analyse local effects in retail markets ◦ Aggregation of local effects from cross-section studies to national level, no detailed investigation in the each local area ◦ Natural that national authorities have more local approach than the Commission? (cf. OFT / CC’s approach)

• Is it worth the effort? The cost-benefit ratio of the NCA’s review of retail mergers?