Anticipated merger between J Sainsbury Plc and Asda Group Ltd Decision on relevant merger situation, substantial lessening of competition and reference ME/6752-18 The CMA’s decision on reference under section 33(1) of the Enterprise Act 2002 given on 19 September 2018. Full text of the decision published on 27 September 2018. Please note that [] indicates figures or text which have been deleted or replaced in ranges at the request of the parties for reasons of commercial confidentiality. SUMMARY 1. J Sainsbury Plc (Sainsbury’s) and Asda Group Ltd (Asda) have agreed to merge (the Merger). Sainsbury’s and Asda are together referred to as the Parties. 2. The Competition and Markets Authority (CMA) believes that it is or may be the case that each of Sainsbury’s and Asda is an enterprise; that these enterprises will cease to be distinct as a result of the Merger; and that the turnover test is met. Accordingly, arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation. 3. Sainsbury’s is the UK’s second largest grocery retailer. It operates a network of grocery stores, petrol filing stations and an online grocery business. In addition to selling various categories of general merchandise (such as toys, electricals and clothing) in its grocery stores and online, Sainsbury’s operates Argos (a multi-format general merchandise retailer) and Habitat (a retailer of furniture and homewares). Sainsbury’s also offers retail banking, consumer credit, insurance and other customer financial services. 1 4. Asda is the UK’s third largest grocery retailer. It also operates a network of grocery stores, petrol filling stations and an online grocery business, as well as selling various categories of general merchandise in its grocery stores and online. Asda offers consumer credit, insurance and other customer financial services. 5. The Parties therefore overlap in the supply or acquisition of a range of products and services in the UK, including the retail supply of groceries (both in-store and online), the procurement of groceries, the retail supply of fuel, and the retail supply of various types of general merchandise. 6. The Parties submitted a request for a fast-track reference of the Merger to an in-depth Phase 2 investigation and gave their consent to the use of the fast-track procedure. The CMA commenced its Phase 1 investigation on 23 August 2018 and issued an invitation to comment seeking views on the Parties’ fast-track request.1 For the case to be fast-tracked, the CMA must, at an early stage of its investigation, have evidence objectively justifying the belief that the test for reference to Phase 2 is met.2 In addition, fast-track cases are likely to be cases where, to the extent that the CMA does find a concern with the merger, that concern would impact on the whole or substantially all of the transaction, and not just one part (that could be resolved through structural undertakings in lieu (UILs)).3 7. In light of the Parties’ request for a fast-track reference, the CMA has focused its assessment in this Phase 1 decision solely on whether the test for reference is met in relation to a single area of overlap between the Parties (the retail supply of groceries in-store) and a single theory if harm (a loss of competition as a result of horizontal unilateral effects). 8. The CMA has concluded that the test for reference is met because there is a realistic prospect that the Merger would lead to a substantial lessening of competition (SLC) in the retail supply of groceries in-store and that these competition concerns would impact on substantially all of the Merger, thereby justifying the use of the fast-track procedure. 9. As the criteria for a fast-track reference are met in relation to a loss of competition as a result of horizontal unilateral effects within the retail supply of groceries in-store, it has not been necessary for the CMA to reach a 1 The CMA also issued a preliminary invitation to comment on 18 May 2018. 2 Mergers: Guidance on the CMA’s jurisdiction and procedure (CMA2), January 2014, paragraph 6.62. 3 Mergers: Guidance on the CMA’s jurisdiction and procedure (CMA2), January 2014, paragraph 6.63. 2 conclusion, at Phase 1, in relation to other potential competition concerns.4 All other areas of overlap between the Parties, and other potential theories of harm, will fall within the scope of the CMA’s Phase 2 investigation, which is not limited to investigating the concerns identified in this Phase 1 decision.5 10. In light of the approach taken by the CMA’s predecessor bodies in previous groceries cases and the evidence submitted by the Parties and third parties, the CMA has assessed the impact of the Merger on the retail supply of groceries in-store at both a national and a local level. 11. On a national basis, the Merger will result in the combination of two of the largest grocery retailers in the UK, bringing together the second and the third largest players in the market. The Merger will involve the combination of two of the so-called ‘Big 4’, a group of retailers that, according to the available evidence, operate similar business models and compete particularly closely with each other. While the CMA’s investigation to date indicates that both Parties compete, at least to some extent, with a number of retailers, the Parties’ internal documents and submissions from third parties nevertheless confirm that the Parties are an important competitive constraint to each other. The CMA therefore believes that the Merger gives rise to a realistic prospect of an SLC in the retail supply of groceries in- store at a national level. 12. At a local level, the Parties’ stores overlap in several hundred local areas across the UK. The CMA believes that the Merger may give rise to a realistic prospect of an SLC in many of these local areas if Sainsbury’s and Asda are insufficiently constrained by other local competitors. In light of the Parties’ fast-track request, the CMA has, for the purposes of the Phase 1 decision, adopted a filtering approach using a fascia counting methodology to identify local areas where that may be the case. Based on this assessment, the CMA believes that the Merger gives rise to a realistic prospect of an SLC in 463 local areas.6 13. The CMA has received a substantial number of detailed third-party submissions during its investigation to date. Some of these submissions have been referred to briefly in this Phase 1 decision. Other submissions, 4 These potential competition concerns include, but are not limited to, the impact of the Merger on competition in the supply of groceries online, the supply of fuel, the supply of general merchandise, or the implications of the merged entity increasing its buyer power in negotiations with suppliers or the greater risk of coordination among grocery retailers. 5 Merger Assessment Guidelines (CC2 (Revised), OFT1254)), September 2010, paragraphs 4.2.5 and 4.2.6. 6 Based on information (as of February 2018) submitted by the Parties on 8 June 2018. 3 including those relating to product overlaps and theories of harm that it has not been necessary to considering in the CMA’s Phase 1 investigation, are not referred to in this decision. These submissions will be taken into account within the CMA’s Phase 2 investigation. Third parties will also have further opportunities to present their views during the Phase 2 investigation. 14. As part of their request for a fast-track reference, the Parties waived their procedural rights at Phase 1, which included their right to offer undertakings in lieu of reference (UILs). As a result, the CMA has not considered UILs under section 73 of the Enterprise Act 2002 (the Act). 15. The CMA has therefore decided to refer the Merger pursuant to sections 33(1) and 34ZA(2) of the Act. ASSESSMENT Parties 16. Sainsbury’s is a UK grocery retailer which operates a chain of 606 supermarkets, 815 convenience stores, 311 petrol filling stations (the majority of which are co-located with Sainsbury’s supermarkets) and an online grocery business (offering click & collect and home delivery) across the UK and Ireland. In addition to its core offering of groceries, Sainsbury’s sells various categories of general merchandise (including toys, electricals and clothing) through its grocery stores, in-store and online. 17. Sainsbury’s also operates: Argos, a multi-format general merchandise retailer in the UK and Ireland currently operating across 624 standalone stores, 216 concessions within Sainsbury’s stores, the Argos website and Argos mobile applications; and Habitat, which sells furniture and homewares from three stand-alone Habitat stores in London and Leeds, 11 Mini Habitat stores within Sainsbury’s stores, and via the Habitat website.i 18. Finally, Sainsbury’s offers retail banking, consumer credit, insurance and other customer financial services through its wholly-owned subsidiary, Sainsbury’s Bank. 19. The turnover of Sainsbury’s in the financial year ending March 2018 was £28.5 billion worldwide, of which £[] billion was generated in the UK.7 20. Asda is a UK grocery retailer which operates a network of 584 grocery stores, 317 petrol filling stations (all but 18 of which are co-located with 7 Both figures excluding VAT. 4 Asda stores), and an online grocery retail business (offering home delivery and click-and-collect). Like Sainsbury’s, Asda sells various categories of general merchandise through its grocery stores, in-store and online.