Sports Direct International plc and JJB Sports plc A report on the acquisition by Sports Direct International plc of 31 stores from JJB Sports plc 16 March 2010 Competition Commission 2010 Website: www.competition-commission.org.uk Members of the Competition Commission who conducted this inquiry Diana Guy (Chairman of the Group) Phil Evans Roger Finbow John Smith Chief Executive and Secretary of the Competition Commission David Saunders The Competition Commission has excluded from this published version of the final report information which the inquiry group considers should be excluded having regard to the three considerations set out in section 244 of the Enterprise Act 2002 (specified information: considerations relevant to disclosure). The omissions are indicated by []. Some numbers have been replaced by a range. These are shown in square brackets. Acquisition by Sports Direct International plc of 31 stores from JJB Sports plc Contents Page 1. The reference .................................................................................................................. 6 2. The parties and the industry ............................................................................................ 6 Sports Direct ................................................................................................................... 6 JJB .................................................................................................................................. 6 Industry background ........................................................................................................ 7 3. The transaction ............................................................................................................... 8 Outline of the transaction ................................................................................................ 8 Events leading to the OFT’s reference to the CC and the CC’s initial steps ................... 10 4. Jurisdiction .................................................................................................................... 10 The statutory period for reference ................................................................................. 10 Enterprises ceasing to be distinct .................................................................................. 11 Share of supply test....................................................................................................... 11 5. The counterfactual ........................................................................................................ 12 JJB’s options for each store transferred to Sports Direct ............................................... 12 Sports Direct’s options .................................................................................................. 13 6. Market definition ............................................................................................................ 14 Product market definition ............................................................................................... 14 Customer survey ....................................................................................................... 15 Products sold by the parties and evidence that customers value a bundle ................ 15 Candidate market ..................................................................................................... 16 Further analysis on the candidate market ................................................................. 18 Sports Direct and third-party views ........................................................................... 20 Conclusions on product market definition .................................................................. 21 Geographic market ........................................................................................................ 22 Customer shopping patterns and store catchment areas .......................................... 22 Customer diversion ratios ......................................................................................... 23 Econometric analysis of entry ................................................................................... 23 Sports Direct and third-party views ........................................................................... 24 Internet sales ............................................................................................................ 24 Conclusion on geographic market ............................................................................. 26 7. Barriers to entry and expansion ..................................................................................... 26 Access to brands ........................................................................................................... 27 Premium-brand volume discounts ................................................................................. 27 Set-up costs .................................................................................................................. 28 Reputation advantage ................................................................................................... 29 Potential entrants’ expansion plans ............................................................................... 30 Evaluation of the likelihood of entry ............................................................................... 30 JD ............................................................................................................................. 30 JJB ........................................................................................................................... 31 Conclusion on barriers to entry ................................................................................. 31 8. Effects on competition of the store transfers .................................................................. 31 Introduction ................................................................................................................... 31 Constraint exercised by transferred JJB stores on existing Sports Direct stores ....... 32 Constraint on Sports Direct by other retailers ............................................................ 33 Local effects .................................................................................................................. 33 Existing local variable responsive to competition ...................................................... 33 Incentive to make local offering responsive to competition ........................................ 34 Summary of analysis on local effects ........................................................................ 35 Store closures ............................................................................................................... 35 1 National effects ............................................................................................................. 36 Actual increase in prices ........................................................................................... 36 Incentives to increase prices ..................................................................................... 37 Summary of analysis on national effects ................................................................... 38 Conclusion on effects on competition of store transfers ................................................. 38 9. Effects on competition of the store transfers through possible coordination ................... 39 Markets conducive to coordination ................................................................................ 39 Effect of the store transfers on the likelihood of coordination ......................................... 39 Ability to identify and monitor coordination ................................................................ 40 Remaining constraints and barriers to entry .............................................................. 40 The individual interests of Sports Direct and JJB ...................................................... 40 Effect of store transfers on likelihood of future coordination ...................................... 41 Conclusion on coordinated effects on competition ......................................................... 45 10. Findings ........................................................................................................................ 45 Appendices A Terms of reference and conduct of the inquiry B The counterfactual C Diversion ratios D Local entry analysis E Critical loss analysis F Local margin concentration analysis G National analysis Glossary 2 Summary 1. On 7 August 2009, the Office of Fair Trading (OFT) referred the completed acquisition of 31 JJB Sports plc (JJB) stores by Sports Direct International plc (Sports Direct) to the Competition Commission (CC) for investigation and report. The reference was made under section 22(1) of the Enterprise Act 2002 (the Act) and requires us to determine whether a relevant merger situation has been created; and, if so, whether the creation of that situation has resulted in or may be expected to result in a substantial lessening of competition (SLC) within any market or markets in the UK for goods or services. Following an extension of the original 24-week inquiry period under section 39(4) of the Act, we were required to publish our final report by 24 February 2010. Following a further extension under section 39(3) of the Act, we were required to publish our final report by 21 April 2010. 2. Sports