The UK Competition and Markets Authority ("CMA") announced on 10 May its intention to open a full blown investigation into the proposed merger between take-away food operators Just Eat plc (LSE:JE) and Hungryhouse Holdings Limited (a privately owned entity).
Part of the remit of the CMA is to police proposed mergers and acquisitions where these could create problems for competition within the market. To that end, it has the power to consider notifications from the merging parties or to investigate transactions of its own initiative. The CMA may block deals, permit them, or to allow them subject to conditions (which can include undertakings offered by the parties themselves in order to address the CMA's competition concerns).
Why is the CMA investigating this case?
Just Eat announced its plans to buy rival Hungryhouse in December 2016. In March 2017, that the CMA confirmed it had opened an inquiry into the merger. As part of this process, the CMA opened a consultation in which it sought the views of parties interested in the case on what effect the merger would have for them.
JustEat and Hungryhouse are two of the biggest players in the market for take-away foods. Specifically, they operate as intermediaries between take-away restaurants and customers. Each business runs a website which provides information to customers on available take away outlets. For a fee, they allow restaurants to list on their sites, running searchable databases for end users, who can search for restaurants by their desired criteria (such as type of cuisine, price bracket and location).
The CMA is concerned that the size of each of the operators, coupled with the similarity of the services they provide, could lead to restaurants suffering from worse deals when buying from either of the two firms.
Whilst there are businesses providing alternative food delivery services (these include Deliveroo and UberEATS), the CMA considers those may not be direct competitors as they tend to target dine-in restaurants in fewer locations. Hence if Just Eat and UberEATS tie up, there may be an insufficient choice of operators for restaurants relying on access to business to customer platforms.
What happens next?
The CMA investigation is composed of a maximum of two phases. At Phase 1, it examines whether it could be the case that the merger could lead to a substantial lessening of competition in any market in the UK (or part of it). Phase 1 exercises are in effect a preliminary overview of the proposed deal and must generally be completed within 40 working days.
If the CMA considers that there is a reasonable prospect of a SLC it will invite the parties to propose undertakings to remove the competition concerns. This could for example involve them agreeing to sell off part of the merged business in order to preserve competition in the market. It could also entail commitments not to raise prices or to change the terms on which the entities currently trade. The CMA will only agree to close its file if it is satisfied that the undertakings proposed are effective.
If the CMA remains unsatisfied by the parties' proposals, it will then proceed to a more, in-depth Phase 2 investigation of the transaction, where it will consider in detail the views of the parties' competitors and customers, as well as economic evidence on the likely impact of the acquisition (for example, whether it will lead to increased prices for customers). That could culminate in an outright prohibition or a conditional clearance. Even if an unconditional green light is given, this could entail months of effort and costs for the merging parties.
The importance of electronic platforms
This case illustrates the importance of online platforms and search engines in today's ever more digitalised economy. Previously, the CMA has investigated the activities of Online Travel Agents ("OTAs"). OTAs perform an essential role in helping hotels to reach their customers. In those cases the CMA looked at complaints that the OTAs were leveraging their collective market power to secure certain terms from hotel operators which were potentially anti-competitive. In other inquiries, regulators have similarly been keen to ensure that Google does not unfairly favour its own business offerings (for example for online shopping or map services) over those of its competitors by ranking them unfairly in search engine results.
Likewise in this case, the CMA will be concerned that the merger of two of the most useful Business to Customer platforms in the take away food space could leave restaurants at the mercy of a market juggernaut; an unavoidable trading partner able to impose unfair terms and higher prices on the restaurants which rely on it. A Phase 2 investigation would look at the evidence for this possibility arising and give the parties an opportunity to respond.
Having strong distribution channels is essential for business success and the take-away food sector is no different from other industries in that respect. Increasingly, customers have been turning to the Internet as a means of sourcing goods and services. This trend has been coupled with a growth in regulatory activity from antitrust watchdogs who, with a view to protecting consumers, are committed to preserving an open and level playing field in on-line markets.
Local food delivery - a difficult market to break?
In considering the likelihood of a specific merger causing a SLC, the CMA will need to consider the likelihood of new entrants as well as existing ones. There may be a temptation to think that barriers to entry are low into such a market – consisting principally of operating a website, an advertising campaign and promoting directory services to take-away restaurants. There is evidence, however, that this may not be the case, as the track record of recent new entrants has not been encouraging.
Maple, a New York-based prepared food delivery start-up, was set up in 2014 with substantial financial backing. It had raised $30 million in equity funding from investors, including Thrive Capital and Primary Venture Partners. Although the company was valued at $115 million in 2015, it recently ceased trading and was forced to sell a significant part of its operations. Maple is not the only start-up to fail to make it in the sector. Take Eat Easy, Kitchit, Dinner Lab and SpoonRocket all folded last year, possibly due to difficulties in scaling operations.
What does this mean for the industry?
Stakeholders – in particular, competitors and customers of JustEat and Hungryhouse - need to watch this space carefully. They stand to be affected by whatever the CMA does next. In order to get the deal home, JustEat and Hungryhouse will likely offer concessions to the CMA in order to placate it and avoid the rigours of further analysis. That will likely lead to a further consultation in relation to whether or not these undertakings will remove structural problems.
How could stakeholders be harmed? Well, competitors to the merging firms should be concerned whether the new entity could use its market power to commit restaurants to exclusivity and/or longer contract terms, as that would not only threaten their ability to grow but even possibly their client base. Likewise for restaurants need to consider whether a market giant could push for even higher levels of commission which could impose a potentially fatal squeeze on their margins.
Staying silent or overlooking developments in this case risks an outcome which fails to cater for the needs of the sector and which could even be a recipe for disaster.